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Smell the Fear

Rates May Go Lower

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Guest Charlie The Tramp
Mr Nickell is in the last year of his final term as a member of the MPC and was keen to defend his role as an activist member of the committee, often dissenting from the majority position.

<_<

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Are they playing games here. The MPC have said before that the expectation of a cut or raise is as effective as an actual cut or raise - could it be they want to leave rates as they are but are offering the promise of a cut to stimulate retail activity??

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Guest Charlie The Tramp
Remember expectations are helpful, but only real cuts put money back in peoples pockets to spend.

Not if they are maxed out with debt.

Retail spending will continue to drop in the next few years as people struggle to pay off their massive debts or become one of the predicted 60k bankrupts annually by 2006. No big rate cuts will make a difference and IMO Mervyn and the big guns on the MPC know it. Inflation and financial stability will become the new keywords and the debtors will pay the price of their folly.

Historically recessions bring high unemployment, high inflation, and high interest rates. 250k repossessions in the last crash and recession, dread to think how many this time when the MEWers are unable to sell their holiday homes in sunny Spain to pay off their greatly increased mortgages. :(

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In an interview Mr Nickell said consumer expenditure growth was being curtailed by high oil prices, increasing slack in the labour market and high levels of household debt. There was also a a possibility that household savings rates would rise, denting consumption growth.

These guys at the BOE know exactly what's going on.

When consumers sense trouble they increase their savings rates.

There is a very strong correlation with house prices here, ie they fall as people cut back spending.

The BOE know it's happening, they're just giving the news to us in nice woolly terms.

Edit: The bottom is going to drop out of the Spanish market completely. I'm very tempted to buy myself a nice place on an island in a few years.

Edited by BandWagon

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There was a better than even chance of a cut in November and that has been helped by the election result in Germany which will almost certainly weaken the Euro and therefore make it easier for UK to cut.

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Remember expectations are helpful, but only real cuts put money back in peoples pockets to spend.

The expectation must have more effect than the actual cash. Expectation means that people will saddle up with more debt - maybe even a hundred grand or more to buy a home.

The actual cash is nothing. A quarter point cut on a 100k mortgage puts £21 per month back in the borrower's pocket. That will pay for a curry and a couple of beers, a cheap shirt, or a trip to McDonalds with the kids.

Somehow I can't see that setting the highstreet alight...... :rolleyes:

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There was a better than even chance of a cut in November and that has been helped by the election result in Germany which will almost certainly weaken the Euro and therefore make it easier for UK to cut.

The Eurozone has now raised it's inflation target to 2.2%. So this should indeed weaken the currency (if I've got my economics round the right way).

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The Eurozone has now raised it's inflation target to 2.2%. So this should indeed weaken the currency (if I've got my economics round the right way).

Not quite, higher interest rates should help support capital inflows (prop up the currency) since you will get better returns in that currency, that's exactly why the BoE upped the rates two times in one day to 15% during the ERM crisis, theoritcally it meant better returns so money should have flowed into GBP, I'm sure some did, the central bank certainly provided a lot of support (buying their own currency for more than it's "worth"), but they couldn't beat the short sellers and had to give in.

Of course it's not always that simple, higher interest rates may signal higher inflation which erodes even high interest rates in real terms. The BoE's actions during the ERM also smacked of desperation of course, nothing moderate about that. The rate cycle also reflects the wider economic cycle of course, higher rates should translate into slower future economic growth, hence selling pressure.

The US Fed has been raising rates of course yet the dollar has still suffered, that's because the deficits are such that they need to attract vast amounts of capital into the market every day just to keep some sort of balance. When foreign central banks and investors get tired of supporting the USD they have to be tempted by higher returns (high rates). However this may signal other problems, if they cannot support infows then the Fed may have to introduce liquidity by monetizing debt themselves through buying their own Treasury bills, the fed then writes a cheque to itself, this is basically the FRB counterfeiting on a grand scale (see >$200b for Katrina for example) this can can kick off inflation, it's like watering the whisky down, hence it's not very nice if you're a foreign central bank left holding USD eroding in value.

Trading partners support currencies for all sorts of reasons aside from their returns, people certainly don't buy US securities for their pitiful yields, but it stops their own currency appreciating against the dollar hence helps domestic companies that export to the US. Through buying T'bills they also introduce liquidity into the US for American consumers, it enables them to borrow cheaply so they can buy all the tat you're exporting to them. All the Asian economies do this, but something will have to give eventually, here's the basic model, it could cause a run on the dollar if things went wrong, people are already reluctant to accumulate further dollar holdings. Imagine high rates in order to attract inflows yet those same rates killing domestic consumption through crippling debt payments, it's like a nasty version of stagflation of yore.

The US Dollar is special, if any other country ran trade deficits at >6% of GDP they'd be done for, most countries like Argentina have been pushed over the edge at 3% and below. Up until the 60's the USD was sought after, foreign central banks would happily exchange gold for dollar holdings, then Nixon changes a few things B)

I'd be buying the Swiss franc.

Edited by BuyingBear

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Not quite, higher interest rates should help support capital inflows (prop up the currency) since you will get better returns in that currency, that's exactly why the BoE upped the rates two times in one day to 15% during the ERM crisis, theoritcally it meant better returns so money should have flowed into GBP, I'm sure some did, the central bank certainly provided a lot of support (buying their own currency for more than it's "worth"), but they couldn't beat the short sellers and had to give in.

Of course it's not always that simple, higher interest rates may signal higher inflation which erodes even high interest rates in real terms. The BoE's actions during the ERM also smacked of desperation of course, nothing moderate about that. The rate cycle also reflects the wider economic cycle of course, higher rates should translate into slower future economic growth, hence selling pressure.

The US Fed has been raising rates of course yet the dollar has still suffered, that's because the deficits are such that they need to attract vast amounts of capital into the market every day just to keep some sort of balance. When foreign central banks and investors get tired of supporting the USD they have to be tempted by higher returns (high rates). However this may signal other problems, if they cannot support infows then the Fed may have to introduce liquidity by monetizing debt themselves through buying their own Treasury bills, the fed then writes a cheque to itself, this is basically the FRB counterfeiting on a grand scale (see >$200b for Katrina for example) this can can kick off inflation, it's like watering the whisky down, hence it's not very nice if you're a foreign central bank left holding USD eroding in value.

Trading partners support currencies for all sorts of reasons aside from their returns, people certainly don't buy US securities for their pitiful yields, but it stops their own currency appreciating against the dollar hence helps domestic companies that export to the US. Through buying T'bills they also introduce liquidity into the US for American consumers, it enables them to borrow cheaply so they can buy all the tat you're exporting to them. All the Asian economies do this, but something will have to give eventually, here's the basic  model, it could cause a run on the dollar if things went wrong, people are already reluctant to accumulate further dollar holdings. Imagine high rates in order to attract inflows yet those same rates killing domestic consumption through crippling debt payments, it's like a nasty version of stagflation of yore.

The US Dollar is special, if any other country ran trade deficits at >6% of GDP they'd be done for, most countries like Argentina have been pushed over the edge at 3% and below. Up until the 60's the USD was sought after, foreign central banks would happily exchange gold for dollar holdings, then Nixon changes a few things  B)

I'd be buying the Swiss franc.

Is the Swissy backed by gold?

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Not quite, higher interest rates should help support capital inflows ...

But the point about increasing the inflation target is that it allows the Eurozone to not raise interest rates. They can let inflation naturally rise to the new level without taking action. So this means lower interest rates than would have been the case had there been no change in the target.

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But the point about increasing the inflation target is that it allows the Eurozone to not raise interest rates. They can let inflation naturally rise to the new level without taking action. So this means lower interest rates than would have been the case had there been no change in the target.

Oh indeed, but the fed are raising rates so the ECB is on a one way street, given the weakness of the dollar they can get away with it now.

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  • 301 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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