UK Interest Rates and GDP Growth Trend Relationship

By: Nadeem_Walayat

This analysis forms part of a series that aims resolve in an accurate UK interest rate forecast for 2010 which follows in depth analysis and forecasts for UK inflation and economy.

UK Interest Rates and GDP Trend Relationship

The below graph shows UK Interest rates against annual GDP as well as the spread between the two. Also included is the current forecast trend for UK GDP growth for 2010 and 2011.

The above graph shows an average interest rate spread against annual GDP of 2%, with a wider range of 4% to 1% i.e. UK interest rates are normally expected to be 2% above GDP. The current spread as of Q4 estimate of -4.73% is at 5.25% which illustrates why the Bank of England embarked upon Quantitative Easing aka money printing in March 2009 as interest rates of 0.5% had little impact on the actual economy at the time due to the degree of economic contraction under way.

However taking the strong forecast GDP growth into account that projects to +2.8% for 2010 and +2.3% for 2011, then the current base interest rate of 0.5% will result in a swift plunge in the real economic interest rate to far below the trend of 2% and the low of 1%, which therefore suggests that the UK interest rate by the end of 2010 would be targeting 4% to stay within this range and rise to 4.5% by mid 2011. Off course this is dependant upon the strong GDP forecast growth of +2.8% actually transpiring, nevertheless this analysis does suggest that even a mild recovery of below trend to +1.5% would still target an interest rate of at least 2%, therefore this analysis is suggestive of an end 2010 interest rate range of between 2% and 4%.

UK interest rate Forecast 2009

The UK interest rate forecast of early December 2008 for 2009 forecast that UK interest rates should decline to 1% (from 3%) by early 2009 and remain there into the second half of 2009. However following the cut to 0.5% in March 2009, the Bank of England has continued to pursue an artificial banking system by keeping interest rates at an extreme historic low of just 0.5% into the end of 2009 so as to flood the bankrupt banks with liquidity to enable them to rebuild their balance sheets by overcharging customers against the base interest rate and manipulated interbank market rate of 0.66% against rising real market interest rates which have been in a steady climb since March 2009 which increasingly means that the base interest rate has become irrelevant to the retail market place as explained in the article - Bailed Out Banks Not Lending, Sitting on Tax Payers Cash.

Forecasts for UK Inflation and Economy 2010 and Beyond

The below are the concluding forecast graphs from in depth analysis for UK inflation and economy that build towards the UK interest rate forecast for 2010 as well as the inflation mega-trends ebook. To receive the final analysis and forecast in your email in box, ensure you are subscribed to my always free newsletter.

UK Inflation Forecast for 2010

UK Economy GDP Forecast for 2010 and 2011

Source: http://www.marketoracle.co.uk/Article16381.html

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

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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 UK inflation, economy, interest rates and the housing market . Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 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

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