Jump to content
House Price Crash Forum
Sign in to follow this  
Skewers

Interest Rates - Medium To Long Term

Recommended Posts

One of the imbalances in the economy, which I'm hoping will help cause a severe HPC, is that interest rates will go back up to the long-term average of 4-5% (IIRC).

However, I wonder if interest rates really won't go back to those levels in the medium to long-term as the fallout will be too much to bear. Hasn't Japan kept rates this low for about 10 or so years now?

Are there any economic forces that will inevitibly push interest rates up in the medium to long-term?

Share this post


Link to post
Share on other sites

One of the imbalances in the economy, which I'm hoping will help cause a severe HPC, is that interest rates will go back up to the long-term average of 4-5% (IIRC).

However, I wonder if interest rates really won't go back to those levels in the medium to long-term as the fallout will be too much to bear. Hasn't Japan kept rates this low for about 10 or so years now?

Are there any economic forces that will inevitibly push interest rates up in the medium to long-term?

LONDON, Oct 1 (Reuters) - The Bank of England has allocated all it intends to in quantitative easing, and will not exit the bond purchase programme for another six months at least as the economic outlook remains shaky, a Reuters poll showed.

Median forecasts from the poll of 60 analysts, taken Sept. 28-Oct. 1, suggest the central bank will limit its purchases of mainly government bonds to 175 billion pounds. However, a third of respondents said the Monetary Policy Committee could expand the programme further when it meets on Oct. 7-8.

"You can never rule out that they will surprise but I think they have probably done enough," said Michael Saunders at Citi.

The highest forecast saw the MPC eventually deciding to spend 250 billion pounds, and both the median and maximum forecasts were in line with a poll taken last month.

Median forecasts see the MPC holding the main interest rate at an historic low of 0.5 percent until July 2010 at the earliest, in line with a poll taken in early September.

Rates were seen rising to 0.75 percent by September next year and then finishing off 2010 at 1.25 percent.

Doesn't mean that mortgage rates are not going up though does it?

Banks Defend Raising IR despite low Libor

Edited by Sybil13

Share this post


Link to post
Share on other sites

One of the imbalances in the economy, which I'm hoping will help cause a severe HPC, is that interest rates will go back up to the long-term average of 4-5% (IIRC).

However, I wonder if interest rates really won't go back to those levels in the medium to long-term as the fallout will be too much to bear. Hasn't Japan kept rates this low for about 10 or so years now?

Are there any economic forces that will inevitibly push interest rates up in the medium to long-term?

1. Inflation

CPI is stubbornly at 1.8%, but RPI is next to nothing. The difference is mainly property related so may even out. The Jpanese had CPI deflation

2. Demand for Gilts

20% of gilts held by the BoE, 40% by UK institutions/individuals and 40% by overseas institutions

Key difference to Japan where the whole market is domestic savings

The UK has a lot of gilts to issue next year, not sure foreigners will be keen to buy them

Our situation isnt really much like that of Japan, we have real inflation still and we need foreigners to buy our government debt <_<

Share this post


Link to post
Share on other sites

One of the imbalances in the economy, which I'm hoping will help cause a severe HPC, is that interest rates will go back up to the long-term average of 4-5% (IIRC).

However, I wonder if interest rates really won't go back to those levels in the medium to long-term as the fallout will be too much to bear. Hasn't Japan kept rates this low for about 10 or so years now?

Are there any economic forces that will inevitibly push interest rates up in the medium to long-term?

I think the average for mortgage rates is something closer to 10%.... but I don't really think we'll be back there again any time soon.

Personally I think the "recovery" will be weak , unemployment will remain slugishly high and house prices will be flatish..... with that backgorund I reckon rates will stay lowish ( perhaps 3-4% ) for the medium term. Persoanlly I am unconviced by the arguments from the those backing a return to rapant inflation although I understand why they back that route.

Share this post


Link to post
Share on other sites

1. Inflation

CPI is stubbornly at 1.8%, but RPI is next to nothing. The difference is mainly property related so may even out. The Jpanese had CPI deflation

2. Demand for Gilts

20% of gilts held by the BoE, 40% by UK institutions/individuals and 40% by overseas institutions

Key difference to Japan where the whole market is domestic savings

The UK has a lot of gilts to issue next year, not sure foreigners will be keen to buy them

Our situation isnt really much like that of Japan, we have real inflation still and we need foreigners to buy our government debt <_<

Merv's quote with the August figure of 1.6% was that inflation was likely to be volatile over the next 6 months. In other words, inflation will be 3% at some point, don't worry we knew it would, but we clearly don't need to increase rates. Then it'll be sorry we seems to have created excess inflation due to the trashed pound etc.

Share this post


Link to post
Share on other sites

I think the average for mortgage rates is something closer to 10%.... but I don't really think we'll be back there again any time soon.

Personally I think the "recovery" will be weak , unemployment will remain slugishly high and house prices will be flatish..... with that backgorund I reckon rates will stay lowish ( perhaps 3-4% ) for the medium term. Persoanlly I am unconviced by the arguments from the those backing a return to rapant inflation although I understand why they back that route.

Thing is those 3-4% BoE rates will mean mortgage interest payments will double when coupled with current bank mortgage margins

That will be interesting <_<

Share this post


Link to post
Share on other sites

Thing is those 3-4% BoE rates will mean mortgage interest payments will double when coupled with current bank mortgage margins

That will be interesting <_<

I doubt banks will maintain their margins in that environment.

Share this post


Link to post
Share on other sites

Merv's quote with the August figure of 1.6% was that inflation was likely to be volatile over the next 6 months. In other words, inflation will be 3% at some point, don't worry we knew it would, but we clearly don't need to increase rates. Then it'll be sorry we seems to have created excess inflation due to the trashed pound etc.

But he needs insitutions (mainly foreign ones) to buy the gilts he has to issue

If they think the pound will be weak or inflation strong, they will want a higher coupon than 3.5% on a ten year note to buy them

QE cannot continue to grow until the BoE owns all the gilts in circulation

Moore's law:

If something cant continue indefinately it will stop

Share this post


Link to post
Share on other sites

I doubt banks will maintain their margins in that environment.

I disagree:

- no-one is chasing market share

- funding is tight

- banks need UK mortgage lending business to be profitable

- the risks of default are now higher

Margins may decrease, but they probably will not decrease by much in my opionion <_<

Where there is less risk (eg 50% LTV loans at 1.5x combined income) you might see much softer pricing but not at 75%+ loans

Share this post


Link to post
Share on other sites

CPI is stubbornly at 1.8%, but RPI is next to nothing.

With VAT going back up and mortgage rates rising from this years all time low RPI will rocket next year - it was the only one of the two that could be heavily manipulated in the short-term (pre election).

Share this post


Link to post
Share on other sites

With VAT going back up and mortgage rates rising from this years all time low RPI will rocket next year - it was the only one of the two that could be heavily manipulated in the short-term (pre election).

I've heard this on here before, but i havent had the time or inclination to look at the make up of RPI to see whether its true

Be interesting to see what happens if it does <_<

Share this post


Link to post
Share on other sites

But he needs insitutions (mainly foreign ones) to buy the gilts he has to issue

If they think the pound will be weak or inflation strong, they will want a higher coupon than 3.5% on a ten year note to buy them

QE cannot continue to grow until the BoE owns all the gilts in circulation

Moore's law:

sound's like UK plc has problems - raising demand for gilts means that demand must be raised for £s, so weak-currency cannot be maintained.

thus, debt needs to be paid off or reneged on

ouch

Share this post


Link to post
Share on other sites

sound's like UK plc has problems - raising demand for gilts means that demand must be raised for £s, so weak-currency cannot be maintained.

thus, debt needs to be paid off or reneged on

ouch

Debt will begin to be paid off after the election

All mainstream political parties are united on that one ;)

They also seem to be united in avoiding spelling out to the UK electorate precisley how unpleasant and long lasting that will be though <_<

Share this post


Link to post
Share on other sites

I've heard this on here before, but i havent had the time or inclination to look at the make up of RPI to see whether its true

Be interesting to see what happens if it does <_<

I'm no expert on this either but my understanding is that mortgage rates are only reflected in the RPI. The way it diverged from CPI and went into free fall at the time of plummeting mortgage payments suggests that the reverse will happen next year when the higher mortgage rates of last year filter out and the index will have to reflect the rise from this years all time low point. If anything I was expecting RPI to have fallen much more so we are in for a big upswing IMHO. :D

Share this post


Link to post
Share on other sites

Persoanlly I am unconviced by the arguments from the those backing a return to rapant inflation although I understand why they back that route.

Agreed, I have just about remained a deflationist although can see the logic inthe other argument. Deflation ed presumably keep some downward pressure on rates.

I think the 2 strongest arguments for an upward trend are a) the overall borrowing requirement and b ) if UK decouples from other major economies as some recover - at the moment one of the key things keeping rates low worldwide is the fact that everyone's in the sh*t together so it's harder for the markets to single out any economies (of course, if there are those who believe we cd recover before others, this an upside risk)

Edited by FallingKnife

Share this post


Link to post
Share on other sites

I disagree:

- no-one is chasing market share

- funding is tight

- banks need UK mortgage lending business to be profitable

- the risks of default are now higher

Margins may decrease, but they probably will not decrease by much in my opionion <_<

Where there is less risk (eg 50% LTV loans at 1.5x combined income) you might see much softer pricing but not at 75%+ loans

Theres a suprise.

Those with a different view would argue.

- Higher rates would could more competion

- Funding pressures are actually easing

- new mortgage lending is more profitable now than it has been for a generation and margins could slide quite a distance. If rates did rise they wouldn't rise into a low volume market also needs consideration.

- The downside property risks are actually lower currently than they have been for a while not higher.

I'd agree the lower the risk the lower the pricing but in reallity if anything banks are going to widen rather than shrink their lending baskets.

Share this post


Link to post
Share on other sites

Merv is stuffing the banksters pockets with cash.

When the time comes for the BoE to reduce their bond buying the banksters will assume (be forced to assume) the mantle.

Until China are forced out of their mercantilism I don't really see where the inflationary pressure will come from.

Share this post


Link to post
Share on other sites

Theres a suprise.

Those with a different view would argue.

- Higher rates would could more competion

- Funding pressures are actually easing

- new mortgage lending is more profitable now than it has been for a generation and margins could slide quite a distance. If rates did rise they wouldn't rise into a low volume market also needs consideration.

- The downside property risks are actually lower currently than they have been for a while not higher.

I'd agree the lower the risk the lower the pricing but in reallity if anything banks are going to widen rather than shrink their lending baskets.

Pecking at the tree of your argumernt like a persistent lil woodpecker

- Higher rates will lead to more competition but there has been a huge exodus from the market (Northern Rock, B&B, HBOS, all the wholesale market outfits). The Spanish and Chinese rnew market entrants just didnt come here to write high LTV self cert / BTL business

- Funding pressures are easing from total seizure (sp?)

- New mortage lending is more profitable than it has been in a decade that included the greatest expansion in the world ever, not a generation. 250-350 bps spreads were pretty common in the 90s

- The downsides from property risks are infinitely apparent which they weren't in 2007: we have just suffered a 15-20% correction; the US market has fallen twice this amount; unemployment is rising

- Banks are being asked to use less leverage and hold more capital; they need higher lending margins

Peck, peck, peck...

I'm just not convinced.... <_<

peck, peck, peck

Share this post


Link to post
Share on other sites

Pecking at the tree of your argumernt like a persistent lil woodpecker

- Higher rates will lead to more competition but there has been a huge exodus from the market (Northern Rock, B&B, HBOS, all the wholesale market outfits). The Spanish and Chinese rnew market entrants just didnt come here to write high LTV self cert / BTL business

- Funding pressures are easing from total seizure (sp?)

- New mortage lending is more profitable than it has been in a decade that included the greatest expansion in the world ever, not a generation. 250-350 bps spreads were pretty common in the 90s

- The downsides from property risks are infinitely apparent which they weren't in 2007: we have just suffered a 15-20% correction; the US market has fallen twice this amount; unemployment is rising

- Banks are being asked to use less leverage and hold more capital; they need higher lending margins

Peck, peck, peck...

I'm just not convinced.... <_<

peck, peck, peck

Woodpeckers don't fell oaks... we'll have to agree to disagree.

Share this post


Link to post
Share on other sites

I don't understand why RPI is only slightly below zero.

My mortgage interest dropped from 1100 to 340 pounds and nothing went up by significantly much so my personal RPI is hugely negative compared to the figures.

With 3 - 4 million others on trackers it makes me think that mortgage rates don't have that much of an effect on RPI.

Hint: most people dont have big mortgages like you do <_<

Share this post


Link to post
Share on other sites

I don't understand why RPI is only slightly below zero.

My mortgage interest dropped from 1100 to 340 pounds and nothing went up by significantly much so my personal RPI is hugely negative compared to the figures.

With 3 - 4 million others on trackers it makes me think that mortgage rates don't have that much of an effect on RPI.

Share this post


Link to post
Share on other sites

But he needs insitutions (mainly foreign ones) to buy the gilts he has to issue

If they think the pound will be weak or inflation strong, they will want a higher coupon than 3.5% on a ten year note to buy them

QE cannot continue to grow until the BoE owns all the gilts in circulation

Moore's law:

"QE cannot continue to grow until the BoE owns all the gilts in circulation"

Yes it can. The way you pump more money into the economy is for the government to spend more than it takes in tax receipts, and finance the difference with monetary printing. Theoretically this is can be limitless. Do it too much and you get raging inflation, until, as Zimbabwe found, the currency itself becomes worthless no matter how many zeroes you put on the end of your note.

But in times of deflation, you can do a surprisingly large amount of QE, without generating inflation.

I must admit to being staggered by the 175 billions worth of printing that the Bank of England has done, and little sign of rampant price increases. The gilt market remains stable too.

And if Jonny Foreigner had the audacity to stop buying our gilts, that is good too. Then the fall in the value of the pound that would result, would provide our exporters with extra demand. There would be no need for the government to run a deficit, and monetary printing could stop and interest rates could rise to a much higher level without there being a recession/depression in the UK.

Others would have to suffer said reduction in demand. Too right too. Tis time that Germany, China, Japan and other net creditor nations switched to importing some of our stuff. There has to be a rebalancing at some point, and the exchange rate will move until this is made to happen.

Good old QE. A useful weapon to have in your armoury, if you know how to use it. But if you dont, like Osborne Gono, you can end up shooting yourself.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   295 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.