Friday, Oct 05, 2007
Lower Sterling and Lower INterest Rates Predicted
Daily Telegraph: HSBC warns of hot money exodus from Britain under 'siege'
HSBC predicting lower sterling and, interestingly, cuts to interest rates in the New Year. This matches my own belief of what will happen. Perhaps the Government is content for higher inflation as it will erode debts?
Posted by talking rot @ 08:13 AM (1498 views) Add Comment
23 Comments
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1. Axxo said...
They have some facts wrong here, £176,300 divided by 5 is £35,300 this is not the average wage in the UK, minus tax leaves £25,063 divide by 12 gives income in hand of £2,088, the mortgage repayment on a loan of £176,300 with a 5% deposit is around £1,000... this is 50% of mortgage costs as a percentage of income not 32%.. John Andrew do you own a calculator?
2. eyeoftheweasel said...
Unfortunately, this is something that's concerned me about the way the UK economy is heading. Hopefully it will end in a HPC, but there could be a fall in the value of sterling instead/as well, cushioning the extent of the HPC (or even negating it in sterling terms). Or, to put it another way, the cost of over-inflated property prices is spread out amongst everone in the country, regardless of whether they own a property or not.
A significant fall in the value of sterling would be bad news for everyone in the UK: higher prices across the board (particularly bearing in mind the current high volume of imported goods into the UK); the value of pensions and savings eroded; etc. Plus I very much doubt that UK salaries would rise in line with the increase in prices, not without a lot more strikes anyway.
I think a lot of this would have been avoided if the government had used a more honest measure of inflation (i.e. one that includes house price inflation as well as consumer prices) and that had been used in the setting of the BoE's interest rates. Of course, that would probably have contained Gordon's magic house price boom, but it would have left the UK economy in a much more stable state long term.
3. alan said...
"HSBC believes that Bank of England will have to begin cutting rates by early next year, with growth falling to 1.7pc for 2008 as a whole"
If one ponders the implications of interest rate cuts, does this automatically mean that mortgages get cheaper (for those still in jobs to pay them)?
If lots of money, which is propping up our consumer boom, leaves the country what happens then?
How will the government deal with higher inflation - a "spring of discontent" may come along over wage deals?
4. inbreda said...
Which means that teh best move is either to currency trade against GBP or buy gold.
But even gold only protects against inflation - if house prices are stagnant, you'd still have to wait until your salary had caught up to enable you to buy a house at 3.5 x income. Meaning that BTLers would be off the hook.
It's a long tight-rope to walk though.
5. C'mon Correction said...
In another 3-6 months from now when inflation is once again touching or over the 3% limit, i think people will be talking about when the next rate rise will be again.
There will not be a rate cut unless we are clearly in recession (or within a few months of) or a HPC has started. Any cut the MPC make, the UK economy will pay for dearly by imported inflation. If things go badly then I think we could have a rate cut next Easter-Summer, otherwise I still think we'll hit 6% base by Feb '08.
6. bingo said...
If the BoE were as smart as I think they might be, they will be looking at the last rate cut by the Feds in the US and currently be in a 'wait and see' mode. The indications are that the half percent cut has had no immediate impact other than to inflate the Dow a little more. It hasn't spurred house sales, consumer spending or a massive collapse in the greenback. It is still early days yet, and they have some 'not great' news coming up regarding employment. So far it looks to have had a pretty benign affect on the US economy as a whole.
7. paul said...
Now we will see Mervyn Kings true colours.
I think its good that the Augst 2005 rate cut has been remembered as a mistake, and that Mervyn himself opposed it. If the Bank of England and MPC are truly independent, we won't see any rate cutting for some time. HSBC know what they are talking about too - they were the first to predict the current turmoil about six months ago, and so their predictions have a nasty habit of coming true.
8. Disillusioned said...
"If one ponders the implications of interest rate cuts, does this automatically mean that mortgages get cheaper (for those still in jobs to pay them)?"
@Alan: No it doesn't. The banks are still unwilling to lend at low rates and will continue to be for a while - too risky for them. An interest rate cut won't reduce mortgage rates.
9. japanese uncle said...
"Mervyn himself opposes it"
How naiive to buy those published minutes at its face value. Classical method to disperse responsibility/blame, saving the face of a figurehead. They were fully aware that such decision should afterward be picked up as the single biggest error (in fact it was undoutedly a deliberate act to boost the bubble to the maximum) . hence this cheap farce. Members of the MPC are more or less employed by the kind of people who benefit the greatest from volatile/fluctuating rather than stablized economy, so this sort of trick is the best we can expect of the BoE, or any other central bank for this matter. Responsibilty of such wrong decision is shared by half a dozen individuals. You can not possibly sack them all can you?
10. confused76 said...
Barclays too is bear re the pound. News of this morning.
11. sold 2 rent 1 said...
I'm moving most of my cash to a stocks trading account in Canadian dollars CAN so I can easily buy gold mining stocks on the Totonto Stock exchange. The CAN has surged recently and will continue to rise as this gold/commodity secular bull run picks up pace.
Guys, IMHO, we will not experience any rampant inflation in the west like the 1970s. The threat is clearly deflation. Any inflationary effects of food and imports will be offset by the deflationary forces of falling stocks and property, rising unemployment and recession.
Above all, for inflation to take off you need a wage-price spiral and that will not happen (offshoring and immigration have put caps on wages)
The link I posted earlier this week that showed the relationship between IRs and stocks has gone from a negatively correlated one to a positively correlated one (the turrning point was 1997 - mid-point in this interest rate secular bear). From 1981-1997 interest fells but the markets showed their biggest fear was inflation. From 1997-2015???? interest rates will keep falling to near zero but the markets now fear deflation more than inflation.
Sure, inflation may pick up by 2015 and we may end up with an inflationary blow-off (like in 1937) but don't expect any rampant inflation any time soon.
Looks like inflation is picking up in the emerging economies but for us - Think Japan 1990-2005.
12. japanese uncle said...
S2R;
I agree basically, but in the UK and US you must expect near run on currencies. GBPand USD may well devalue by 30% in the very near future, which would certainly create some inflationary pressure here as we are surrounded by imported goods. But more than half of such pressure will be absorbed by getting rid of the 'froth' of economy including the reduction of profit margins, I guess.
13. mrmickey said...
We've had the hyperinflation bit, it's gone in to housing, commodities and stocks. We could see some inflation now in consumer prices but as you've pointed out sold 2 most people don't have any bargaining power when it comes to wage deals so it won't come from wage inflation. So yes I agree we are heading for a long deflationary slump like Japan, this is a problem if you are thinking of buying a house, houseprice could fall slowly but over a very long time as in Japan.
14. planning4acrash said...
It could be worse mrmickey, fancy puffing through a joint of stagflation? It'll be coughing and spluttering all the way!!
But I think something bigger is happening here, lets for a minute look beyond the transition and think about where we are heading. A depreciating currency in the west will force developing countries to stop dumping their cash in foriegn reserves and will destroy the carry trades that have been going on. So countries that have produced, saved and invested will begin to consume and consumer goods from the UK will retain their quality and become far cheaper with a depreciated currency. British manufacturing could be the next big bet, what we have left is very innovative and robust. Expect Germany to have a manufacturing boom if the Euro begins to depreciate. This could therefore be a seisemic shift, a logical conclusion of offshoring our economy. The interesting thing is that the shift is a definite expansion of the world economy and resources are limited, so inflation and currency fluctuations will work together to ration access to the new economy.
15. bingo said...
That really is an interesting take on the situation. I could run with that idea, the only point I would make is that basic costs of foods (raw materials) is experiencing severe inflationary pressure at the moment due to issues outside the control of our farmers. The main drivers for this is due to emerging economies changing diets, some ecological issues (drought etc.) both of which are causing a supply vs demand crunch and also fuel and power costs, increasing labor costs in 2nd world (even the Poles won't work for peanuts anymore).
16. eyeoftheweasel said...
Do we have any manufacturing industry left in the UK worth talking about? There are probably plenty of empty factories around that could be utilised again, assuming they haven't all been turned into BTL flats.
17. cyril said...
@ P4C - a weak pound may be good for manufacturing but I can't think of anything which is still made in Britain to benefit from it (except stuff like building materials). When people think of manufactured goods like cars, most of these are just assembled here from components made abroad to get round the EU rules.
18. Dstars said...
Banks and wags are all playing at genius for they think, given that the BOE is owned by the politicians and Bernanke is a poor lost soul, that central banks will lower rates for that's what '[i]we[/i]' all need.[/b]
Indeed, if they had not been doing just that very thing since the Asian currency crash that would be a good thing and maybe even get us out of this mess. Perhaps we might even all get rich as money is pumped in through the housing market and lobbed into outer space in CDOs and related dobs of joobie?
But, after a little while during which it will seem to them that they're in control, it will become obvious that stagflation will not be so easily dismissed.
These people are the people who have torn the global economy apart and they are not equipped to fix it. It will fix itself, in time, but only after '[i]we[/i]' realise that we cannot manipulate things as easily as we wish. (Any more.)
Cable (GBP/USD) is not about to 'fall'; outside of the minds of people who think central banks have just made it easy.
[b]
What that means is that it will fall.[/b] [i][b]It will fall enough to make people believe it will fall some more.[/b][/i] It will look like a self-fulfilling prophecy. But it will hit the bottom of a range and then it will come back. Speculators will take it down and the invesment bank thugs will dive in for some easy money. But just as it seems the poor pound is toilet paper, people will start to get the idea that prices are going up and up and up, even as our economy cools down. Rates will go up whether central banks and Finnoula Whatever-her-fcking Nationwide name is wants lower rates or not.
[b]
The longer term for cable is still upwards for the dollar is dying. [/b]And when the investment bank sheep see that despite their best efforts rates simply will not do what they are told; then cable will bungee up to a new range.
Anyone who listens to invesment bank currency analysis needs their heads examined.
But certainly there is money to be made on the downside... for a wee while.
19. planning4acrash said...
Cyril and weasel, it is little known that we are the worlds biggest exported of cultural goods, media, books, films, music (and these are boom time industry's as the third world gets digital and on-line) and our wealth is very dispersed, British companies own many lucrative industry's all over the world. Little known that manufacturing that survived the downwards rout since the 70's is extremely high quality and extremely robust, some of the best in the world, we lost the dross that had been suported by government but kept what could survive a difficult environment and off-shored labour intensive activities, so what we have remaining is high value added. Unfortunately some of that is in nasty military manufacturing, look at the billions Saudi is paying for military hardware (FROM BRITISH MANUFACTURERS), look at companies like Rolls Royce, we produce (tho don't own) excellent cars like the mini, there is a lot of creativity that could grow steadily over the next couple of decades and make up for losses in the city. That would also help to re-balance the economy away from London, the north is now a relatively low cost base in european terms.
But we will also retain a healthy city in the long term, because the ease at which firms can sack and hire workers in London and London's capacity to build more office space means that this city is one of the most responsive in the world to the needs of the financial sector. Government will I'm sure ensure that taxes don't squeeze the companies away either. Companies that survive downturns appreciate flexibility and will on the whole stay, why operate in Paris where regulations stop you responding to a downturn by sacking desk jockey's?
In the short-term house prices will be down down down and we will need to deflate or default our debt (consumers here can easily just go bancrupt, IVA and dump debt and our high currency can deflate debt, so I doubt it will take more than a few yrs to be gotten rid of, even if that means having a depression) but the UK is very well placed for the longer term. Even in terms of peak oil (we still have oil and have a few hundred of years of coal left particularly when coal gassification becomes viable, I just hope we master carbon storage and capture before that happens) we have the greatest access to renewable energy (wind, wave, tide) in Europe and that will be exploited in time. And our climate will not be as adversely affected as many other major economies. Flooding and the risk of the north atlantic drift stopping aside.
20. paul said...
p4c, I don't whole heartedly agree.
I think the last five years have been very distracting for the UK economy. When was the last time the government publicised any industry initiatives to boost investment or R&D? No instead the government has been able to sit back and watch the money roll in by doing precisely nothing.
Labour have had a very easy time of it economically, and has become very lazy about stimulating growth in the economy outside adding incentives for proprty investors.
Sure, military spending has continued but only because it would be too risky to outsource it. All other manufacturing has dried up (remember Rover? - they do in Solihull!). What exactly is left? The city, which makes its money by repackaging fixed income debt, which with that money goes and buys mortgages which can be repackaged to generate fixed income-based securities etc. etc. Not a complex relationship, but one that is fairly isolated from the real economy.
I'm not being obtuse or wishing to be unnecessarily pessimistic but I simply don't see the other income-generating sectors of our economy.
21. waitingfor hpc said...
Guys I work in mnfr and supply all the big names in south east. It is all moving production / product sourcing to china & e europe. Manufacturing in this country is dead unless imports become more expensive and fast but that may even bee too late now.
All i hear is this is closing, that has closed. XYZ is buying all products abroad or setting up a factory in Poland, Hungary, anywhere that offers cheap labour.
One of my customers was given the land to build a factory in Serbia!!! He is paying £6 per hour for office design workers better skilled than in the UK which would cost £40 per hour!!! When he opened the site he had over qualified boffins applying for jobs.
22. mrmickey said...
I think the old guard like the UK, France & Germany are screwed due to their massive welfare states which render them uncompetitive in the new global market, the cost of living is way to high in this country it needs to fall a long way to make our labour competitive again, we should have a well educated population that can take on the challenges coming our way but we don't were screwed, most people only have the skills to stick labels on toy dolls.
23. Paranoia Blue said...
The bottom line, as far as the UK economy is concerned, is:
a) A virtually total dependence on the service industry - with a chronically unhealthy bias on the so-called financial sector.
b) A miniscule “real” manufacturing output.
c) A terminally declining commodity base.
Not a particularly happy outlook!