Thursday, Jun 21, 2007
Up, Up and Away!
The Independent: Rates are going higher. Get used to it
The situation is much more like the late 1990s - when bank base rate rose as high as 7.5 per cent - than the era of poor world growth which has caused the low interest rate environment we have become used to.
The British population may now be so in debt that consumption would indeed fall off a cliff if the tightening cycle proceeded much further. Yet there is not much evidence of a significant change in consumer behaviour. We are still at that stage in the cycle where most people's idea of economising is to swap champagne for prosecco in the weekly shop.
The Bank of England gains nothing by delaying. On the stitch- in-time principle, it should be getting the pain over and done with now. It now appears clear that we are set for a period of significantly higher interest rates.
14 Comments
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1. paul said...
MPC .... credibility .... ebbing .... away ...
2. bidin'matime said...
I don't see how Merv can stay as Guv'nor if he can't get his arguments across to the MPC - he was proved right before and he will be proved right this time - but in the modern world of spin and influence, as we know, being right is no use unless you actually have the levers of power in your hands. And if the Guv'nor of the BofE doesn't have control of the situation, then what hope is there for the rest of us..?
"Too little, too late" will be the epitaph on the MPC's gravestone.
3. george monsoon said...
8pc interest rates by December anyone?
4. maddison said...
No chance sorry. My bet is 6.25%
5. Rimmer said...
Not sure how soon but my money has always been on 8%
6. Orwell said...
Too much George,
6% in August possibly (provided that Swerve can drag himself away from the BOE Lawn Tennis Club). Definetely 6% by December. Then he wil lrealsie with the onset of xmas spending as well and the pay rise season that he has indeed as most here say, acted too little and too late, then 7.5% possibly buy this time next year.
His problem is that although his inflation target is 3%, inflation is actually running at twice that and this will feed through to higher wage rises (nb watch the posties pay deal in the pipeline at the present).
The markets have already priced in long term 3% inflation. This assumes that bonds, food and consumer prices, wage rises and China behave themselves. Small chance I think. I therefore anticipate that IR's will need to be at least 20% higher than the predicted rate by next year, namely about 7.2 (7.5%).
7. uncle tom said...
I still think 6% is more likely than 6.25% (or more) at year end, but it's a fine call.
The rise to 6% is most likely to happen in either September or October, which leaves room for a possible further hike before Christmas.
A year ago I projected 6% as the most likely outcome for this year end. Looking forward to end '08 is harder - the money men are playing games that could very quickly end in tears... Barring major upsets, I see a further gentle climb in rates next year - there is no serious prospect of a reduction.
My call for the most likely year-end rate in '08 is 7.25%
8. Wisebear said...
I like the way you're thinking uncle Tom.
7.25% by the end of '08 will do me fine.
Any thoughts on Aussie rates by this YE and next?
9. sold 2 rent 1 said...
I'm going for 6% at year end.
I don't think they will get more than 2 rises in before a big stocks crash (and then they will pause).
I am changing my mind and now think rates will rise well into 2008 too.
In 2008 growth in many western economies will slow sharply and even go into recession. These slowing economies would normally start cutting interest rates. Not this time though.
Inflation is set globally now and inflation will grow with no wage-price spiral in the UK.
There is no let-off for the pain when rates peak either. Once the markets know the next rate move is down the GBP will fall and keep inflation high with imported inflation.
Maybe UK rates will only come down once the emerging economies start to experince big problems themselves. At a guess this will be 2009.
10. confused76 said...
Market is pricing 6.25% by year end today
11. Scott said...
I also think 6.25% by the end of this year. Any delay will result in sharper rises in 2008, but in both cases the end result is the same.
12. Planning4acrash (previously Pr) said...
S2R1, that is an amazing analysis, spot on in many ways I think, albeit that the reality will most probably involve a few other factors. I think you are right that we are powerless to reduce interest rates until a crash elsewhere. The only thing is, that you may understimate the BOE's ability to lower rates given that it would take 2yrs for them to feed through, so, planning for a worldwide crash in 2009, you would expect a rate cut in 2007-8. The BOE can't be expecting one till at least 2010-11 given its current behaviour.
You may also over-erestimate the beneficial impact of a crash elsewhere. This would send commodities downwards, which would take a couple of years to feed into inflation. Of course, the impact could be swift if a crash elsewhere sends Sterling upwards again. In addition, a crash here would probably be synchronised with problems in Europe and the US, and we could take down emerging economies with us. It goes to see how far their economies have decoupled from ours. That will be the real test as to whether we experience a traditional recession or stagflation. I would bet on it being a mixture of the two, we are on a decoupling trend, with new powers elsewhere, but connections remain strong.
Everybody talking about rates going up to 8%, I can see that, but, I reckon that would be a swift process if CPI gets totally out of control. If it goes close to 3.5 then we could see half point rises back to back. If that doesn't happen, I think 6% end of year, possibly 6.5 in 2008, with any higher rates coming as a panick reaction with things out of control, as happened in 1992. A real possibility is that RPI becomes so decoupled from CPI that it starts to cause second round wage led inflation. If that happens, the treasury will be forced to dump the CPI in favour of the RPI. That will cause a major uplift in interest rates, having a very similar impact as when we exited the European Exchange Rate Mechanism.
13. sold 2 rent 1 said...
Planning4,
I agree with most of your points although the text is a little confusing with the word "crash" being used many times.
It might be worth stating whether you are refering to a stocks crash, hpc, commodity crash, or economy crash (recession) in each occasion.
For the record I think there will be a 10-20% stocks crash later this year. There will be a small recovery in stocks after that but the trend in real terms will be down by 70% over the next decade.
As for HPC. Prices to peak in Q4 but the crash could take 4-8 years to bottom out with a 40-50% reduction in real terms.
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