Wednesday, Jun 06, 2007
IR at 6% tomorrow?
Bloomberg: Bank of England Needs Shock Move to Tame Prices
"Where will U.K. interest rates peak? Most people in the market say it is somewhere between the current 5.5 percent and 6 percent. They are kidding themselves. When the Bank of England's Monetary Policy Committee begins its two-day meeting today, it should consider a shock half-point move straight to 6 percent. Meanwhile, the markets should be thinking about rates peaking closer to 7 percent"... straight talk, but it may be just wishful thinking...
Posted by confused76 @ 10:36 AM (141 views) Add Comment
14 Comments
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1. Orwell said...
I cannot remember the times that I have told people I suspect it will be 7.5 % by next year.
Where there are labour governments there are periods of overspending in the public sector. This causes the spending of money that at first is taken from tax and when that dries up or finishes then they print money they don't have.
Therefore we have two crunches. Firstly the amount of your taxes taken mean that you don't work so hard and therefore slacken off whether employed or self employed, (if you don't stop business as a self employed person in the UK all together of course), Secondly that needs to be made up and the money supply extended / increased. This means that there needs to be either a devaluation (see Andrew Marr on Tuesday about the 1970's as a good example (nb Harold Wilson's government) or higher interest rates to encourage investment to make up the deficit.
Any guess which? the City (coupled with the expense of Afghanistan, Iraq and now Iran) and probably the electorate won't allow a devaluation will they now?
IR's at 7.5 % by next year
2. Realist said...
The MPC are too scared of spooking the markets to go for shock moves so I suspect they will continue the drip, drip approach of increases - death by a thousand cuts. I also think that the economists calling 5.75% as the top have got it wrong - most of them hadn't previously forecast that they would go that high so their forecasts are getting revised upwards all the time.
Rates at 7% = major real falls in prices. Many homeowners wouldn't be able to service their mortgages at that point.
3. Mark Wadsworth said...
Well, at the risk of sounding callous ... bring it on! (I am a net saver)
4. Pelethar said...
Superb article, but the wise monkeys on the MPC will ignore this logic as they don't want to risk upsetting Gordon. They will take IR's to 6%+ within the next 9-12 months I'm sure, but they will continue to attempt to boil the frog - they don't have the balls for anything tougher.
5. Seenitallbefore said...
This is the trouble with the head in the sand 'steady as we go approach'. The BOE is out of touch with how a lot of people consider finances. It's a bit like putting 10p on a packet of fags every budget for 5 years. The creepage doesn't seem as bad as whacking 50p on in one go and therefore it gets absorbed. The point is simple - if you want to discourage excessive borrowing and speculation you have to use a heavy stick to get the message across sometimes. Now is one of those times - So 0.50 this month to set the scene and then a repeat dose next month. Get in quickly in case the sun shines brightly throughout the summer and incourages the spending, borrowing morons to spend and borrow more. The credit binge has to stop sometime as it did (and nobody predicted it would) back in the late 1980's early 1990's and it may as will stop now.
Or as I am beginning to cynically think, the MPC members themselves have too much at stake individually and they are trying to buy time to offload their own portfolios prior to giving the general public and greedy BTL's six of the best.
6. Scott said...
It is clear that the current interest rates are not making a difference. An extra £120 a year on your mortgage for example. So what, any idiot can afford that. I could afford that, even if I was still in my first job. Don't get me wrong, I believe there will be a crash, but lets start being practical rather than hopeful.
7. royston said...
If only!
I think that higher interests rates are inevitable throughout the western world now. The ubiquitous policy of using the interest solely as an instrument for inflation-targeting, where inflation is measured as CPI, has proved a failure. We need a broader measure of inflation which reflects the true cost of living of the average individual. We also need to separate our concepts of savings and investments, which most people see as the same thing. Savings and investments are not the same thing. Savings don't nose-dive in value because a piece of bad news comes out. On the other hand, they also don't surge in value when too many people are buying. People in the west are not saving anymore. As a result, they have no reserves when asset prices fall. Similarly, their ability to consume is determined solely by how inflated assets prices are. Falls in asset prices leads to cut-backs in consumption, which in turn leads to a slowdown in the global economy. This is a house of cards. For stability, we need people to have savings - i.e. cash in the bank. How do we get people to save - pay higher rates of interest!
8. Orwell said...
Seenitall...
Touche, Couldn't agree more. However, one must consider that self styled economists such as Kate Barker are pseudo academics. They may have large portfolios etc., but then this also goes for Judges etc. who very occasionally can be persuaded to rule outside their narrow class interests.
The truth is that IR's need to rise to 7.5% and there is no talking that Kate and crew can do to prevent this. It is only a matter of (a short) time!
And, don't forget, as pseudo academics they will have to answer to their peers and look respected in their eyes.
Oh the dismal science. Who would 'practise' it? even at several £100k per annum! (well ok I could be persuaded to lie for that - I am a lawyer after all!)
9. Orwell said...
Of course the other thing about overspending in the public sector is that it freezes genuine inspiration and enterprise out - another downward spiral! Hence, more spending...spin...less enterprise...spin...more spending...spin...less enterprise..
But I am sure the message is clear. All those schoolboy and poly-versity student politicians, the reckonings coming....
There again you do have 40/60ths index linked pensions on your £59K p.a. salary don't you?
10. confused76 said...
Scott, I am not quite sure where you have learned that an additional £120 per month will not make a difference. Do you know how many people already cannot service their mortgages? How many of them are "any idiot"? I don't, but if you also do not know then please explain how you reached your conclusion.
However, UK consumer confidence is all time high today and ECB has just raised IR to 4%, which means doubled in 18 months !!!!
I know, this cannot happen in Fantasy Island... where all is different here and this time....
remain hopeful maybe we ll read the good news tomorrow
11. Chilli said...
Confused - Scott said '120 a year'. Not a month.
However, 130 000 average morgage at 0.25% equals 325 a year. 27 a month. Not exactly as low as 10 a month, but still very affordable.
12. Orwell said...
Chilli,
Its Compund and not Straight interest!
There is a far more complicated method/formula you have to follow - and its much more than £325 p.a. !
13. denzil said...
6.0% by close of 07 and 6.75% by close of 08. Can't see a peak of greater than 7.25 over the next few years at least.
14. Neal_ferris said...
What could happen. We join the Euro at a rate which devalues the pound by 10 - 20%. That would fit in with past experience. The pound in your pocket and all that.
Interest rates fall to the European levels and the house price boom continues. Everybody's happy, including UK holiday resorts because overseas holidays become very expensive.