Wednesday, Nov 19, 2008
What happens when they run out of interest rate s to cut?
BBC: Bank hints at further rate cuts
There could be more cuts in UK interest rates, according to the minutes from the Bank of England meeting at which rates were lowered from 4.5% to 3%.
The Bank's nine-member committee voted unanimously for the cut on 6 November, but considered a bigger one.
The Bank's own calculations showed that a cut to 2.5%, or even lower, would be needed to stop inflation falling too far below its target next year.
Posted by flintster1994 @ 11:39 AM (828 views) Add Comment
12 Comments
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1. stillthinking said...
They will start to monetise debt i.e. print money. They will have to do that anyway because real buyers of government debt are already running out and now 2009 looks as though its going to be the bad year.
Also, they must be aware that they can't kickstart borrowing if all the money is already in UK gilts, and nothing left for the housebuyers.
2. flintster1994 said...
If the?y crank up the printing presses even more, then isn't deflation going to be possibly short lived and hyperinflation takes it's place?
3. stillthinking said...
Personally I don't think so. I might be wrong of course.
It doesn't make much difference who borrows the money, the public won't, so the government will instead. The problem is that the government won't be able to borrow sufficient amounts to compensate for the public.
They are not cranking the printing presses at the moment, government borrowing is funded, but the number of people who want to fund gov. borrowing is falling. That is 'gilt coverage' i.e. who wants the debt. This used to be at 2.4 or the debt was oversubscribed because so many people wanted to lend to such a 'safe' borrower, or they were pension funds holding your money who have invest in gov. borrowing legally.
This went down to 1.4. Still oversubscribed. The problem is when less than 1. i.e they have run out of people who want to fund them. In which case interest rates on the debt have to become more attractive.
I am not totally sure about all this but when we are tapped out in the UK, foreigners will look at relevant sterling falls as well, the interest rate must compensate for any losses from our ongoing devaluation.
If you look at the Barclays international loan this makes sense. Obviously Barclays cannot have borrowed at 14% with a domestic lending rate of 4%. They can't make any money like that. So although which currency they have borrowed is not mentioned in the media, sadly enough, I think that they must have borrowed in sterling to fund their international operations in other currencies.
Truthfully I can't see how borrowing at that price makes any sense and probably is just a top -up measure for capital adequacy.
Not letting that stop me, you can see that if you make a profit on internation currency lending say 4%, and that sterling is devalued by 50%, then the real return in sterling would be 6%, if you are using sterling as your capital base to underpin the loan.
4. paul said...
I've written this as comments under a number of articles talking of deflation (Guardian, Telegraph, Times) but no-one seems to print the them.
Either the economics article writers don't think the point is relevent, or they would prefer to pretend its not relevant.
A little bit like the revelation last week that there is a gentlemen's agreement in Westminster not to discuss the possibility of a run on the pound. We are supposed to be living in an open democracy! And yet there are some topics around the Bank of England's decisions that simply must not be openly discussed in the media:
I firmly believe that if these questions had been asked, early on, the MPC would have had to rethink their house price inflation-chasing strategy, and we would almost certainly be in a better situation than now when we have to print money to get out of the current fix.
The MPC have failed abysmally. So how come no-one's asking why?
5. stillthinking said...
Another aspect of the Barclays loan, it isn't just that specific funding cost, it is their -average- funding cost.
For example, if I accidentally wander into an expensive bar and am faced with a eye-wateringly expensive beer, I will buy it anyway because I know that it is my average beer cost which is important, not just each individual one, and that I can immediately reduce the average price when I get home by swigging loads of Tesco Back-To-Basics lager.
@paul. The MPC didn't lose control, they never had it. Their fake illusion of control was achieved by forcing the consequences of unnatural interest rates onto the value of sterling.
6. paul said...
Yes, I accept that they were never controlling it literally, but no-one has questioned why the MPC's rate has suddenly detached. They'll happily talk about the effect, and reason what it means, and why it won't necessarily mean lower mortgages, but the media will not ask why and how the MPC and Bank of England got themselves into that mess.
7. stillthinking said...
But we know why anyway. We all borrowed too much and had a big fake boom.
8. Puppee said...
interest rate cut's will do nothing to save this country it will just devalue the £ which i believe is the plan so they can introduce the euro on a 1-4-1 basis, the only thing that stand's a chance to save this country now is to slash house price's now back to the early 90's and it might even be to late for that to work but brown is doing everything in his power to stop house price's falling WHY?
9. shipbuilder said...
That's a good explanation, stillthinking@3.
The fear would be that if it came to printing money that people to not understand the consequences, or at least are convinced by fear that the benefits to them outweigh the downside.
10. paul said...
No, I don't think we do know why, stillthinking.
The reason we all borrowed too much and had a fake boom was because the Bank of England engineered it. It is debatable whether that was deliberate - I suspect they regret it thoroughly now.
However it doesn't take away from the fact that now the plane has crashed, the passengers are all a bit dazed and confused and meanwhile the pilot is sloping off unscathed, and most importantly, unquestioned.
11. landofconfusion said...
> 8. Puppee said...
>
> brown is doing everything in his power to stop house price's falling WHY?
Sentiment and re-electability.
Rising house prices -> people feel richer -> they spend more -> 'stronger' economy -> less chance of voting out the current idiot.
The opposite happens when house prices fall.
12. flintster1994 said...
"Rising house prices -> people feel richer -> they spend more -> 'stronger' economy -> less chance of voting out the current idiot."
I agree with this statement if you add in the words "the illusion of a" before stronger economy.