Bank Of England To Keep Rates Low As Government Spending Cuts Loom

[interestrateripoff]

http://www.telegraph.co.uk/finance/economics/interestrates/7816441/Bank-of-England-to-keep-rates-low-as-Government-spending-cuts-loom.html

The Bank of England is expected to hold interest rates at a record low on Thursday – and possibly for the rest of this year – as it seeks to safeguard Britain's fragile recovery.

Bank of England Governor Mervyn King will be seeking to shield the British economy from the eurozone debt crisis, as David Cameron’s government prepares an emergency Budget on June 22 to tackle what Fitch Ratings calls a “formidable” debt burden.

The risk is that the size of Budget cuts needed could derail the economic recovery and plunge the nation back into a slump after it emerged from its worst recession on record last year.

GDP rose 0.3pc in the first quarter, slower than the 0.4pc pace recorded in the prior three months.

All 61 analysts in a Reuters poll forecast the central bank would keep borrowing costs at 0.5pc on Thursday and most see no move until early next year as rate-setters wait to see how economic conditions pan out.

The bank is also expected to maintain its quantitative easing programme of bond holdings at £200bn.

It will announce its decision at noon in London.

With inflation running 3.7pc, almost double the 2pc target, there are signs that some policymakers are starting to feel uneasy about price pressure and some economists see a small chance of a rate rise before the end of this year.

However, with the coalition Government having pledged to cut the country's budget deficit, currently at almost 11pc of GDP, at a "significantly accelerated" pace – starting with £6bn of cuts this year – the Bank will want to wait until the scale of fiscal tightening is clear before deciding on whether to withdraw stimulus.

So for years it was interest rates are the flexible tool to control the economy, now all of a sudden inflation can be control by the govt spending less and taxing more....

Meanwhile interest rates get to stay uber low to help out the banking sector. Although if household budgets are being squeezed by higher taxes and lower wages lower baseline rates won't help the banks for long....

[aa3]

I'm waiting until the fall when we see the yoy inflation numbers compared to q4 2009. Right now the yoy is comparing to q1 2009 which was basically the worst quarter in the post world war 2 era for the world economy.

I suspect inflation will head down below the 2% threshold and there will not be pressure to raise in early 2011.

[fluffy666]

So for years it was interest rates are the flexible tool to control the economy, now all of a sudden inflation can be control by the govt spending less and taxing more....

Meanwhile interest rates get to stay uber low to help out the banking sector. Although if household budgets are being squeezed by higher taxes and lower wages lower baseline rates won't help the banks for long....

My fixed rate expires in November which is probably the best 'Murpharian' indicator available.... expect a financial crisis and 10% interest rates about a week afterwards.

More seriously.. I would not like to know just how many people there are out there with mortgages in the 100-200k range and average household incomes, who would be wiped out by mortgage rates >5%.

[SarahBell]

Loads of business people bleating how interest rates need to be kept low for longer.

We need lots of savers moaning on telly.

Oh and the supermarket guy saying inflation on food is zero or negative as they're selling many things below rrp.

Is that how they work inflation out these days?

[MrFlibble]

The Bank of England is expected to hold interest rates at a record low on Thursday – and possibly for the rest of this year – as it seeks to safeguard Britain's fragile recovery.

Oh for the love of Pete, can we stop trying to protect this fictitious recovery and start embracing some reality?

It was bad enough we created some growth on the back of £200bn in freshly printed money, but now we have to go through the constant pain of trying to maintain some positive figures so the recovery can be claimed to be 'locked in.'

[Realistbear]

The Koalishon inherited Brown's property bubble and they believe they must try to sustain it as a pop will take us down like California where prices have fallen around 47% from peak.

IMO, the pop is inevitable as everything around the bubble is deteriorating including employment, trade gap, personal bankruptcies and sterling. The government will eventually have to let property prices find a natural level as maintaining low IR and other subsidies to keep house prices high will, in the long run, slow the long march to economic health.

Edited June 10, 2010 by Realistbear

[OnlyMe]

The Koalishon inherited Brown's property bubble and they believe they must try to sustain it as a pop will take us down like California where prices have fallen around 47% from peak.

IMO, the pop is inevitable as everything around the bubble is deteriorating including employment, trade gap, personal bankruptcies and sterling. The government will eventually have to let property prices find a natural level as maintaining low IR and other subsidies to keep house prices high will, in the long run, slow the long march to economic health.

You assume there will be a long march to economic health. I maintain that if they keep on trying this failed game there will be a long march to the bottom of the hill with hardly a sector left in which the population of this country can compete with the rest of the world.

[Realistbear]

My fixed rate expires in November which is probably the best 'Murpharian' indicator available.... expect a financial crisis and 10% interest rates about a week afterwards.

More seriously.. I would not like to know just how many people there are out there with mortgages in the 100-200k range and average household incomes, who would be wiped out by mortgage rates >5%.

This will be the result:

http://www.bloomberg.com/apps/news?pid=20601103&sid=a_DvistqljUs

U.S. Home Seizures Jump 44% to market forces.Record as All States Show Rise

By Dan Levy

June 10 (Bloomberg) -- U.S. home foreclosures reached a record for the second consecutive month in May, with increases in every state, as lenders stepped up property seizures, according to RealtyTrac Inc.

The US are not deluded as we are here with our still intact property bubble. The bubble has popped in the US and they are probably still 5 years away from a bottom. But at least they are heading closer to recovery by not fighting against market forces.

[interestrateripoff]

More seriously.. I would not like to know just how many people there are out there with mortgages in the 100-200k range and average household incomes, who would be wiped out by mortgage rates >5%.

How many with mortgages in the 100-200k range will get wiped out with higher taxes and lower wages?

Although perhaps the BoE is playing the govt and letting the govt take the blame for the collapsing economy? Nothing to do with us we did all we could by keeping base rates low, we don't set tax policy?

[moonriver]

Loads of business people bleating how interest rates need to be kept low for longer.

We need lots of savers moaning on telly.

Oh and the supermarket guy saying inflation on food is zero or negative as they're selling many things below rrp.

Is that how they work inflation out these days?

Yes, I heard some business guests saying on bbc radio this morning, that interest rates must stay low, and that there should be more QE, so the "recovery" would not be put in danger.

When the presenter asked him about savers losing out with the high inflation and low rates on their savings, he said savings were not important, because we don't want people to save, we need people to spend, so we don't have a recession.

They also mentioned that food was not increasing in price.

[Pent Up]

I think our HPC will still happen with low rates. But it would certainly speed things along with a nice little hike.

wouldn't it be funny if rates went up today. All the people moaning that they can't afford their greed fuelled mortgages

[interestrateripoff]

Yes, I heard some business guests saying on bbc radio this morning, that interest rates must stay low, and that there should be more QE, so the "recovery" would not be put in danger.

When the presenter asked him about savers losing out with the high inflation and low rates on their savings, he said savings were not important, because we don't want people to save, we need people to spend, so we don't have a recession.

They also mentioned that food was not increasing in price.

Did the presenter ask if people don't say where do we get the money you borrow from?

[Guest_James Toney_*]

i would love IR of 10% , never happen again but would be nice

i wounder how many would be in trouble if they even went to 5% ?

[pilchardthecat]

Lots (most?) people who are net tax contributors have mortgage debt. Many of them have been given an effective increase in disposable income because of low rates. This allows the government to increase the tax burden on the PAYE mugs like me more quietly.

I think it really is that simple. If the rates go back up to 5-10% first, the pain of an increaisng tax burden will be felt immediately (rather than deferred until the rates go up 12 months later).

[Guest_James Toney_*]

I think our HPC will still happen with low rates. But it would certainly speed things along with a nice little hike.

wouldn't it be funny if rates went up today. All the people moaning that they can't afford their greed fuelled mortgages

it would be very very very funny if rates went up toady, i cant see IR going up this year, but can always hope. things are really hotting up on the HPC front,

[cypher007]

it would be very very very funny if rates went up toady, i cant see IR going up this year, but can always hope. things are really hotting up on the HPC front,

yeah right. you guys have been saying this for years. a property near me just sold in about two weeks at about 2006 prices, to a russian and portuguese couple, why a russian can work here im not sure, i didnt think they were part of the EU. most other property is now back to 2007 prices, asking wise.

Edited June 10, 2010 by cypher007

[abharrisson]

http://www.telegraph.co.uk/finance/economics/interestrates/7816441/Bank-of-England-to-keep-rates-low-as-Government-spending-cuts-loom.html

So for years it was interest rates are the flexible tool to control the economy, now all of a sudden inflation can be control by the govt spending less and taxing more....

Meanwhile interest rates get to stay uber low to help out the banking sector. Although if household budgets are being squeezed by higher taxes and lower wages lower baseline rates won't help the banks for long....

There have always been a number of tools to control inflation.. interest rates have been amongst the most powerful BUT govt spending and taxation have also had a role to play... the reason interest rates are staying low is due to the nature of the infaltionary cause. I don't entirely buy into it but the logic goes that with tax rises in the pipeline and possibly more to follow this will act to control demand to a degree. Equally frozen salaries and upcoming cuts in public salaries will do the same. Secondly they are anticipating that strong action on the cuts will help to strengthen the pound and this again will act to effectively reduce inflationary pressures... so effectively what they are saying is that raising rates ( which takes a little while to come into effect) has little merit until we have seen how all the actions currently in train effect things.

Finally of course they have a very thorny issue to deal with... common understanding is that the pound has devalued and this in part has led to inflation ..... and with the pound at 1.44 to the dollar and at a low ebb against other important currencies this is true.... however the pound has actually APPRECIATED by 10% or more against the euro... we were down to near parity , we are now somehwhere around the 1.21 level. The importance of this is that its a nasty double wammy... we have imported inflation from those countries we have devlaued against and chinese wage inflation continues to drive inflation here, but at the same time our major export markets n europe have been damaged by a strengthening of the pound against the euro..... strengthening the pound and reducing infaltion by raising rates has a very difficult and unwanted effect by reducing competitiveness for our exports and therefore limiting growth prospects.

For this reason I suspect while many cheer lead for rate rises in a simplistic way becasue they think it will control inflation there arer some quite complicated things going on and I think the govt and the bank are backing taxation and spending policies to control inflation and will try and keep the growth building by NOT raising rates while everyhting is so fragile and a stronger pound would further damage exports.

I have long maintained that higher levels of inflation will not mean rates will rise... we will only see rate rises when a decent recovery is well underway and that could be 18 months or more away.

[Pent Up]

yeah right. you guys have been saying this for years. a property near me just sold in about two weeks at about 2006 prices, to a russian and portuguese couple, why a russian can work here im not sure, i didnt think they were part of the EU. most other property is now back to 2007 prices, asking wise.

can you honestly say you have not notices a difference in the last dew months? Even the msm are saying words like 'stagnation' and even 'price falls' read an EA in the telegraph at the weekend say that vendors should consider very carefully any offers because they regret it in a few months time.

In my area stock on the Market is surging. People are getting fewer and fewer viewings. Lots and lots of reductions.

Halifax hpi has been negative 3 out of the last 4 months and prices are now lower than January.

And all this before the greatest austerity measures since world war 2 kick in.

If this isn't the big one I'll give up and start a highly leveraged BTL empire.

[fluffy666]

How many with mortgages in the 100-200k range will get wiped out with higher taxes and lower wages?

Although perhaps the BoE is playing the govt and letting the govt take the blame for the collapsing economy? Nothing to do with us we did all we could by keeping base rates low, we don't set tax policy?

That's OK, we have a locked-in recovery..

More to the point, you are right that if the BoE suddenly hikes rates and hence sparks a huge wave of reposessions / HPC, then they'll be taking the blame from the government. It's like a mexican standoff on quicksand..

[Bloo Loo]

i would love IR of 10% , never happen again but would be nice

i wounder how many would be in trouble if they even went to 5% ?

just been offered a business loan...12%.

[fluffy666]

just been offered a business loan...12%.

That's your fault for wanting to engage in productive activity. That's like sooo 1900s.

[war]

No excitement this time as expected:

Bank of England holds interest rates at 0.5%

Interest rate held

[Bloo Loo]

That's your fault for wanting to engage in productive activity. That's like sooo 1900s.

forgot to mention, the £250 arrangement fees and personal guarantees.

[Guest_James Toney_*]

just been offered a business loan...12%.

a mate of mine got offered the same % , so looks like the BOE IR does not even matter anymore

[olliegog]

cue lots of tracker mortgage holders exclaiming 'how clever I am to have a lifetime tracker at -1%' their gain is someone else's loss. Would be interested to know how many winners there are in this situation and how many of them are BTlers. But then of course if they are BTLers they will have to pay tax on the amount by which the rental income exceeds their £1 a month interest on their mortgage .