Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
9.WE HAVE NO CHOICE BUT TO INVEST IN STOCKS AND HOUSING MARKET - Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
FREETRADE Want to LEND My Shares to Short Sellers! - 8th Aug 22
Stock Market Unclosed Gap - 8th Aug 22
The End Game for Silver Shenanigans... - 8th Aug 22er
WARNING Corsair MP600 NVME2 M2 SSD Are Prone to Failure Can Prevent Systems From Booting - 8th Aug 22
Elliott Waves: Your "Rhyme & Reason" to Mainstream Stock Market Opinions - 6th Aug 22
COST OF LIVING CRISIS NIGHTMARE - Expect High INFLATION for whole of this DECADE! - 6th Aug 22
WHY PEAK INFLATION RED HERRING - 5th Aug 22
Recession Is Good for Gold, but a Crisis Would Be Even Better - 5th Aug 22
Stock Market Rallying On Slowly Thinning Air - 5th Aug 22
SILVER’S BAD BREAK - 5th Aug 22
Stock Market Trend Pattren 2022 Forecast Current State - 4th Aug 22
Should We Be Prepared For An Aggressive U.S. Fed In The Future? - 4th Aug 22
Will the S&P 500 Stock Market Index Go the Way of Meme Stocks? - 4th Aug 22
Stock Market Another Upswing Attempt - 4th Aug 22
What is our Real Economic and Financial Prognosis? - 4th Aug 22
The REAL Stocks Bear Market of 2022 - 3rd Aug 22
The ‘Wishful Thinking’ Fed Is Anything But ‘Neutral’ - 3rd Aug 22
Don’t Be Misled by Gold’s Recent Upswing - 3rd Aug 22
Aluminum, Copper, Zinc: The 3 Horsemen of the Upcoming "Econocalypse" - 31st July 22
Gold Stocks’ Rally Autumn 2022 - 31st July 22
US Fed Is Battling Excess Global Capital – Which Is Creating Inflation - 31st July 22
What it's like at a Stocks Bear Market Bottom - 29th July 22
How to lock in a Guaranteed 9.6% return from Uncle Sam With I Bonds - 29th July 22
All You Need to Know About the Increase in Building Insurance Premiums for Flats - 29th July 22
The Challenges on the Horizon for UK Landlords - 29th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22
The Psychology of Investing in a Stocks Bear Market - 26th July 22
Claiming and Calculating The Research and Development Tax Credit - 26th July 22
Stock Market Bearish Test - 26th July 22
Social Media Tips and Writing an Effective Call to Action - 26th July 22
Has Rishi Sunak Succeeded in Buying His Way Into No 10 - Fake Tory Leadership Contest - 26th July 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

UK Interest Rates Forecast to rise much higher due to rising Inflation and high Money Supply Growth

Economics / UK Interest Rates Oct 22, 2006 - 09:19 PM GMT

By: Nadeem_Walayat

Economics

Interest are set to to rise to 5% in November 2006, some market commentators are already seeing this as a potential peak despite REAL UK interest rates being at historic lows.

The spread between the base rate (4.75%) and RPI (3.6%), is currently at 1.3%, or marginally higher than the low set in 2003 of 1.1%, which preceded a rise in interest rates from 3.5% to 4.75%. This took the spread to 2%, since that time, RPI has risen and interest rates fell to 4.5%. This puts the UK under similar interest rate hike pressures as during the start of the rate hikes in 2003.

UK Interest Rates Forecast to rise a Much Higher due to rising inflation and High Money Supply Growth


So either one of two things needs to happen or a combination of two

a. UK inflation falls.
b. UK Interest rates rise.

The key target here is a move back to the 2% spread, which if inflation stayed put, projects a rise in base rates to 5.75%, substantially higher than market economists are forecasting at this point in time.

Can UK Inflation fall ?
Given most recent data, showing domestic inflation as running far ahead of imported inflation which has fallen due to the recent drop in crude oil. This is likely to also be reversed once commodities resume their uptrend. Sterling is also expected to be weak due to the large trade deficit, and a weak sterling will cause high additionally imported inflation. The trade and budget deficits are likely to result in Gordon Brown breaking his Golden Rule of balancing the budget over an economic cycle, i.e. printing excess money, this will ensure that sterling is likely to decline even if interest rates rise. So for the forseable future, inflation is unlikely to fall.

Another major inflationary influence is that the UK money supply is running at 14.5% !! That represents a 16 year high, this alone is alarming and should prompt the BoE to raise interest rates as well as other measures to reduce the money supply growth which unless addressed will cause even higher future inflation. We can speculate how high, given RPI of 5% + 2% = 7% base rates ! Well beyond current expectations, and recent experience, but neither has the money supply been running at levels not seen since 1990 when interest rates had risen to 15% !

Conclusion
Interest rates are headed much higher, far higher than current or even recent mainstream forecasts suggest. Though the Market Oracle did project way back in November 2005, that UK interest rates are targeted to rise to 5.75% - UK Long-term Interest Rates Trend is still UP ! At this point in time this target still holds, and unless something is done to curb the growth in the Money Supply it could still head much, much higher !

Nadeem Walayat

(c) MarketOracle.co.uk 2005-2006

Disclaimer - This Analysis / Forecast / Trade Scenerio is provided for general information purposes only and not a solicitation or recommendation to enter into any market position, and you are reminded to seek independent professional advice before entering into any investments or trading positions.
The Market Oracle is a FREE Financial Markets Forecasting & Analysis online publication. We aim to cut through the noise cluttering traditional sources of market analysis and get to the key points of where the markets are at and where they are expected to move to next
! http://www.marketoracle.co.uk

This article maybe reproduced if reprinted in its entirety with links to http://www.marketoracle.co.uk


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments


30 Oct 06, 03:21
Re: UK Interest Rates Forecast to rise much higher due to rising Inflation and high M
Thanks !

Thats a nice graph

Also don't forget the UK debt now is very, very high ! Perhaps you could do a chart / article on that too, if rates do rise as far as you suggest then the UK housing market definetly will crash !

Post Comment

Only logged in users are allowed to post comments. Register/ Log in