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Under What Circs Do Interest Rates Rise?


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Obviously the powers that be want central bank base interest rates to be kept low to prevent sudden failures in commerce while the excessive leveraging is unwound.

So what stops this lasting forever? Under what circumstances will CB base interest rates _have_ to rise, and what will the warning signals of this be?

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1. Measured inflation in the form of price and wage rises...

2. A bond strike by international investors that want higher levels of risk compensation...

Both (1) and (2) are obvious from online stats. If RPI / CPI start to climb higher with any certainity, or if if bond prices drop significantly, they're here...

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No warnings.

Failed Gilt auction. Panic immediately afterwards.

...that`s what I was thinking. BBC presenter will one day just say BOE raised rates to 3% today in a move designed to fend off the adverse global economic deterioration which started in America, and then move on with a smile to "rabbit found eating lettuce in a hutch in Nottingham"? It will then be double digit again before we know where we are?

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Going cap in hand to the IMF should do it.

I am not so sure that there will be a sudden and total Gilts strike, but the current situation looks to me as if it is one where the Bank of England / Government may no longer be able to control market rates of interest.

Normally what happens is the Bank of England sets their Base Rate. It is difficult to find out exactly who charges whom this particular rate of interest, the BofE dont like to say, but I think it is the rate of Interest paid to commercial banks on the cash that they deposit with the Bank of England. (Anyone care to correct me over this?).

In more normal times, this rate of interest is accepted by the market, and all rates are linked to this rate in some way, with riskier loans attracting a higher rate of interest.

But now I am looking at the Gilts market. That is the real place that Interest Rates are determined. If buyers of Gilts start refusing to buy unless the Government drop the price of Gilts, then interest rates are going to rise irrespective of what the Base Rate is. If that happens, I think we are in unchartered territory. Setting Interest Rates is a tool to manage the economy, lose control of it, and the remaining tools may not be enough to allow you to achieve your required objective.

So watch the Gilts market.

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Going cap in hand to the IMF should do it.

I think this will be the only thing that actually gets the government to correctly price lending risk.

Despite the softening up platitudes that Mandelslime gives us on TV, the IMF will treat the UK just like any other corrupt third world country that has squandered and corrupted their economy.

I fully expect immediate rise of interest rates, immediate firesale of nationalised banks, forced separation of investment and retail banking activities and severing of cosy financial-political ties will be obligatory.

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As others have said, they've already had an uncovered wotsit. That said, I suspect a run of the things would do it.

I'd say there is a difference between a true gilt strike and the one failure they had so far - wasn't it something like 97% coverage?

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I'd say there is a difference between a true gilt strike and the one failure they had so far - wasn't it something like 97% coverage?

yeah, and it was 40 year maturities as well, i seem to recall. If it happens in the 2-10year region of the curve, it is game over.

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Normally what happens is the Bank of England sets their Base Rate. It is difficult to find out exactly who charges whom this particular rate of interest, the BofE dont like to say, but I think it is the rate of Interest paid to commercial banks on the cash that they deposit with the Bank of England. (Anyone care to correct me over this?).

It seems the overnight deposit rate sets a floor for a minimum rate to reduce short term interest rate volatility.

http://www.sifma.org/regulatory/comment_le...ives/061104.pdf

The Bank has obviously had some previous success reducing volatility in short term rates such as in 2001 when it introduced an overnight deposit facility to put a floor under overnight interest rates.

The higher limit must be then set by the rate at which the BOE will lend to banks settling overnight at the BOE which presumably is called 'The BOE rate'?

So a bank with surplus ovenight reserves can earn a minimum interest from the BOE by depositing with the BOE and can earn maximum interest in the BOE framework consisting of settling banks if it trusts those banks unable to borrow cheaper from other banks in the framework and who are forced to begin to approach the BOE to borrow at the target rate.

Any fine tuning comments welcome as i am only really guessing based on what i have learnt so far.

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Central bankers have a major problem, it's called a debt mountain.

This mountain is now so huge interest rates cannot move upwards because no one can afford the interest either individuals, companies or govts. The system has failed.

For interest rates to move upwards you either need huge growth or wage inflation so people can afford the interest or you write off huge chunks of the debt, or issue new debt at a higher rates whilst keeping the existing debt on ultra low rates.

Interest rate policy is about to collapse because debt is too large.

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Obviously the powers that be want central bank base interest rates to be kept low to prevent sudden failures in commerce while the excessive leveraging is unwound.

So what stops this lasting forever? Under what circumstances will CB base interest rates _have_ to rise, and what will the warning signals of this be?

The circumstances concerned would be inflation or the belief that default is likely. If we currently have actual deflation there is no need to raise rates unless people actually start to believe the UK govt will default.

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Central bankers have a major problem, it's called a debt mountain.

This mountain is now so huge interest rates cannot move upwards because no one can afford the interest either individuals, companies or govts. The system has failed.

For interest rates to move upwards you either need huge growth or wage inflation so people can afford the interest or you write off huge chunks of the debt, or issue new debt at a higher rates whilst keeping the existing debt on ultra low rates.

Interest rate policy is about to collapse because debt is too large.

You cant have a debt without a saver.

How about the savers begin spending?

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You cant have a debt without a saver.

How about the savers begin spending?

you only need savers to supply reserves.

since the gov have started funding the reserves of the banking system, savers are largely irrelevant.

thats why the savings rates can be so low.

also, with QE happening, where you have the gov funding the purchase of it's own bonds, you don't necessarily have to see a massive rise in rates any time soon.

what you will see is a drop in the pound, as confidence is eroded.

Edited by Mr Nice
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you only need savers to supply reserves.

since the gov have started funding the reserves of the banking system, savers are largely irrelevant.

thats why the savings rates can be so low.

So the eastern savers are just a myth?

the vast disparities between rich and poor dont exist?

And you only need savers to supply reserves but the government are now doing that so savers are irrelevant?

Meanwhile there is the reality that most of the worlds money supply is not created by the government. Instead it is privately created

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So the eastern savers are just a myth?

the vast disparities between rich and poor dont exist?

And you only need savers to supply reserves but the government are now doing that so savers are irrelevant?

Meanwhile there is the reality that most of the worlds money supply is not created by the government. Instead it is privately created

the "eastern savers" value to the west wasn't to create money, but to provide a market for the products that our banking system created.

you are getting the cart before the horse.

and yes, now that the gov is supplying much of the reserves of the banking system, private savers are less relevant.

you wouldn't be able to have such low savings interest rates otherwise.

in fact, you would get the impression from the banks that they have little interest in aquiring new savings deposits their rates are so low.

and that is because for the most part, they aren't.

yes, the banks DO create most of our money supply, what's your point?

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guest host on cnbc this morning, economist at UBS from what i recall, was suggesting that yields could will rise quite sharply over a fairly short period of say a couple of months. He was situation that this could only occur when if and when the economy is out of trouble.

the consensus seems to be low interest rates for a couple of years, during this period on central bank and Fed treasury/gilt purchasing spree and wider economic malaise. When the economy turns the corner, BoE / FED presumably use the exit strategy for queasing, and yields to rise.

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the "eastern savers" value to the west wasn't to create money, but to provide a market for the products that our banking system created.

you are getting the cart before the horse.

and yes, now that the gov is supplying much of the reserves of the banking system, private savers are less relevant.

you wouldn't be able to have such low savings interest rates otherwise.

in fact, you would get the impression from the banks that they have little interest in aquiring new savings deposits their rates are so low.

and that is because for the most part, they aren't.

yes, the banks DO create most of our money supply, what's your point?

One of is getting this back to front! :P

Or maybe we both are?

Chinas government alone accumulated about 1.5 trillion USD.

How? we bought stuff from them.

How did we buy stuff from them? They lent us money. They were the savers who were not consuming.

Yes the mission of the central banks now is to encourage spending rather than saving. They want more or less zero interest rate savings deposits to be devalued by inflation so that savings are forced to be spent and people buy assets and stuff which have a chance of retaining their value to the savers.

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One of is getting this back to front! :P

Or maybe we both are?

Chinas government alone accumulated about 1.5 trillion USD.

How? we bought stuff from them.

How did we buy stuff from them? They lent us money. They were the savers who were not consuming.

Yes the mission of the central banks now is to encourage spending rather than saving. They want more or less zero interest rate savings deposits to be devalued by inflation so that savings are forced to be spent and people buy assets and stuff which have a chance of retaining their value to the savers.

Does world saving = total debt?

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Fractional reserve banking?

Credit cannot be spent unless you create savings for the seller - otherwise it is not credit.

When it is not credit is is just a fully funded loan coming from excess cash reserves already existing.

Fractional reserve creates credit that is spendable by creating savings - there is no other way of doing it.

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I am not so sure that there will be a sudden and total Gilts strike, but the current situation looks to me as if it is one where the Bank of England / Government may no longer be able to control market rates of interest.

Normally what happens is the Bank of England sets their Base Rate. It is difficult to find out exactly who charges whom this particular rate of interest, the BofE dont like to say, but I think it is the rate of Interest paid to commercial banks on the cash that they deposit with the Bank of England. (Anyone care to correct me over this?).

In more normal times, this rate of interest is accepted by the market, and all rates are linked to this rate in some way, with riskier loans attracting a higher rate of interest.

But now I am looking at the Gilts market. That is the real place that Interest Rates are determined. If buyers of Gilts start refusing to buy unless the Government drop the price of Gilts, then interest rates are going to rise irrespective of what the Base Rate is. If that happens, I think we are in unchartered territory. Setting Interest Rates is a tool to manage the economy, lose control of it, and the remaining tools may not be enough to allow you to achieve your required objective.

So watch the Gilts market.

As far as I know they don't set the price. They set the maturity value and a coupon (Set interest returns per year) , there is then an auction for these. So it is not the case of the Government dropping the price of the Gilts. It is a case of them raising the returns available on these purchased in an auction.

I am still not completely sure how raising coupon rates for Gilts will automatically equate to the BoE base rate having to rise. Why would the raising of the coupon to attract investors automatically mean the base rate goes up to ? Why can these not be independent ? I am sure there is a simple answer.

Anyone care to explain...

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