UK Interest Rates, Money Supply
and Inflation 2008
by Nadeem Walayat, TheMarketOracle.co.uk | January 24, 2008
PrintThe US Fed's emergency 0.75% interest rate cut to 3.5% following the global stock market plunge on fears of a looming US recession now increases the probability of a near certain cut in UK interest rates at the February MPC Meeting, rather than at the originally forecast March MPC meeting. Whilst the US has made deep cuts in interest rates from a peak of 5.25% to 3.5%, the UK has only cut rates by 0.25% from a peak of 5.75% to 5.50% with the expected February cut to take rates to 5.25%.
The Market Oracle forecast as of August 07 and Sept 07 is for UK interest rates to fall to 5% by September 2008, with interest rates about to reach 5.25% by February 08, would now suggest that the original 5% target could be breached by September 2008. However some economists suggesting much deeper rate cuts on par with the US cuts may be greatly disappointed as inflationary pressures persist which are further being exacerbated by a weakening British Pound that has fallen from a peak of $2.11 to $1.95 today.
UK Economy
The forecast for UK GDP growth by the end of 2008 is for a an annualized growth rate of between 1% and 1.3%. Which suggests that despite much bad news on the economic front, the UK looks set to avoid a recession during 2008. The first half of the year will be much tougher in growth terms then the second half, which therefore suggests a pause in the rate cutting cycle as we move into the second half of 2008.
UK Inflation and Interest Rate Trend Forecasts
As forecast in November 2007 - UK Inflation Forecast 2008 (RPI and CPI), the current up tick in inflation is expected to terminate in Jan 08, and the trend is expected to resume lower, forecasting a sharper fall for the RPI than the CPI. RPI is forecasting a trend towards 3% and the CPI is forecasting a trend towards 1.9% by September 2008.
UK Money Supply M4
The anticipated trend in the UK's Money supply growth continues to moderate from the high levels of 14% plus towards a trend to below 10% as per the analysis of 18th Sept 07 . Money supply is an important contributory indicator for future inflation between 6 and 12 months forward. Hence money supply growth near 14% during mid 2007 was expected to result in higher inflation going into 2008 ( 22nd August 07 ).
The conclusion is that the Bank of England will take the drop in M4 to below 10% as a better indicator of future inflation 2 years forward, and therefore continue cutting UK interest rates that are now targeting a move to 4.75% by September 2008.
Copyright © 2008 Nadeem Walayat
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