Sunday, Jul 25, 2010
Perhaps that low 5.29% fix was a bad idea after all in 2005
Telegraph: Interest rates will stay low until 2014, predicts E&Y
Having been 'sensible' in the circustances in 2005, I have now concluded that it was perhaps somewhat of a mistake. Surely it cannot be feasible for interest rates to stay at or near 0.5% for 4 more years! The Earnst and Young item club however seem to think that will be the case.
Posted by enuii @ 02:30 PM (2423 views) Add Comment
12 Comments
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1. sureseam said...
"The Ernst & Young ITEM Club said the Bank of England will have to resist calls to raise rates above 0.5pc for more than three years to counterbalance the Government's growth-sapping austerity cuts."
The ITEM club thinks the BoE are leaders and not followers ..... WRONG. If bond markets lose confidence then 'de facto' the GILT rates will have to rise and with it LIBOR et cetera. The MLR from the BoE is a herd follower despite appearances.
The current phase could be described as George Osbornes honeymoon. The bond markets have reacted well, thus far, to the austerity plans, but ithout credible follow through of these plans, the bond markets will switch tack and things will get bumpy and ugly.
All this really tells us, is that the ITEM club anticipate a strong does of deflation over several years.
My view is that very low interest rates, like a very high center of gravity - brings capricious volatility and risk of capsize. Interest rates need to normalize (from the lowest in 400 years) back into a normal range. Economics has been played like an arcade game for the last decade or two with accompanying hubris.
In short, the attempts to hold interest rates down will lead to the very instability that will force them up.
2. miken said...
I'm seriously thinking of moving my money to Australia.
At least I can get 6% on my savings there and is not being inflated away.
http://www.savingsaccounts.com.au
3. techieman said...
miken - i hope you cover that with some exotic currency options!
sureseam - true re lead / follower, and as argued here before.
4. paul said...
I reckon they could well be right if the BoE have exclusive say over real interest rates. However this extend and pretend approach to monetary management cannot last.
5. quiet guy said...
"this extend and pretend approach to monetary management cannot last."
Surely the lesson in the last few years is that market distortion can last much longer then we think.
6. tom101 said...
Miken, New Zealand will be easier to open a bank account..... which could be a bad thing. I don't believe they have a depositor protection scheme, but who really does?
7. Seeourhen said...
The lesson of the last couple of years, and possibly for some time to come, (depending on austerity cuts to benefits) seems to be to spend all you have and leave yourself in the most vulnerable position possible. Then you will avail yourself of a huge range of government help. If you have debt, you will will pay next to nothing to service it. You'll probably get subsidised council tax and free dentistry, together with God knows what else. When you retire you'll also get a pension top up. And at the end of your life when you need help, the State will also pay all your care costs. Contrast that with having your house sold to meet all your care costs. Live for today and enjoy it while you can
8. letsgetreadytotumble said...
I emailed my MP, for all the good it will do, regarding low interest rates, higher inflation and the effect on savings.
However, to be fair, I usually get a written response back through the post, so they do take notice.
Trouble is, it needs to be done on mass.
9. sureseam said...
Quiet Guy: "Surely the lesson in the last few years is that market distortion can last much longer then we think."
I am the proud owner of a copy of the Economist May 31st to June 6th 2003 which has a 16 page supplement on the global property bubble. The last page includes this: "Anyone thinking of buying in any of the housing markets that this survey has identified as bubbling should wait until prices have fallen".
My instinct tells me that the longer the distortion lasts, the greater the devastation at the end of it. But what do I know.
10. quiet guy said...
@sureseam
Thanks for the quote. It's a sobering thought that a bubble identified in 2003 by the Economist still hasn't been popped.
11. fallingbuzzard said...
And what did they say in 2008?
"predicts GDP growth will slow from 3.1 pct in 2007 to 1.8 pct this year, recovering to 2.5 pct in 2009. The ITEM Club expects the BoE to cut interest rates by a quarter-point at least three times this year, following its cut to 5.50 pct from 5.75 pct in December."
Economic forecasting with no basis whatsoever. They could not see what was going on in 2008 and have no clue whats going on now.
12. cyril said...
The ITEM club should do its own independent forecasts instead of relying on HM Treasury.