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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

UK Interest Rates on Hold, the Easing of Quantitative Easing?

Interest-Rates / UK Interest Rates Apr 09, 2009 - 01:21 AM GMT

By: Nadeem_Walayat

Interest-Rates Best Financial Markets Analysis ArticleUK Interest rates are expected to be kept on hold at today's MPC meeting at the record low of 0.5%, which is indicative of the FAILURE of monetary policy to counter the economic slump as the economy started to fall off the edge of the cliff during the summer months of 2008 in the wake of a housing market in freefall as bank after bank teetered on the edge of bankruptcy requiring literally a £1 trillion tax payer guarantee and capital injection bailouts to prevent financial armageddon.


Now all eyes are on "Quantitative Easing" aka money printing, the central banking nuclear option has been detonated at the end of which lies the ultimate destination of an hyperinflationary collapse of the fiat currency. However, having scheduled to print some £75 billion of fresh crisp notes out of thin air (electronic money), the Governor of the Bank of England is clearly starting to have second thoughts as in recent weeks he has issued statements against excessive government borrowing and further quantitative easing as he does not want to go down in history as the person responsible along with his accomplices in the Labour government for the destruction of the British Pound. We shall probably soon find out that these are manoeuvrings for historical purposes by a failed central bank governor as the Bank of England will continue to buy government debt as the consequences of failing to do so will likely result in a repeat of the recent government bond auction failure.

UK Interest Rates

UK interest rates at 0.5% are AT THE BOTTOM as a further cut to 0.25% would make NO DIFFERENCE to economy, but instead hit sterling. Therefore the only question now is WHEN will UK interest rates start to rise again, my original forecast as of 4th of Dec 08 is for rates to start rising during the second half of 2009 as the economy begins to stabalise from free fall following the governments borrowing and spending binge.

UK Deflation Coming to an End.... Soon

UK deflation in the face of the bursting of the asset bubble is expected to come to an end during the summer months with signs that the preferred measure of CPI is already warning of fast gathering inflationary clouds as it failed to fall on recently released data instead ticking higher from 3% to 3.2%, and therefore widening the gap to the RPI measure which fell to 0%. The original forecast as of Dec 08 continues to see deflation going into mid 2009, followed by a rising inflationary trend during the second half of 2009. The key reason for which is the sterling bear market which continues to push up prices in the shops as retailers restock as warned of during mid December 2008.

UK Recession

The economy is on track towards starting to recover by the end of 2009 from the worst recession since the Great Depression that is forecast to see GDP contraction of -6.3% as per the original forecast as of mid Feb 09. However as I have warned several times, that the growing debt mountain could trigger a double dip recession AFTER the next election as public spending cuts and tax rises are undertaken by the next government in an attempt to bring government debt under control. This therefore implies that we have not seen the end of Quantitative Easing as like a drug, it will be difficult to wean the economy off of it, therefore my expectation is that the government will force the Bank of England to accelerate Quantitative Easing far beyond the £75 billion announced to date.

Meanwhile the mainstream forecasters including the Treasury continue to play catchup by constantly revising debt levels higher whilst revising economic growth lower. For instance the Governments forecast remains for GDP contraction of 1% this year, this is against my forecast for contraction this year of nearly 4%. Similarly in recent weeks the consensus has gradually drifted towards a contraction of 3% this year.

UK Debt and Liabilities

Quantitative Easing, exploding public sector debt and liabilities with the petrol of bankrupt banking sector liabilities that look set to reach £2 trillion thrown on top of the countries balance sheet, all paint a bleak picture for the UK economy for many years if not decades. The inevitable outcome of which will be for the devaluation of the purchasing power of the currency which means higher inflation, and therefore suggestive of a stagflationary economic environment for many years.

In the final analysis, all that quantitative easing and extremely low interest rates does is for savers to subsidise reckless borrowers so as to improve the Labour Governments chances of winning the next election, the price of which will be paid for AFTER the next election as taxes rise and public spending is cut to narrow the huge budget deficit in a stagflationary economic environment.

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

Copyright © 2005-09 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's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 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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Comments

Harris
11 Apr 09, 18:36
Zach

Another great article Nadeem. May I ask if we are ger Hyper inflation can we not pay off the country's debt?


Nadeem_Walayat
11 Apr 09, 20:10
Hyperinflation

Hyperinflation would devalue the debt denominated in sterling, during hyperinflation the country would default on external debt which would be written off.

Though we are some way off of hyperinflation.


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