Wednesday, Nov 21, 2007
BoE determined to cut rates. Balls :( It's like 2005 all over again :(
Telegraph: Rate Cut is a "Real Possibility" next month
The Bank of England appears to be going to lower rates even though inflation is rising and oil is near $100 USD a barrel.
It's like 2005 all over again.
And just to keep the housing market going. BALLS :(
Posted by david20040_0 @ 04:09 PM (1494 views) Add Comment
19 Comments
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1. drewster said...
David, you may have missed this article in MoneyWeek last week:
"Why cutting interest rates won’t save the housing market"
http://www.moneyweek.com/file/37949/cutting-interest-rates-wont-save-the-housing-market.html
Basically now that the credit crunch has started, even rate cuts won't stop banks from tightening up lending criteria. Add to that the fact that two of the biggest names in BTL lending have gone tits-up (Northern Rock and Paragon), and you have a lot less lending.
2. techieman said...
Erm Riggggghhhhhhhhhhhhhhhhhhttttttttttttttttttt - there's only one piece of this that means anything and that is "Significantly, the state of the markets has deteriorated dramatically since the MPC meeting, with the benchmark London Interbank Offered Rate climbing up to the highest level in two months - a clear sign that banks have once again stopped lending to each other"
Hardly bullish - and illustrates decoupling. If you want to know what the market thinks take a look at short sterling futures. just in case you dont know - not that thats realistic given you seem to be the self declared / (deluded) funtain[sic] of knowledge on these issues, the prices are quoted as 100 less the interest rate. So 9350 would be 6.5% etc, so you go long if you think rates are going down and sell short if you think they are going up. Oh and in case you want to put your money where your mouth is, the contract is £500,000 nominal. So in other words £12.5 a tick for a one lot.
http://www.euronext.com/trader/contractspecifications/derivative/wide/contractspecifications-3657-EN.html?euronextCode=L-LON-FUT
3. tyrellcorporation said...
Rate cuts will do nothing than give a short and temporary shot in the arm to stocks. Cuts from the FED have done nothing other than devalue the Dollar (which will stoke inflation). If our lot go down the same route the same thing will happen.Ultimately it would be better to target the growing inflation threat and hold rates with possible steady tightening over the coming months. De-valuing Sterling would be fatal at this stage.
...There again I'm pretty convinced they'll bottle it and try to save the housing market yet again! (although I reckon it's way too late for that)
4. david20040_0 said...
Surely if the FED cuts rates the US Dollar, it will drop, but if the Bank of England drops rates for us as well Sterling will drop as well accrodingly.
CPI is up, oil is $99 a barrel, surely by cutting rates this is just to prop up the hosuing market and it's 2005 all over again.
5. tyrellcorporation said...
The recent high oil price (eg: >$90 a barrel) has only been with us for a month or so and has yet to really feed in to inflation. Up-to-date inflation data will be with the BoE at their next meeting and my guess is that we'll see another sizeable rise in CPI. I really think they should hold off a cut as a 0.25% cut is neither here nor there (lenders rates will stay the same despite a base rate cut) but will knock Sterling. David, a weaker Sterling makes imports more expensive so driving inflation. A cut really makes no sense - as Jim Rogers will testify.
6. Pelethar said...
It most certainly is not 2005 all over again. Cutting rates - even if they do end up doing it, and I'm far from convinced they will - won't make a significant difference. The Fed slashed them by half a %, are getting ready to do the same again, and hello, the Dow is where it was at its low point in August and their housing market is still in meltdown. Central banks can't force the credit system to start working again.
There has been carnage in the banking industry - the heads of Merrill and Citigroup both forced to resign and dozens more besides them over dodgy lending. Banks are right at the beginning of the job of reassessing their fundamental approach to lending and revaluing risk. This is a process that will take years not months, and in the mean time credit is going to be much, much harder to come by than has been the case over the past decade. While that's going on, confidence is pouring out of companies and punters, just look at the way people's outlooks have changed in the past three months and consider how things will be in another six months.
Add all that into the mix along with the inevitable unravelling of BTL (even take the most optimistic viewpoint and assume that maybe 10% of private landlords will cash in their chips over the next year) and try to tell us that it's 2005 all over again while keeping a straight face.
7. david20040_0 said...
OK if Sterling drops on a rate cut it will increase inflation, possibly, but Sterling is so strong now anyway it might not make much of an effect. Also imports from the USA won't be affected if the $ and £ both drop.
8. tyrellcorporation said...
The strong pound is a major reason why our CPI is as low as it is (coupled with all the fiddling that goes on). With a worsening economic outlook for the UK, I'd have thought Sterling would start to devalue of it's own accord so accelerating this would be a bit bonkers IMHO.
9. European-bear said...
Sterling is already starting to devalue. The rate aghainst the Euro has dorpped quite a lot in the last few weeks. Its just the dollar is doing even worse
10. the northerner living in oz said...
I have been surprised that the U.K has held up its value for so long.
Lowering intrest rates will delay the houseing market crash but will not prevent it.
11. New User 2007 said...
In 2005 the BoE rate was cut from 4.75% to 4.5%. This time it would fall from 5.75% to 5.25%. This means the rate would still be higher than then.
House prices have risen substantially since then and so has therefore the average new mortgage size so if one was paying 4.75% on around £250,000 (assuming London) in mid-2005 this would now be 5.25% (after two cuts) on over £300,000.
This is while the cost of everything else has rocketed over the last two years and income growth has not been fast (excluding City bonuses that are about to drop dramatically). Rental yields are being talked up by VIs, but they are exaggerating. Therefore on every measure people are already at the edge.
Crucially, unlike last time, liquidity was so high in 2005 that BLT lenders were not as dependent on official rates as long as money poured into the short-term debt markets. Even two cuts by the BoE mean nothing if these markets fail to pass them on.
The price boost in 2005 also happens to match the sharp rise in BLT purchases. They will now at best not buy (I think they will start selling).
Also different is that this time the economy is more indebted, it is about to slow a lot and access to money is being shut off everywhere. As an aside...the other day the FT mentioned that sub-prime bad debts have now hit car loans in the US.
Our sub-prime definition does not match the US, they would include self-certified and BLTers, as well as those with small deposits.
Oh, and inflation is not dead, so don't get too excited about the BoE cutting too much. They know China, food and oil are now raising prices, so for them to be considering cutting must mean they are very scared about the economy. Our economy relies on the financial sector, whether the housing and credit card finance, or the City and its links with the US financial markets. All look bad just as banks see problems with their asset bases here.
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13. Realist said...
Balls Dave. How are the US interest rate cuts doing propping up the housing market over there? It's all over Dave. Keep up the hilarious faux concerned posts though. Balls.
14. Van Hoogstraten said...
Blanchflower always votes for a rate cut anyway. The newspapers are clutching at straws.
15. Si said...
Ha Ha, comedy post of the day. etc.
Nice one
16. confused76 said...
David:
1. Don't Bank On Interest Rate Cuts
http://www.fool.co.uk/news/investing/investing-strategy/2007/11/21/dont-bank-on-interest-rate-cuts.aspx
2. Lowering BoE base rate will not reduce the cost of mortgages. We explained it to you so many times....
17. bidin'matime said...
I wrote this comment on the blog early last year and it still stands:-
Much of economics is about expectations – people’s expectations have become led by offers of cheap finance – if they are made to realise the true cost, they will perceive this as a major increase and react accordingly. So without any change in the underlying base rate, a simple change in the marketing strategy of the lenders (from fantasy to reality) can have a major impact.
One other point – once people have come to expect ‘0% finance’, this completely neuters the government’s (sorry, the MPC’s) ability to influence the economy by reducing rates. So we could very easily get the sort of problem they have faced in Japan for a decade or so – a downward spiral of both interest rates and property prices.
18. Aaron Mcdaid said...
Cutting base rates might even increase commercial rates, if you follow this logic: If the central bank decides to pump up inflation, then lenders will see little value in long term repayments and they will want to recoup the capital sooner rather than later. So inflation (or inflation expectations) will put up interest rates.
The credit market is sort-of working correctly as it is. Banks that made stupid mistakes are being flushed out, which is good. The central banks need to restore confidence in the currency so that better-run banks (those that are less exposed to bad debts) can look to lending sooner rather than later.
The central banks need to target inflation, and also be seen to target inflation. This'll restore to credit market to correct functioning. Instead, we have panic as nobody knows what the central banks will do about inflation. If I had money to lend out, I'd now have to invest in gold (or canned goods!) instead of lending to the sound businesses out there that want money to expand; but if inflation expectations were low, I'd be happier to lend.
19. Aaron Mcdaid said...
Cutting base rates might even increase commercial rates, if you follow this logic: If the central bank decides to pump up inflation, then lenders will see little value in long term repayments and they will want to recoup the capital sooner rather than later. So inflation (or inflation expectations) will put up interest rates.
The credit market is sort-of working correctly as it is. Banks that made stupid mistakes are being flushed out, which is good. The central banks need to restore confidence in the currency so that better-run banks (those that are less exposed to bad debts) can look to lending sooner rather than later. Lenders will never really lend at a discount even if there's lots of money about - the point of increasing liquidity is to ensure that lenders can't lend at a premium due to a short of money. Central banks can just push commercial rates down to correct/fair rates, but no lower. Further base rate curts just fuel inflation and actually increase commercial rates.
The central banks need to target inflation, and also be seen to target inflation. This'll restore to credit market to correct functioning. Instead, we have panic as nobody knows what the central banks will do about inflation. If I had money to lend out, I'd now have to invest in gold (or canned goods!) instead of lending to the sound businesses out there that want money to expand; but if inflation expectations were low, I'd be happier to lend.