Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
How to Trade Binance Vanilla Options for the First Time on Bitcoin Crypto's - 2nd Aug 21
From vaccine inequality to economic apartheid - 2nd Aug 21
Stock Market Intermediate Top Reached - 2nd Aug 21
Gold at a Crossroads of Hawkish Fed and High Inflation - 2nd Aug 21
Bitcoin, Crypto Market Black Swans from Google to Obsolescence - 1st Aug 21
Gold Stocks Autumn Rally - 1st Aug 21
Earn Upto 6% Interest Rate on USD Cash Deposits with Binance Crypto Exchange USDC amd BUSD - 1st Aug 21
Vuze XR VR 3D Camera Takes Near 2 Minutes to Turn On, Buggy Firmware - 1st Aug 21
Sun EXPLODES! Goes SuperNova! Will Any planets Survive? Jupiter? Pluto? - 1st Aug 21
USDT is 9-11 for Central Banks the Bitcoin Black Swan - Tether Un-Stable Coin Ponzi Schemes! - 30th Jul 21
Behavior of Inflation and US Treasury Bond Yields Seems… Contradictory - 30th Jul 21
Gold and Silver Precious Metals Technical Analysis - 30th Jul 21
The Inadvertent Debt/Inflation Trap – Is It Time for the Stock Market To Face The Music? - 30th Jul 21
Fed Stocks Nothingburger, Dollar Lower, Focus on GDP, PCE - 30th Jul 21
Reverse REPO Market Brewing Financial Crisis Black Swan Danger - 29th Jul 21
Next Time You See "4 Times as Many Stock Market Bulls as There Are Bears," Remember This - 29th Jul 21
USDX: More Sideways Trading Ahead? - 29th Jul 21
WEALTH INEQUALITY WASN'T BY HAPPENSTANCE! - 29th Jul 21
Waiting On Silver - 29th Jul 21
Showdown: Paper vs. Physical Markets - 29th Jul 21
New set of Priorities needed for Unstoppable Global Warming - 29th Jul 21
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

UK Interest Rates Forecast to Fall to 5% by September 2008

Interest-Rates / UK Interest Rates Sep 18, 2007 - 11:59 PM GMT

By: Nadeem_Walayat

Interest-Rates Best Financial Markets Analysis ArticleThe most recently released inflation data shows UK CPI Inflation falling to 1.8% and RPI rising to 4.1% for August. Even though the picture is mixed, the slowing UK housing market and economy is expected to result in further moderating of the inflation picture over the next 12 months, which is to result in a fall in UK interest rates to a target of 5% by late 2008.


Presently the UK interbank money market rates are trading substantially above the Bank of England's base rate and thus discounting future rise in interest rates of as much as 1% to 6.75% by September 2008. I.e. 3 month LIBOR is at 6.9%, 6 month at 6.8%, 9 month at 6.75%, 12 month at 6.7%. This disparity between the Market Oracle forecast of 5% and money market expectation's of 6.75% by the second half of 2008 is because of a number of factors as follows :

Impact of the Credit Crunch on UK Interest Rates

The credit crunch which was discussed in depth in an earlier article - Hedge Fund Subprime Credit Crunch to Impact Interest Rates (31st July 07), signaled that regardless of the present fundamentals, interest rates were heading much lower and would ultimately be bullish for asset prices. The first central bank to act was expected to be the US Fed, followed by the BoE and then the European ECB. The credit crunch earlier this week nearly claimed its first major victim in the UK, Northern Rock Bank. Fortunately the Government took control of the situation and forced the Bank of England to rescue the mortgage bank Northern Rock Savings 100% UK Government Guarantee (17th Sept 07). Had the government not acted there was a serious risk of the contagion spreading to other banks. The risk of a meltdown in the British banking system have now been greatly diminished by this guarantee offered to savers.

However the credit crunch is not expected to disappear anytime soon, and the impact of the freeze in liquidity is itself similar to a rise in interest rates to 6.75% and therefore to sharply impact upon consumer spending and economic activity in the UK over the coming months.

UK Inflation - CPI and RPI

The preferred measure of inflation in the UK by the government is the CPI, which today has now to below the BoE's target of 2%. However the RPI is an important measure for the UK economy as it is recognized as a more accurate measure of inflation and used in pay deals and in indexation pricing. The current rate of 4.1% is a contributory factor to higher LIBOR interest rate expectations.

The trend in inflation, (both RPI and CPI) is clearly lower. The primary triggers for UK interest rate cuts are for CPI to fall below 2% and RPI to fall below 3%. CPI is currently below 2%, but RPI is some way from reaching the 3% triggering level. Therefore a cut in UK interest rates is not expected to occur until early next year, by which time RPI should have declined towards or below 3%.

UK Housing Market

The warnings of an imminent peak in the UK housing market was issued on 1st of May 07 - UK Housing Market Heading for a Property Crash. Which was timed to occur with the introduction of the Home Information Packs (Hips) the impact of which was expected to drastically reduce the number of transactions. The introduction of the Hips was subsequently delayed from the scheduled date of June 07 to August 07, and have now started impacting on the UK housing market,UK House Price Fall Signals Start of Housing Market Crash (13th Sept 07).

The Expectations as of 22nd August 07 (UK Housing Market Crash of 2007 - 2008 and Steps to Protect Your Wealth) are for UK House prices to fall by at least 15% over the next 2 years. This will have a significant deflationary effect on the UK economy and clear the way for UK interest rate cuts next year.

US and European Interest Rates

The US today cut interest rates by 0.5% to 4.75%. The move is in recognition of the fact that the US may already be in recession, and this the Fed is attempting to cushion the depth of the recession much as occurred in 2001-2002. It is also in recognition that inflationary pressures are expected to ease in the US and across the world as the world economy slows on the back of earlier rate rises.

The European Central bank is expected to follow a cut in UK interest rates early next year. Especially as the US dollar continues to trend lower against the Euro, thus lessening inflationary pressures within the euro-zone.

UK Money Supply

UK money supply growth remains stubbornly high,though expectations are for a decline over the next 12 months to below 10% as trend analysis suggests that the rate of growth has now peaked.

UK Interest Rates

The former Fed Chairman, Alan Greenspan earlier this week commented on the expectations of UK interest rates rising to double digits. Which is contrary to this forecast. However he did confer with the forecast that UK house prices will fall over the coming two years..

As inflation moderates over the coming months, there will be gradual shift in sentiment towards lower interest rates towards the target of 5% by September 2008. However, the first rate cut is not expected until early next year. This is inline and in confirmation of the UK interest rate forecast as of 22nd August 07.

Advantage to Savers!

Currently UK Savers are in a rare position, in that money market savings rates are at ten year highs despite no movement in the UK base interest rate. How long this state can continue is unknown, but it lends savers to the opportunities of locking in interest rates as high as 7% for a year or more, with the added safety of knowing that the savings are now 100% secure. as the Bank of England will come to the rescue of any major bank that may fall victim to the credit crunch.

Once market sentiment starts shifting towards much lower UK interest rate expectations as against expectations of much higher interest rates, then these high Fixed Rate deals will disappear overnight. It is inconceivable that rates of 7% will be available once it is clear that the UK housing bubble has burst as will become evident as each months statistics are published.

In Conclusion:

UK Interest rates are forecast to fall to 5% by September 2008. Savers should take advantage of current high fixed savings rates. Investors should prepare for timing stock market investments. The expectation is that today's Fed interest rate cut may already have sparked such a change in UK stock market sentiment on Wednesday's open (19th Sept). However, the credit crunch will undoubtedly have further negative impacts on the stock market during the next few months and thus offer further opportunities to buy selectively 'cheap' stocks for the long-run.

By Nadeem Walayat
(c) Marketoracle.co.uk 2005-07. All rights reserved.

The Market Oracle is a FREE Daily Financial Markets Forecasting & Analysis online publication. We present in-depth analysis from over 100 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.

Nadeem Walayat Archive

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


Post Comment

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