Thursday, Jan 08, 2009
Interest rates hit all-time low
BBC: UK Interest rates cut again by 0.5%
The Bank of England has cut interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery.
The half percentage point reduction brings interest rates below 2% for the first time since the Bank of England was founded in 1694.
Posted by jack c @ 12:03 PM (2801 views) Add Comment
61 Comments
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1. 51ck-6-51x said...
Some further comment From Preston: Does it matter?
2. 51ck-6-51x said...
I'm wondering how long it is going to be before the eyebrows make an appearance to confirm treasury action in the way of some kind of quantitative easing (since the cut was not more than the expected 0.5%)
3. jack c said...
@51ck-6-51x - The Badger has made various comments on radio broadcasts today that the Gov have no intention of printing money - I'll take that as a signal to tell the workers at De La Rue to warm up the printing presses.
4. paul said...
More importantly, does the MPC matter?
5. P. Riddy said...
Of course the Govt doesn't intend on printing money. The Bank of England is a private institution now, independent from government. It will print money. Notice that gold hasn't jumped up? Apparently COMEX is delivering promises to deliver because it cannot deliver physical gold. System is at breaking point now.
6. crunchy said...
Another cut?
My, what a suprise!
Tell me something I did not already know months ago.
Ground zero to come. Printing? I shudder!
7. inbreda said...
spread the news. My reaction to this is to empty all of my bank accounts on 14th feb for a few weeks. We'll see how the banks survive without my extensive funds ;-)
8. jackas said...
inbreda,
I agree that a "savers alliance" type movement against the banks will focus everybody's mind a little bit, and I'm well up for it.
Where would you put the money though?
9. crunchy said...
I have a hunch that Sterling we see a rise soon on Obama's policies, circa 21st Jan.
Dollar to take a big dip. IMHO.
10. notaneconomicsguru said...
The MPC and governments in general, seem to be equally good when things are nice and steady, but they are equally bad when stuff happens. They far too slow to call time on times of boom and far too slow to call time when times go bad. Having seen the 90s depression and the current one, I now believe that the MPC with all its economics gurus is actually no better at understanding and managing things than an elected minister with no formal training in economics. In fact, the 180 degree change in interest rate policy between the late summer and now leaves me with the impression that despite their experience and qualifications and access to data, the MPC really didn't know what was going on.
11. 51ck-6-51x said...
Inbreda:
I'll repeat my objection to your en-mass savings withdrawal idea here.
It's a great idea as a potential (i.e. as a bullying tool)
BUT
It's a really bad idea to carry it out since it can only damage the value of those savings in real terms.
Don't do it!
Note that I am a saver and have zero debt so I am with you in principle.
12. paul said...
The MPC has never really understood their jobs - in fact they've admitted on a number of occasions that either:
a) They didn't really understand the way financial markets work
b) They didn't really understand that a credit boom - which was observed by them to inflate asset prices could affect the real economy
and now they are saying
c) They don't really understand whether printing money will work
It's just a litany of excuses, shoot from the hip rate decisions and mumbled, ineffectual apologies for the consequences of those decisions.
13. 51ck-6-51x said...
Thinking it through maybe the threat should be a coordinated 5% funds withdrawal on 2008-02-14.
In the case that the acting agents (us) do as they say it would really hurt the banks (their capitalisation ratios would be shattered), but the threat would also still be that of a full on bank run (since who in their right mind would only withdraw the 5% proposed when the banks would collapse).
14. techieman said...
,,,But if you instigate a run then that will just result in a bailout (by the taxpayers) and the very thing you are trying to guard against. Cutting your nose etc.
15. 51ck-6-51x said...
Paul, their job is a simple one albeit a balancing act; however their tool is a particularly blunt one. The BoE has more tools than the single one belonging to the MPC and the treasury has some others too.
16. 51ck-6-51x said...
techieman: yes, as I said "It's a really bad idea to carry it out since it can only damage the value of those savings in real terms."
Cutting your nose to spite your face is the correct metaphor - thank you!
17. dohousescrashinthewoods said...
I guess that's the end of savings. I think the likes of the BBC's MoneyBox are starting to push the point. I'm still trying to think of something other than gold as a home for savings.
So, in a credit crunch, where overspending and debt are the root of the problem, people are penalised for saving and the government is increasing borrowing.
On a contrary note, I'm thinking the Pound will start to gain against the Dollar as the flight to US government bonds abates. Seems illogical to me that people have gone to the Dollar. My guess is that the US is fundamentally bankrupt, so it's only a matter of time until the dollar gets destroyed. I wouldn't buy US assets at the moment.
18. jack c said...
@ inbreda "spread the news. My reaction to this is to empty all of my bank accounts on 14th feb for a few weeks. We'll see how the banks survive without my extensive funds ;-)" Thursday, January 8, 2009 12:41PM
They are debating this very topic now on radio 5 live - right or wrong you are not alone judging by the number of callers.
19. inbreda said...
10. 51ck-6-51x said...
It's a really bad idea to carry it out since it can only damage the value of those savings in real terms.
Why? How?
20. 51ck-6-51x said...
inbreda - You would be instigating a bank run on all banks. The banks will run out of money way before all the savers can withdraw - those savers would end up with either nothing (and we could even end up with a military coup), or if the FSA scheme is used to pay out, it won't have anywhere near enough money, so the printing press would have to be rolled out leading to hyper-inflation, which would erode the value of said monies. It's economics 101 dear boy.
21. techieman said...
ok well there is a little bit of string pushing here. They (really the US) were too slow off the mark and now its all shot to pieces and people think :How bad is this gonna get. They can lead a horse to water but they cant make it go to the checkout.
People will downsize on grocery bills etc. Those that have excess money should just save it - when the confidence turns it turns. Thats where we are. Effectively if you have lower and lower prices, an account that pays no interest is still beneficial. We arent used to living in a deflationary environment where cash is king. The only issue now is how long will that last?
22. 51ck-6-51x said...
Techieman sums it up very well as usual.
23. techieman said...
51ck is right. I was never concerned with the collapse of banks near the begining of this cycle. Although i strongly disagree that the compensation limit should have been increased, its no surprise that the government "underwrote" ALL the losses. The problem is if a really big one goes. (either here or in the US) that is the event risk thats not priced into markets.
I can see Darling - a la lamont - standling there and doing a u-turn because we run out of cash. Not at all palitable and not what any of us should wish for.
24. str 2007 said...
Does anyone on this thread have an educated idea as to how long it would be before the effects of turning on the printing presses would have a negative effect on savings.
How quickly could inflation grow ?
Is it likely to be an increase of 1% a month or more ?
Can they control the flow of money if they see inflation going from 4% one month to 6% the next month ?
25. paul said...
21. 51ck-6-51x said...
Techieman sums it up very well as usual.
22. techieman said...
51ck is right.
Oh hang on ... please get a room.
26. alan said...
So, what next?
Is there a chance of Gordo & Darling taking direct control of all bank lending? Can we be far away from that now?
We are not a reserve currency like the $. So if we overdo the IR cuts I see a real chance of a run on the £.
Regulatory change is possible too.
If another bank falls over ...oh...I hate to think!
27. techieman said...
Paul - fancy a threesome?
28. Captured Brit said...
I live in the States (have done for around 10 years now). What people in the UK (and around the world) don't understand is that the US is so diversified. This is a big country and the resources are huge. So is technical inovation particularly in alternative energies. I know because I work in the industry. In the next few months-not years, the landscape will change in relation to oil and this will have a huge bearing on everything political and monetary. Your assumption on the dollar collapse is way out of wack IMHO. Most countries are in a dance of death in relation to their own dollar holdings (China for instance) and all the threats and associated BS is just hot air. Forget the stimulus package etc-it won't matter. You can never put technical breakthroughs in to any economic model and that is where all forecasts and reference to past "cycles" is flawed. The industrial revolution was the end of civilisation as they knew it. It wasn't. Energy production will be the new industrial revolution. Watch and see. The US will lead.
29. Big_mike said...
Surely "quantitative easing" could be done quietly? I appreciate that the sums involved are large and I am not sure what mechanisms could be used (imagining MI5 agents running BIG retail outlets / house builders / car show rooms etc. Spooks style with unlimited budget accounts.....) But without formal announcements etc. wouldn't the serious sentiment driven down sides fail to happen?
30. 51ck-6-51x said...
Paul - LOL, but note that we both posted simultaneously.
31. 51ck-6-51x said...
str 2007: Good question.
I'd be very interested in a sound quantitative assessment as well
- theoretically it would be slow to get going but hard to stop given current circumstances, but I can't really put numbers on it.
Anyone else got any clues?
32. titaniccaptain said...
Yeah I want an answer to that question posed by STR2007 23.
33. luckyjim said...
No collusion is necessary. People WILL start withdrawing their money from deposit accounts.
If the returns are next to zero (and not entirely risk free) people will look at gilts, gold, oil, shares or (don't shoot) property. Pensioners have liitle choice but to move their money to 'riskier' investments for higher returns.
Will this cause a run on banks? Well we already know that one or two banks may need further government intervention to survive but it will also mean that banks need to offer better saving rates to maintain their asset ratios. Nationwide have already said they will ignore today's and all future rate cuts.
At the very least those of us with savings should be talking with our feet and moving our savings to the higher paying accounts. Market forces at work. You remember market forces don't you ?
34. jack c said...
People are already withdrawing their deposit based monies - competition from the investment houses and major insurance companies is hotting up and as a consequence there are some excellent alternatives with capital and inflation backed guarantees (so long as people are willing to commit to 5 years or more)
35. titaniccaptain said...
"there are some excellent alternatives with capital and inflation backed guarantees (so long as people are willing to commit to 5 years or more)"............f#ck that for a game of soldiers I wont go into anything I cant get my money out quick........
36. jack c said...
@titaniccaptain - cash under the mattress sounds like the best option for you
37. Enoughalready said...
I'm starting to withdraw my savings. As each account matures, I'm simply taking the cash out. I have had horrified looks from my bank, but I feel I'm - in my own small way - teaching them a lesson.
Now if we ALL did the same....ouch!
38. titaniccaptain said...
@jack c
Its all gone a bit wrong mate...........got to be like a hunter stalking its prey only react at the right moment......only problem is none of us know when the right moment is
39. str 2007 said...
Or what the prey is !
40. str 2007 said...
Well as we have Jack C on this thread.
How does the bank of HPC sound.
Could it survive offering 5% return to savers and re-lending these monies in the old fashioned way?
Maybe with a view to launching a property investment type bond in a couple of years when the market's back to a sensible level.
41. jack c said...
@str 2007 - Bank of HPC sounds fine to me running on old fashioned lending principles however the rest of the system is so contaminated we'd probably get dragged down in due course - I really would not rule out full nationalisation of the UK banking system in coming months.
Based on your previous posts/interest in the UK mortgage market and the implications it has on the housing market you might be interested to hear that both Bank of Ireland and Bristol & West have today pulled out of the intermediary market - I'll post up some detailed info later on tonight once the full story has emerged. The view from the coalface is that lending is getting tighter by the day !
42. george monsoon said...
I still want an answer to post no. 23!!!
43. jack c said...
In response to post 23 (I'll have a very brief go). str 2007 said...Does anyone on this thread have an educated idea as to how long it would be before the effects of turning on the printing presses would have a negative effect on savings. How quickly could inflation grow ?
From what I have read so far (argument and counter argument) the majority view is that potentially high inflation will likely hit the UK during the latter part of 2010 - the deflation/inflation debate rages on, however I know lots of people who are hedging against inflation now using index linked gilts etc.. expecting the worst from 2011 onwards.
44. titaniccaptain said...
@jack C
So what do you thonk on the index linked gilts? are they safe?....pros/cons?
45. Rentinginthesouth said...
Strange, before reading this thread, I've closed down my savings account with RBS with the view to get out of stealing.. I mean sterling
46. techieman said...
i can tell you re post 23 that no-one really knows or can give a good guess, the deflation might be so pronounced that the premise that we will have hyper inflation at some time in the future may be wrong. There are too many variables. At some point in time it will be clear but i think its not even wise to speculate (on that anyway) at the moment.
My basic rule is you will have time for the noise to tell you.... you just need to be willing and able to listen. I think that (traditional) Gilts will yeild alot more after the deflation has been priced in (at which time they might be the "quiz of the week" - showing my age there)
47. techieman said...
BTW TC - did you take a long position before this retracement?
48. techieman said...
Sorry just to explain my feeling on traditional gilts (i meant being the "sale of the century" for those youngsters on here) is because i think that the funding requirements will be so big as to ensure that gilts need to yeild a proper rate. Thats regardless of the hyper-inflation argument or otherwise.
Buying index linked gilts now is IMO being in front of a curve that may not exist. I may of course be well off there and thats the point its all very speculative even on what to speculate on.
49. str 2007 said...
Well glad No. 23 promted so much interest.
Thanks for you reply Jack C and I'll come back to this thread this evening to get your 'coal face' view on lending.
Techieman - thanks for that, I feared so - it's knowing what to do at present that's difficult - you feel you should be doing something clever, but when you start looking at the options .........
TC, if you're interested in Jack C's option of Index linked guilts I found out some info on the 'Selftrade' website that was quite informative.
50. titaniccaptain said...
@techie
No long postition for a while....im staying short until I things look more stable....... 3 years lol
51. 51ck-6-51x said...
RE: STR 2007 @ 23:
For those that are mathematically minded...
I can't find an extract from Wilmott On Quantitative Finance on the web, but Chapter 71 of his three volume epic on the subject gives some insight into modelling inflation (however note the caveats implied by the article I posted a few minutes ago).
Alexei Krouglov is someone else who has done some work on the subject, however I have not done any investigative work on the subject myself.
52. 51ck-6-51x said...
(aggh - don't blast me; 'that' should read 'who', above)
53. techieman said...
Sorry TC mistaken identity. I was "chatting" with Tyrell Corp. "OK TC"
54. Tenyearstogetmymoneyback said...
10. 51ck-6-51x and Inbreda were discussing withdrawing their savings.
A better idea which will actually be of benefit to you.
Just be very careful to make sure that you are getting the best possible return on all your savings.
You often find that you can even stick with the same organisations and just move to another account type.
They just rely on the fact that people don't bother to switch from a pathetic account to one paying a decent rate.
If you look at Alliance and Leicester they are still offering (this evening) 6.5% on a current account
(up to £2500). Its even a fixed rate for the next year. The interest on that will pay for my internet all
year which is more than lots of so called savings accounts would.
:- Duncan
No connection with Alliance and Leicester. I have every account paying over 6% that I could find.
55. jack c said...
@40. titaniccaptain said...@jack C
So what do you think on the index linked gilts? are they safe?....pros/cons? Thursday, January 8, 2009 05:19PM
TC - generally regarded as low risk option and hedge against inflation but not a short term option - perhaps I'm causing a bit of confusion with my previous posts - the people I've been talking to already own their home outright are either retired or approaching retirement and have savings on deposit - for those poised to enter the property market and requiring liquidity/immediate access I still think cash is the only option.
techieman indictes he works on very short timescales whilst I operate on 5 year plus investments (anything less and it's pretty much got to be deposit based) In addition the emphasis would be on a balanced portfolio ie cash, gilts, corp bonds, commercial property, equity backed collectives etc.. by diversifing it should spread the risk but it potentially only works on a medium-long term view which as a regular reader of this blog doesnt sound like it would suit the majority.
56. Malct said...
when they create the debt based money supply - they don't create the interest
57. str 2007 said...
Can index linked guilts be traded ?
IE as techieman says 'buying them might be ahead of a wave that might not exist'.
Therefore would buying them now mean their value increases if inflation takes off.
If so perhaps a small level of interest now (more than banks) with the added bonus of a capital gain if inflation takes off.
So for example you wouldn't put all your money in them but if they matured in 5 years and you wanted a house in 2 years and inflation hadn't taken off - you'd have to wait until they matured before you could refit your kitchen rather than when you moved in.
Just a thought.
58. sold out said...
captured brit@28
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Detroit School Lacks Toilet Paper, Light Bulbs
DETROIT -- A Detroit elementary school is asking for donations of toilet paper and light bulbs to continue functioning.
http://www.clickondetroit.com/news/18430596/detail.html
59. titaniccaptain said...
Many thanks Jack c
60. techieman said...
str 2007 - yes they are tradeable... Actually i asked for opinions on index linked gilts some time ago on here. i think either Japense uncle or Uncle Tom contributed, and basically advised not to.
Even though they are tradable that doesnt mean you will neccesarily get your capital back. Any gilt will give you a redemption yield, but between now and then the price can flucuate so that you can get back less capital. Incidentially some gilts which have a high coupon will be priced with an automatic capital loss should you hold to redemption. Thats because to reflect current rates that are less than the coupon offered the yeild gets adjusted which means the price goes over par (traditional gilts).
These may help:
http://investing.thisismoney.co.uk/gilts.cgi?type=index_linked
http://www.dmo.gov.uk/index.aspx?page=gilts/about_gilts
http://www.thisismoney.co.uk/ask-an-expert/investing/article.html?in_article_id=413825&in_page_id=137
http://contraryview.co.uk/042.htm
Effectively i trade the values of the principals, so i trade the Long Gilt futures. Without gettiing too technical thats an instrument based on a hypothetical cash gilt, so it fluctuates inline with normal (non Index Linked) gilts.
I dont kmopw too much about IL Gilts but i know that you would need some advice or some research before gettin involved.
61. 51ck-6-51x said...
TenYearsToGetMyMoneyBack - sure it sounds much better to vote with one's own feet rather than the proposal, which, as I stated, would not be a good idea.
STR 2007 et al:
For your reference here is a 2003 report by the ONS on RPI-like data going back to 1750.
It's got some scary graphs - the last one, figure 3, is probably the most revealing since it has a log scale (one can see the relative change all the way though), one can see the effects of The Napoleonic Wars, WWI & WWII fairly clearly, as well as the deflationary period in the 30's (which was considered so bad that it was decided that we should avoid repetition at all costs). The 50's post war inflationary period seems to merge almost continuously into that of Vietnam and then the fiat currency system cam into effect in 1971 and inflation has since not looked back.
Some more mathematical models for inflation are referenced and described in this paper (see 2.41, 2.42, and 2.43)
To quote Paul Wilmott from On Quantitative Finance, chapter 71:
"There is clearly an interesting and complex relationship between inflation and interest rates. Intersest rates are used by governments to control inflation, and inflation affects people's use of money, their tendancy to save or spend. The causal relationship is not an easy one to model." ('complex' and 'not easy' for him mean 'mind bending' and 'neigh on impossible' for the normal market practitioner IMO)