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Trading Lessons

UK 1% Interest Rate Cut

Interest-Rates / UK Interest Rates Nov 06, 2008 - 04:21 AM GMT

By: Nadeem_Walayat

Interest-Rates Best Financial Markets Analysis ArticleThe MPC meeting is widely expected by the consensus to cut UK interest rates by 0.5% today, however as my recent articles (Credit Quake Persists Ahead of UK Interest Rate Cut of 1%?) have concluded that effectively Gordon Brown cracked the MPC round table in half when he stood up at the House of Commons despatch box on 8th October to announce the interest rate cut of 0.5%, which was followed by the Bank of England's announcement. This suggests that the Monetary Policy Committee is now no longer totally in the control of setting UK interest rates and therefore in many aspects control has been transferred back into the Governments hands.


The existing Market Oracle forecast made prior to Octobers 0.5% cut, was for UK interest rates to be cut by 0.5% at Octobers meeting, with a further cut of 0.5% at Novembers meeting and a continuing down trend to 3.25% by September 2009. However the forecast was made at a time when the Bank of England was firmly in charge of interest rates, which now increasingly suggests that rate cuts could go much lower due the the repeated failure of the LIBOR interbank market to unfreeze as the below graphs illustrate.

Uk interest rate forecast 2009

UK 3 month interbank rate

Today's' actual rate cut will be highly indicative of who exactly is now in charge of UK monetary policy, i.e. if rates are cut by 0.5% then by and large the Bank of England still sets interest rates despite the fact that inflation targeting has been abandoned. A rate cut of 0.75% implies that the Bank of England has been greatly diminished in its interest rate setting role. A cut of 1% would imply that the Government is fully in charge of setting interest rates and dictates behind the scenes the amount to cut interest rates by at each MPC meeting, therefore the Banks monthly meetings are a facade that purely exist for publicity purposes.

The Real interest rate being born by the economy is far above the base interest rate of 4.5%, and even today's consensus cut of 0.5% to 4% will barely begin to impact on the UK economy as the below graph illustrates.

UK Real Economic Interest Rate

One of the primary reasons for the high economic interest rate is due to the slight of hand being used by Bank and Building societies since the start of the year by raising product rates before the base rate cut and then cutting afterwards therefore little net change as I highlighted some 10 months ago in the article - UK Interest Rates Cuts Will Not Help the Housing Market. In this light the Abbey raised interest rates by 0.5% on its tracker range of mortgages yesterday, and thus today's cuts will leave the rates unchanged and thus contribute to the widening in the gap between the base rate and the real economic rate as the above graph illustrates.

The situation is made far worse as the tax payer is now funding the bankrupt banks to the tune of £500 billion so as the banks will reduce their interest rates to customers which is not happening. The impact of this extra borrowing has been felt in the foreign exchange markets as the value of UK PLC has been marked down by over 25% in advance of the doubling of Britain's national debt, from £550 billion at the start of 2008 to more than £1.1 trillion by the end of 2009 and much higher forward inflation following the current asset price led deflationary period.

For forecasts and deeper analysis of for UK economy, inflation, and the much in demand UK house prices. Subscribe to our always free newsletter to get the scheduled analysis in your inbox on the day of publication.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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