UK Interest Rate Forecast 2009

The credit crisis has intensified during the last few weeks to a new manic stage as entire countries are put at risk of bankruptcy due to their banking system rescue attempts exploding liabilities, as the demand goes out for 100% guarantees of depositors and country after country buckles under the pressure so as to prevent a collapse of their individual banking systems. However ever increasing and desperate government bailout cash in the form of escalating amounts of daily interbank liquidity, capital injections, and mortgage bond buy back schemes in addition to issuing depositor guarantees increases the liabilities of ALL countries the immediate consequences of which are being played out in ever increasing volatility in the currency markets and stock exchanges as record breaking points swings take place on alternative days. In such a panic stricken climate there are increasingly deafening calls are for immediate interest rate cuts across the western world including for an Imminent UK Interest Rate Cut.The effect of the crisis is to make the interest rate forecasting utilising the more traditional methods of forecasting less relevant in exchange for market trends in their likely response to government rescue initiatives i.e. this years UK interest rate forecast will seek to focus more on the capital markets, than inflation and money supply whilst also taking into account that the pace of economic contraction is escalating far faster than that which is reflected in economic data released to date. The only economic data that is inline with the current state of the economy are UK house prices which have been crashing over the summer months.

My most recent analysis prior to the September 08 Bank of England MPC Interest rate decision meeting suggested that September would be the last month that rates will be kept on hold which has been reinforced by subsequent crisis events as the cry's for an immediate UK interest rate cut reach a crescendo in response to a banking system collapse panic situation.

Previous UK Interest Rate Forecasts

Interest rate analysis and forecasts for the previous 2 years have proved remarkably accurate, more so in that at the time they were contrary to the consensus views.

November and December 2006 - UK Interest rates to peak at 5.75% by September 2007. - Actual - UK Interest rates peaked at 5.75%.

August and September 2007 - UK Interest rates to fall to 5% by September 2008. UK interest rates fell from a peak of 5.75% and were hold at 5% by the end September 2008.

Impact of Global Deleveraging

Global deleveraging is taking place as financial intuitions are forced to liquidate assets such as property, stocks, bonds and commodities to cover losses on huge derivatives positions that is intensify as evidenced by Iceland's government instructing their financial institutions to repatriate wealth by liquidating over seas assets in defence of the Icelandic Krona as the country faced bankruptcy.

The Prime Minster of Iceland, Geir Haarde, on Monday warned: "In the perilous situation which exists now on the world's financial markets, providing the banks with a secure life line poses a great risk for the Icelandic nation," Haarde said in a televised address to the nation. "There is a very real danger, fellow citizens, that the Icelandic economy, in the worst case, could be sucked with the banks into the whirlpool and the result could be national bankruptcy."

In my analysis of 2nd October 08, I warned that the natural outcome of the credit crisis would be that countries would also start to go bankrupt that would manifest itself along the hyperinflationary bust of the 1920's German Weimar republic.

Meanwhile, the more forced selling takes place the lower asset prices fall which triggers even more forced selling as derivatives positions both on exchanges and over the counter which nearly always tend to be on margin of as much as X30 exposure against the the capital deployed are hence either being forced to liquidate positions are meet margin calls. Therefore deleveraging is intensifying as the only way to finance margin payments is by selling assets as the traditional avenues for short-term money are frozen.

This also means that the impact of interest rate cuts will be muted as it will not induce the banks to lend more because they will not have any available funds to lend, nor are able to borrow money from other banks at as the interbank market freeze hits a new extreme where the only source for both liquidity and capital is now from the central banks and governments. Any capital injections will be utilised to cover losses and not be utilised to provide new mortgages or other lending as the banks face a wall of defaults on existing loans.

Interest Rate Impact - This will imply deep interest rate cuts due to the relatively muted impact on the banking sector and UK economy.

Crude Oil Price Collapse

Crude Oil peaked in early July 2008 at $148, at the time my analysis called for a down trend towards $80 over the next 3 to 6 months as a consequence of deleveraging of crude oil positions having been used as a vehicle to hedge against inflation. ( Crude Oil Parabolic Move Driven by Inflation Hedging that Could Unwind) as the below graph illustrates, so far the trend to date has been inline with expectations due to deleveraging ahead of a global recession and economic deflation.