Interest Rate Rise, It May Happen Sooner Than Many Think!

[DisQ]

Lets see if they got the balls to do it.

UK has a one-in-three chance of being forced to raise rates this year

Britain has a one-in-three chance of being forced into an unplanned interest rate rise this year, a veteran private equity manager has warned.

By Philip Aldrick, Banking Editor

Published: 10:37PM BST 28 Jun 2010

Jon Moulton, chairman of Finncap, said the UK has been put at risk due to the scale of public debt and that rising rates threaten to derail the recovery.

George Osborne attempted to address the issue in last week's Budget, with plans to close the deficit – the shortfall between tax revenue and public spending – by 2014/2015. As a result, the volume of gilts to be issued this year has been reduced by £20bn to £165bn, following last year's record £227bn.

However, Mr Moulton believes a sovereign debt crisis elsewhere would spill over to the UK as investors lose their appetite for government bonds. "There is so much sovereign debt out there that it's a real problem," he said. "It doesn't have to be a UK failure but one or two others would quickly infect the UK."

He described the global system as a "giant experiment". "Everyone is running deficits, everyone's debt is at high levels," he said. "There are lots of low probability events that add up to a decent probability in total... I reckon there's a one in three shot of a rate rise during the course of this year."

Economists expect the Bank of England to start raising rates, currently at 0.5pc, at the end of this year and to stop at 2pc in late 2011. However, Bank policymaker Andrew Sentance has already called for a rate rise this month.

http://www.telegraph.co.uk/finance/economics/7859229/UK-has-a-one-in-three-chance-of-being-forced-to-raise-rates-this-year.html

BIS plays with fire, demands double-barrelled monetary and fiscal tightening

The Bank for International Settlements has warned authorities across the developed world that they cannot rely on ultra-low interest rates to cushion the blow of austerity measures.

By Ambrose Evans-Pritchard

Published: 10:26PM BST 28 Jun 2010

Both fiscal and monetary policy may have to be tightened at the same time and ­before recovery is entrenched, a chilling possibility for asset markets. "Macroeconomic support has its limits," said the bank's annual report.

The Swiss-based "bank for central bankers" said ultra-low rates and massive fiscal stimulus saved the world from an economic meltdown during the credit crisis, but the balance of advantage has since shifted.

"Such powerful measures have strong side-effects, and their dangers are becoming apparent. The time has come to ask how they can be phased out," it said.

"There are limits to how long monetary policy can remain expansionary. Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial stability. We cannot wait for the resumption of strong growth to begin the process of policy correction."

The clarion call for higher rates and an end to quantitative easing is controversial and pits the BIS against the International Monetary Fund in an epochal policy battle. If wrong, the BIS strategy risks pushing the global economy into depression.

Dominique Strauss-Kahn, the IMF chief, warned against zealous self-flagellation at the G20 summit. "It could be a catastrophe if all the countries were tightening, it could totally destroy the recovery."

Gabriel Stein, of Lombard Street Research, said the BIS is playing with fire. "Fiscal and monetary tightening were tried in tandem in the early 1930s and it didn't work then. The BIS ought to know better," he said.

The bank said the US and Europe made the fatal error of holding rates too low after the dotcom bust, fearing a slide towards deflation. The effect was to fuel asset bubbles and depress credit yields, pressuring lenders to chase risk. "Our recent experience with exactly these consequences a mere five years ago should make us extremely wary this time around," it said.

The BIS warned that central banks are luring banks into a fresh trap by shoring up lenders with cheap access to short-term funding, which is then used to buy long-dated bonds at higher yield – the so-called sovereign "carry trade". Some have already been caught out badly in Greek debt.

"Financial institutions may underestimate the risk associated with this maturity exposure. They might face difficulty rolling over their short-term debt. An unexpected tightening of monetary policy might cause serious repercussions," it said.

The parallel with post dotcom errors is likely to rile critics. Housing markets and banks were robust at the time, whereas the damage now is deeply structural in the US, Britain and Europe. Yet the BIS has clearly concluded that it is better for indebted economies to take their punishment early rather than dragging out the ordeal as in Japan.

On the spending side, the bank called for "immediate front-loaded fiscal consolidation" in key industrial states. "Public debt-to-GDP ratios are on unsustainable trajectories," rising from 76pc of GDP in 2007 to 100pc in 2011. The picture is worse than it looks since the crisis has "permanently" reduced output, and aging costs are soaring.

Yet fiscal austerity may be less of a drag on recovery than presumed. Denmark slashed its primary deficit by 13.4pc of GDP from 1983-1986, yet eked out growth of 3.9pc a year. Sweden grew by 3.7pc during its hair-shirt episode in the 1990s, Canada by 2.8pc, and Belgium by 2.3pc.

These cases do not tell us what would happen if half the world tightens at the same time, feeding on each other. Even so, the BIS data challenges Keynesian claims about fiscal stimulus. State spending merely "crowds out" private activity.

Besides, governments have no choice. They must retrench to appease the bond vigilantes in the new era of sovereign frailty. "A sudden loss in market confidence would be far worse," said the BIS.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7859800/BIS-plays-with-fire-demands-double-barrelled-monetary-and-fiscal-tightening.html

[bear call spread]

No thanks, its fine as it is

[Bam]

I doubt whether a rise in the base rate will actually do that much. It could send a few over, but any rise will only be in the order of 0.5 to 1%

So you're only looking at an extra £100 or so a month for those on a base rate tracker

[Pent Up]

I doubt whether a rise in the base rate will actually do that much. It could send a few over, but any rise will only be in the order of 0.5 to 1%

So you're only looking at an extra £100 or so a month for those on a base rate tracker

£100 a month is a lot of money. Se my morons thread on the anecdotal. The idiot is getting a tracker and using up all his available income on paying it. It base rate +5% or something stupidly similar. A 1% rise will wipe him and many others out IMO. As well as deterring future buyers.

[ArthurHon]

What we are going to hear is the current spike in inflation couldn't work itself out of the statistics because of the VAT increase at the tail end of it. We will have moderatley high inflation and low interest rates unless there is some kind of market event which forces them to raise rates. With the coalition cutting expenditure like gooduns, unprompted, I think an 'event' is less likely.

[siskin]

I've been wondering about this for a while. At the moment all the big economies in Europe and the US are holding their base rates down at historically low levels. They're doing this because they're all in trouble but that also makes them prone to instability. If one big country is forced into raising its rates by a bond crisis for example won't the rest be under a lot of pressure to raise theirs too whether their governments and central bankers want to or not?

[lulu]

£100 a month is a lot of money. Se my morons thread on the anecdotal. The idiot is getting a tracker and using up all his available income on paying it. It base rate +5% or something stupidly similar. A 1% rise will wipe him and many others out IMO. As well as deterring future buyers.

1% is nothing and should happen. If nothing else it will send a warning out to all those morons still looking to overstretch themselves 'to get on the ladder' it would probably save more people that it ruins - and anyone ruined by a rise in the base rate to 1% (unless there really are circumstances such as unemployment etc) really is a muppet and deserves it.

Sorry if that sounds harsh but one of the reasons I didnt buy a few years ago was that I looked at the figures and realised that if rates went up even only slightly I may have been in trouble - though looking back I proabbly should have gone for it as who expected rates to get so low...

[okaycuckoo]

CAB people I speak to reckon a tick up in base rates will cause havoc for alot of mortgagors. I've no doubt they're right.

Base rates won't tick up - we're here for years.

[Bam]

New Zealands base rate increased from 2.5% to 2.75% last June, however mortgage rates are now falling

Will we see the same here?

My link

[Pent Up]

New Zealands base rate increased from 2.5% to 2.75% last June, however mortgage rates are now falling

Will we see the same here?

My link

No. With the governments special liquidity scheme being phased out now and ending completley by jan 2012 UK banks will have to borrow money from the open Market rather than cheaply from the government. This will cause a rise in mortgages rates even if base rates don't move. Many of us on here have predicted a new credit crisis for some time and it looks the recent BOE survey proves us correct. Many banks are planning to scale back mortgage lending over te next 3 months.

http://www.dailymail.co.uk/news/article-1291203/Warning-second-credit-crunch-lenders-warn-worsening-mortgage-drought.html?ito=feeds-newsxml

[Bam]

No. With the governments special liquidity scheme being phased out now and ending completley by jan 2012 UK banks will have to borrow money from the open Market rather than cheaply from the government. This will cause a rise in mortgages rates even if base rates don't move. Many of us on here have predicted a new credit crisis for some time and it looks the recent BOE survey proves us correct. Many banks are planning to scale back mortgage lending over te next 3 months.

http://www.dailymail.co.uk/news/article-1291203/Warning-second-credit-crunch-lenders-warn-worsening-mortgage-drought.html?ito=feeds-newsxml

Perhaps we will not see that here for a while, what is more of interest to me though is the competition being formed between then banks.

In this case for new zealand a higher base rate does not necessarily mean higher lending rates