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.

Forecast for UK Economy 2009

The UK economy has experienced a long period of economic growth from 1993 - 2008. However, this unprecedented period of unbroken economic growth is coming to an end.

The UK economy is experiencing a number of problems


Credit crunch leading to shortage of borrowing and lending
Falling house prices, which is reducing consumer confidence and consumer spending.
Record debt levels which leave little room for manoeuvre in a recession.
Cost push inflation making it difficult for the MPC to cut rates. Inflation well above the government's target of 2%
Increased government borrowing, as the cyclical downturn worsens the governments finances.
Global economic downturn causing lower exports. e.g. even the devaluation in the pound has done little to boost growth.
Persistent weakness in Manufacturing sector - contributing to persistent current account deficit.
In the next 12 months, growth will slow and the economy will enter recession. However, with the slowdown in growth and lower oil prices, inflation will fall enabling lower interest rates. This will help the economy to recover.

The housing market will struggle to recover whilst the shortage of mortgage finance persists. Also whilst house prices are falling people won't want to buy so the problem will be exacerbated.

Falling house prices will also continue to have a negative impact on the economy in 2009.

UK Economy forecast, year of recession in 2009,

The British economy will contract in 2009 in its first full year of recession since the early 1990s, one of the country's leading economic forecasting groups said today.

Capital Economics said a combination of a weaker than anticipated domestic economy, a recession in the eurozone and the threat of a contraction in bank lending would result in a quarter-point reduction in gross domestic product next year.

The forecast, the first to suggest that Britain will have a year of negative growth, came after last week's news that growth in the economy came to a halt in the second quarter of this year. Capital Economics said the recession of 2009 would be sandwiched between two years of weak growth - 1.2% in 2008 and 1% in 2010.

Academics and City analysts have been trimming their estimates of 2009 growth, with the latest consensus for expansion of 0.9% next year. That is well below the latest forecasts delivered by Alistair Darling in his March budget. The chancellor said then that the economy would grow by 2% this year and 2.5% next, though he will be revising down his estimates in the pre-budget report this autumn.

A separate report yesterday from the ratings agency Standard & Poor's said Europe was no longer likely to remain immune from the US-prompted slowdown and should be braced for a period of stagflation, while the chief executive of Britain's biggest independent financial adviser warned that Britain was heading for further trouble.

"The state of the economy is very worrying and I don't think people have properly factored in how bad things really are," said Hargreaves Lansdown boss Peter Hargreaves.

S&P said the UK, with its high debt levels and declining housing market, was more exposed than the eurozone.

Vicky Redwood, of Capital Economics, said: "For now, we expect a modest contraction of about 0.25%. But given the magnitude of the downside risks, it is becoming clear that the possibility of another full-blown slump like that in the early 1990s cannot be dismissed out of hand. What's more, a fall in bank lending could mean that the economy takes even longer to get on its feet again. Even in 2010, we expect growth of just 1% or so.

"All this supports our view that interest rates will eventually fall much further than the markets currently expect. For now, we are sticking to our prediction that rates will drop to 3.5% next year, but we think it is quite plausible that they fall even further."

George Osborne, the shadow chancellor, said: "Another day brings another gloomy prediction. The Brown bubble has burst and, thanks to Labour's incompetence, nothing was put aside for a rainy day to help British families cope."

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