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Bootle Still Thinks We'll Have Years Of Low Interest Rates

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http://www.telegraph.co.uk/finance/comment/rogerbootle/7786865/Despite-a-challenge-Im-sticking-to-my-view-that-interest-rates-will-stay-low.html

Last week, as the markets quaked and then partly recovered, another bombshell was dropped by the Organisation for Economic Co-operation and Development (OECD), the august Paris-based international organisation.

It said that UK interest rates would have to rise to 3.5pc by the end of next year. I have openly declared for a radically different view, that is to say that Bank rate will be at roughly the current level for five years. I am sticking to this view.

The OECD's case is based on the threat of higher inflation. CPI inflation has risen to 3.7pc, and the old target measure, RPIX, has reached 5.4pc. The OECD fears that if nothing is done, then inflation may rise further.

If you are a forecaster, you have to accept that not only being contradicted but being proved wrong are occupational hazards.

Clearly, I could be wrong now. But I am sure that if the OECD is right, then the consequences would be devastating. Although the housing market has recovered well from its attack of the wobbles, it remains heavily over-valued and now seems to be softening a bit. What has buoyed it up has been low interest rates. A rise of Bank rate to 3.5pc would increase mortgage rates by about 3pc. This would surely send the market tumbling.

Housing wouldn't be the only market to fall. Government bond prices would fall (ie their yields would rise) and this would tend to weaken both the commercial property market and the equity market, thereby hitting both bank balance sheets and non-bank wealth levels. Moreover, higher government bond yields would increase the cost of financing the government's deficit.

At least one market price might go up – the exchange rate for the pound. That would certainly help to bring inflation down but it would also clobber our hopes for an export-based recovery.

Furthermore, all this would be happening while the new Government was delivering a massive fiscal squeeze through expenditure cuts and higher taxes, which would tend to weaken the economy.

In short, if the OECD forecast is right, then not only would the economy fall into a double-dip but the fall would be so severe that it could make the 1930s look like a tea party. This would increase the Government's deficit. But if inflation did stay obstinately high would the Bank of England counter it with higher interest rates? There is a legitimate debate about whether in these circumstances it would be better to let inflation rise a bit.

In fact, some people in the City believe that the Bank is already covertly following that policy. They believe that the Bank tells everyone that inflation will fall, not because it believes this, but in order to provide cover for the secret policy of tolerating, and even (through Quantitative Easing) encouraging, higher inflation. This, it hopes, will bolster economic recovery by delivering significantly negative real interest rates and reducing the real value of debt.

Those who believe this yarn have been reading too much Dan Brown. Given the choice, you should always opt for the ****-up, rather than conspiracy, theory of history. In this case, conspiracy theorists grossly over-estimate the policy-makers' capacity for cunning and grossly under-estimate the scope for getting their forecast wrong for a time while genuinely still believing that it will come right pretty soon.

Exactly why inflation has stayed obstinately high is a subject I will tackle in a later article. But let me emphasise here that I take broadly the same view of inflation as the Bank. Spare capacity in the economy will soon drag inflation well down. And although higher VAT may cause the headline rate to go even higher in the short term, the withdrawal of purchasing power that it, and spending cuts, will imply, should before long intensify the downward pressure on inflation.

Mind you, the Bank (and its supporters) cannot stick to this view forever. I feel sure that if inflation stays high for an extended period then, under the present regime, the Bank would raise interest rates. There is probably about six months for the dovish view of inflation to receive some clear support from the underlying inflation numbers.

If it does, then talk of higher interest rates will fade away, and more people will come round to my view that low rates are here to stay for a long time. That would lend support to the government bond market and other asset prices, and would mean that monetary policy is able to provide help to the economy to offset the contractionary impulses coming from fiscal policy. If it doesn't, then you had better fasten your seat belts.

Whether rates can be kept as low as they are is the $64,000 question, clearly if they are forced up there will probably be carnage in the housing market, but keeping rates low causes other problems especially if inflation gets out of control meaning the manipulation of statistics means it's impossible to hide.

We are certainly in economic mire, there is no exit strategy and the policy makers are riding their luck. So far they have managed to avoid the SHTF moment but I doubt their luck will last forever.

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If we are headed into a deflationary period IR should remain low.

If our debt situation is serious we may face a downgrade and the bond markets will dictate higher IR as compensation for holding dodgy pounds.

IMO we are already into the second leg of the big recession. The banks have been artificiality resuscitated with public money and the actual economy has not benefited. IN a sense, it is worse off as jobs have been lost, production is down and the world is in crisis.

The only thing that is holding up is the thing that caused all this trouble in the first place. Speculative house prices. Everything depends on house prices remaining high because they represent the value of all those trillions we have borrowed.

The problem is that the house market cannot be held up for much longer as jobs are being lost and production is faltering and both are required to keep the house prices moving.

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Must con-fess i was totally wrong on this one, by now i expected 5-6% rates & a crashed/Trashed Currance.................not yet?

"They" are worried about something, to be honest when DC starts to get REAL hassle over the cuts i expect "Friends" to come out to play......& the £ WILL drop. The threat will then be issued......"Either let us cut or face MEGA high rates for years!"

Mike

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If we are headed into a deflationary period IR should remain low.

If our debt situation is serious we may face a downgrade and the bond markets will dictate higher IR as compensation for holding dodgy pounds.

IMO we are already into the second leg of the big recession. The banks have been artificiality resuscitated with public money and the actual economy has not benefited. IN a sense, it is worse off as jobs have been lost, production is down and the world is in crisis.

The only thing that is holding up is the thing that caused all this trouble in the first place. Speculative house prices. Everything depends on house prices remaining high because they represent the value of all those trillions we have borrowed.

The problem is that the house market cannot be held up for much longer as jobs are being lost and production is faltering and both are required to keep the house prices moving.

Interest rates are already rising in the markets that actually supply the cash - SVR's were going up to about 3.99% this week. The Boe Liquidity scheme comes to an end soon. I cs only see rates rising and cannot se how they will stay low for much longer. Inflation has reached 5.3% on the RPI measure. In any normal time you would not see rates of 0.5%. If you do not see them rise then the govt and Boe have effectively decided to have inflation and devalue our way forward. That would be worse IMHO than IR's at 3.5% and a HPC and recession we should have had before. The biggest problem for banks not yet out in the open is their Commercial lending which is in a critical state with massive loans currently underwater and needing refinancing. Same in Spain and their troubles are now coming out!!

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If we are headed into a deflationary period IR should remain low.

If our debt situation is serious we may face a downgrade and the bond markets will dictate higher IR as compensation for holding dodgy pounds.

IMO we are already into the second leg of the big recession. The banks have been artificiality resuscitated with public money and the actual economy has not benefited. IN a sense, it is worse off as jobs have been lost, production is down and the world is in crisis.

The only thing that is holding up is the thing that caused all this trouble in the first place. Speculative house prices. Everything depends on house prices remaining high because they represent the value of all those trillions we have borrowed.

The problem is that the house market cannot be held up for much longer as jobs are being lost and production is faltering and both are required to keep the house prices moving.

The whole pack of cards is tettering to collapse as bank crisis round 2 arrives with sovereign debt default.

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From the very same sentence...

it remains heavily over-valued......a rise of Bank rate.........would surely send the market tumbling.

Just in case we were ever in doubt as to where their priorities lie, even though they know it's "over-valued"

Edited by pete.hpc

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Interest rates are already rising in the markets that actually supply the cash - SVR's were going up to about 3.99% this week. The Boe Liquidity scheme comes to an end soon. I cs only see rates rising and cannot se how they will stay low for much longer. Inflation has reached 5.3% on the RPI measure. In any normal time you would not see rates of 0.5%. If you do not see them rise then the govt and Boe have effectively decided to have inflation and devalue our way forward. That would be worse IMHO than IR's at 3.5% and a HPC and recession we should have had before. The biggest problem for banks not yet out in the open is their Commercial lending which is in a critical state with massive loans currently underwater and needing refinancing. Same in Spain and their troubles are now coming out!!

+1 logical thinking, that adds up. ;)

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Think about it. the Banks borrow for the BoE at 0.5%, they lend to you & me at a much higher rate....

they make money, while keeping the cost of borrowing at a level that can keep this "show" going.

If the base rate goes up a lot the "show" ends. happened two years ago, they know what they want to avoid.

Bootle says in that article he will be proved right or wrong in 6 months time.

Rates held at 0.5% for over one year !!! should give you a big clue.

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Think about it. the Banks borrow for the BoE at 0.5%, they lend to you & me at a much higher rate....

they make money, while keeping the cost of borrowing at a level that can keep this "show" going.

If the base rate goes up a lot the "show" ends. happened two years ago, they know what they want to avoid.

Bootle says in that article he will be proved right or wrong in 6 months time.

Rates held at 0.5% for over one year !!! should give you a big clue.

Also whenever Merv gets in front of a mic he basically says "If the govt raise taxes to curb the inflationary pressures then I will not raise the BoE rate."

Could not be plainer to me we will see the base rate at .5 to 1% for at least a year and maybe 18 months.

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Also whenever Merv gets in front of a mic he basically says "If the govt raise taxes to curb the inflationary pressures then I will not raise the BoE rate."

Could not be plainer to me we will see the base rate at .5 to 1% for at least a year and maybe 18 months.

Amazing how for decades the Central bank mantra has been interest rates control inflation, now we suddenly have a new plan govt taxes to control inflation.

Interest rate policy is a complete crock of economic 5h1t.

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http://www.telegraph.co.uk/finance/comment/rogerbootle/7786865/Despite-a-challenge-Im-sticking-to-my-view-that-interest-rates-will-stay-low.html

Whether rates can be kept as low as they are is the $64,000 question, clearly if they are forced up there will probably be carnage in the housing market, but keeping rates low causes other problems especially if inflation gets out of control meaning the manipulation of statistics means it's impossible to hide.

We are certainly in economic mire, there is no exit strategy and the policy makers are riding their luck. So far they have managed to avoid the SHTF moment but I doubt their luck will last forever.

I would support a theory of low interest rates for the forseeable future, partially becasue I feel we'll have low growth for the forseeable future...... my guess is BOE rates will remain below 3% for the next three years and possibly for the next five years..... while that doesn't seem low compared to where we are now it is historically very low.... the key point though is that as the BOE raises its rate I suspect the margin to Libor will shrink back to say 0.5% and the mortgage margin will hang around at 1-1.5% so Boe rates of 3% would imply mortgage rates somewhere in the 4.5-5% arena..... so even though BOE rates would have risen 6 times at the oputside the effect on actual borrwing costs could still be very limited.

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Amazing how for decades the Central bank mantra has been interest rates control inflation, now we suddenly have a new plan govt taxes to control inflation.

Interest rate policy is a complete crock of economic 5h1t.

Yep, as was/is the measuring of inflation.

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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