How High Will Interest Rates Go?

[pilchardthecat]

Curious to know your thoughts on this.

There's a lot of noise at the moment suggesting i should bin my lifetime BoE tracker, but i remain unconvinced. When i took it out a few years ago rates were 6% or there abouts. I can't see them being back at that level in the next 2 or 3 years, can you?

Where are they heading?

[ken_ichikawa]

I can't see them being back at that level in the next 2 or 3 years, can you?

Although they don't want to politiking.. I think they'll be forced into it through one thing or another.

[Georgia O'Keeffe]

Curious to know your thoughts on this.

There's a lot of noise at the moment suggesting i should bin my lifetime BoE tracker, but i remain unconvinced. When i took it out a few years ago rates were 6% or there abouts. I can't see them being back at that level in the next 2 or 3 years, can you?

Where are they heading?

Personally i think they will still be below 1 in 2 years time but at that point they may start going up quite quickly if a real crack up boom happens. However interest rates are almost unpredictable, there could be a currency crisis at any point forcing them up.

The thing i doubt hardly anyone considers when thinking about timing rates is equity, its not impossible for houseprices to fall 30 to 40% in the next 2 to 3 years so someone with 40% equity able to get a good deal today thinking about switching in a couple of years when they may start rising quickly may have no equity to get a good deal in 2 years.

There are so many variables to consider its almost impossible to end up being right so personally i wouldnt advise a mortgage full stop, not very helpful but like i say the rate/equity/inflation variables are too many to make an informed decision. But if i was going to have a fix now the minimum period i would want would be 7 years, i dont think 5 is going to be remotely effective unless most of the debt can be paid down during this time

Edited January 23, 2011 by Tamara De Lempicka

[Frank Hovis]

How irrelevant is the BoE base rate to real world interest rates such as Libor and SVRs?

1. Very Irrelevant
   
2. Incredibly Irrelevant
   
3. Hugely Irrelevant
   
4. More Irrelevant than a very Irrelevant thing
   
5. Even more Irrelevant than that
   

[Georgia O'Keeffe]

How irrelevant is the BoE base rate to real world interest rates such as Libor and SVRs?

1. Very Irrelevant

2. Incredibly Irrelevant

3. Hugely Irrelevant

4. More Irrelevant than a very Irrelevant thing

5. Even more Irrelevant than that

yes but i guess its extremely relevant to those on trackers and lifetime trackers which seems to be quite alot in the uk

[Frank Hovis]

yes but i guess its extremely relevant to those on trackers and lifetime trackers which seems to be quite alot in the uk

Indeed. Why they are still available baffles me, Banks and BSocs in full-on suicide mode.

[Tired of Waiting]

Although they don't want to politiking.. I think they'll be forced into it through one thing or another.

+ 1

And to curb inflation IR may have to go above inflation. If inflation peaks at, say 6%. IR may have to go up to ... 8%?

Just guesses though. It will all depend on (too many) international factor, sterling levels, commodities levels, and in this current extremely weird world economy, anything is possible.

yes but i guess its extremely relevant to those on trackers and lifetime trackers which seems to be quite alot in the uk

+ 1

[Georgia O'Keeffe]

Does anyone know how banks make money?

Lend long (7%?) borrow short (0.5%?)

Do you know how they hedge this risk against not being able to borrow at low rates??

INTEREST RATE DERIVATIVES.

The derivatives market is currently at around $600 trillion or so (in gross notional value).

...o (In contrast, the size of the worldwide bond market (total debt outstanding) as of 2009 was an estimated $82 trillion)!!!

...o (Also: CIA Fact Book puts the world economy at $58 trillion in 2009).

so $600 Trillion is a HUGE number.

Interest rate derivatives, in turn, are by far the most popular type of derivative.

So......

if rates rise and the writers of Interest rate derivatives start to go bust, one thing will lead to another and ...oops.... all the banks go over like dominoes.

NOTHING CAN BE ALLOWED TO FAIL - if even 10% of the derivatives go pop (notional becomes nominal at that point), that's the size of the world economy right there. In just a 10% default.

==> RATES WILL NOT RISE.

everything ultimately fails given enough time, the only constant is change, just because something bad happens its never actually stopped something bad happening

Edited January 23, 2011 by Tamara De Lempicka

[Georgia O'Keeffe]

Disagree: the Central Bankers have shown us they will do ANYTHING to save the system. They will do whatever is necessary.

This 'bad' thing will end their reign of power (fiat money) so it will not be allowed to happen.

Eventally, of course they will lose control as people decide for themselves what to use as money.

well if you think that bit in bold then you dont actually disagree, whatever the cause be it self inflicted or externally inflicted it will change at some point.

There is clearly an almost historical level of perception that risk no longer exists in markets for whatever reasons, the only time this level of complete lack of risk awareness has existed historically to this extreme is when risk is about to bitchslap the market participants.

Edited January 23, 2011 by Tamara De Lempicka

[CHF]

Disagree: the Central Bankers have shown us they will do ANYTHING to save the system. They will do whatever is necessary.

This 'bad' thing will end their reign of power (fiat money) so it will not be allowed to happen.

Eventally, of course they will lose control as people decide for themselves what to use as money.

OT - I'd like to see your sig updated

[Democorruptcy]

Does anyone know how banks make money?

Lend long (7%?) borrow short (0.5%?)

Do you know how they hedge this risk against not being able to borrow at low rates??

INTEREST RATE DERIVATIVES.

The derivatives market is currently at around $600 trillion or so (in gross notional value).

...o (In contrast, the size of the worldwide bond market (total debt outstanding) as of 2009 was an estimated $82 trillion)!!!

...o (Also: CIA Fact Book puts the world economy at $58 trillion in 2009).

so $600 Trillion is a HUGE number.

Interest rate derivatives, in turn, are by far the most popular type of derivative.

So......

if rates rise and the writers of Interest rate derivatives start to go bust, one thing will lead to another and ...oops.... all the banks go over like dominoes.

NOTHING CAN BE ALLOWED TO FAIL - if even 10% of the derivatives go pop (notional becomes nominal at that point), that's the size of the world economy right there. In just a 10% default.

==> RATES WILL NOT RISE.

(Edit: apart form if there is a run on the currency)

Edit2:

The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows.

You say that there are interest rate derivatives and the whole derivatives market is $600trn then seem to be implying that if interest rates rise the whole derivative market will go pop and the world cannot even afford a 10% pop.

However as derivatives are a form of insurance surely if interest rates rise, some other derivatives will be worth more, i.e. there will be hedges against hedges.

It is not a one-way $600trn bet on interest rates not rising.

[MrFlibble]

Disagree: the Central Bankers have shown us they will do ANYTHING to save the system. They will do whatever is necessary.

This 'bad' thing will end their reign of power (fiat money) so it will not be allowed to happen.

Eventally, of course they will lose control as people decide for themselves what to use as money.

The system is already out of control. At some point countries are going to have to start backing their paper with something real or the paper itself will lose all credibility. It will be easy for the energy/resource rich and the ones who have healthy reserves of Gold, but what about the UK? What will we be backing our paper with? An overvalued stock of shanty-town housing?

[athom]

I'm amazed that so many people here think 5% is a high/unlikely interest rate. I can only assume you are factoring in what you expect would be a tragic outcome for millions to persuade you that the BOE will also consider that when setting rates. They might a little, as much as they can, but they have said time and again that their primary aim is controlling inflation. 5% is not high, 10% even is not high.

[onesmallstep]

Does anyone know how banks make money?

Lend long (7%?) borrow short (0.5%?)

Do you know how they hedge this risk against not being able to borrow at low rates??

INTEREST RATE DERIVATIVES.

The derivatives market is currently at around $600 trillion or so (in gross notional value).

...o (In contrast, the size of the worldwide bond market (total debt outstanding) as of 2009 was an estimated $82 trillion)!!!

...o (Also: CIA Fact Book puts the world economy at $58 trillion in 2009).

so $600 Trillion is a HUGE number.

Interest rate derivatives, in turn, are by far the most popular type of derivative.

So......

if rates rise and the writers of Interest rate derivatives start to go bust, one thing will lead to another and ...oops.... all the banks go over like dominoes.

NOTHING CAN BE ALLOWED TO FAIL - if even 10% of the derivatives go pop (notional becomes nominal at that point), that's the size of the world economy right there. In just a 10% default.

==> RATES WILL NOT RISE.

(Edit: apart form if there is a run on the currency)

Edit2:

The Bank for International Settlements estimates that the notional amount outstanding in June 2009 were US$437 trillion for OTC interest rate contracts, and US$342 trillion for OTC interest rate swaps. According to the International Swaps and Derivatives Association, 80% of the world's top 500 companies as of April 2003 used interest rate derivatives to control their cashflows.

thanks for this, assuming it is factual, it just shows what a joke our financial system has become.

presumably a possible way out of this would be a very gradual increase in rates.

the whole thing is an unbelievable mess.

I actually think they will put up rates in a bit of a panic like the ERM fiasco.

[Sour Mash]

Indeed. Why they are still available baffles me, Banks and BSocs in full-on suicide mode.

Incredibly low rate trackers/lifetime trackers are not still available.

Existing examples of such trackers are honoured because it's a contract they entered into. Obviously they mean big losses for the lender but then they just heap the costs onto new borrowers.

[gf3]

Inflation is slowly eroding our standard of living. But what do you expect?

Do you think that living in the west means that we will always have a better standard of living than the rest of the world?

There is nothing the bank of england can do to stop this erosion. raising interest rate is not going to magically keep us rich, how could it?

Interest rate are going to stay low for a long time IMO.

[Prescience]

B of E could drop Base Rate to 0%.

it is wholly irrelevant.

What are relevant:

1. Bond Rates:

2. LIBOR:

3. Sterling's Cross Rates in the FOREX market.

UK banks and governments are compelled to seek funds in all periods from the global capital markets.

Once the effects of economic stimulus, bank bail outs and QE filter through the system, added to UK Government's continuing need to borrow awesome forward sums in a Sovereign Risk market which is already hugely risk-averse and cynical, then Sterling will take a bath on exchange rates.

Unmentioned by any economic "Experts" or commentators is UK's Balance of Trade Deficit. It has been in deficit, hugely now since the early 1990s: this has to be funded.

Global capital investors will factor in Sterling's increasing incipient weakness as risk zones: since they stand a good chance of capital loss against other major global hard currencies.

Thus the interest rate most compensate them for such repatriation risk exposure.

Eventually, as a defensive panic knee jerk do not be surprised to see effective LIBOR sterling at 10%: or even higher.

BTW: all these lovely clever rocket scientist's risk management derivs didn't prevent the 2007-9 meltdown, did they!

I wonder why............................................

[gf3]

Curious to know your thoughts on this.

There's a lot of noise at the moment suggesting i should bin my lifetime BoE tracker, but i remain unconvinced. When i took it out a few years ago rates were 6% or there abouts. I can't see them being back at that level in the next 2 or 3 years, can you?

Where are they heading?

I am surprised at the range of rates that people think interest rate will be at. I would have thought most of us would be singing from the same hymn sheet. just wondered if this poll has helped you make up your mind as to go with a fixed deal or not. and what your rate is now BofE +?

[Pants]

Perhaps the Koran was right all along, but simply misunderstood. Usury is not forbidden, just impossible perhaps it is not sustainable for an economy to have interest above 0%!

[mfp123]

also the idea that interest rates musnt go up because it will affect the recovery is flawed.

if they dont get a grip on inflation the cost to the country will be significant.

whats the point securing x amount of new jobs if the cost of living rises 10% for everyone.

new jobs will essentially be subsidised by everyone else being forced to pay more for their goods and services.

if high inflation costs the average family an extra £1000 a year, youre paying the cost of creating an easier environment for someone else to get a job.

[Frank Hovis]

Incredibly low rate trackers/lifetime trackers are not still available.

Existing examples of such trackers are honoured because it's a contract they entered into. Obviously they mean big losses for the lender but then they just heap the costs onto new borrowers.

Some version of them must be, somebody only a few weeks ago asked me whether they should go for a tracker or fixed and my first question was does the tracker run off BoE and it did. It certainly wasn't a full term one though.

[pilchardthecat]

I am surprised at the range of rates that people think interest rate will be at. I would have thought most of us would be singing from the same hymn sheet. just wondered if this poll has helped you make up your mind as to go with a fixed deal or not. and what your rate is now BofE +?

I'm also surprised. I think they will creep up slowly to 2 or 3% by intent, but there is a risk that something significant happens and they are forced to go much higher, much quicker, into double figures. I suppose the poll reflects that to a degree.

I'm sticking with the tracker - i'd pay an immediate premium if i switched it now. Also i think people do overestimate the impact of rates on repayment mortgages - if interest rates went up by a factor of 20 to 10%, my payments would roughly double, from c£500 to c£1000. When i took the thing out, rates were about 6% and i was paying about £800.

I'd be almost happy for rates to go up a bit if it pushed petrol prices down... i'm going to be spending more on unleaded than i do on my mortgage soon

[Prescience]

What seems forgotten all the time is that money is simply a commodity: and like all commodities it is a medium of exchange of value.

Doesn't matter a wee flying F*** what gubergit would like: interest rates, eventually, are determined by the market.

And if the risk exposure increases: then the cost penalty rises.

Furthermore, since the UK lacks sufficient capital to self-finance (Which is why it is now totally reliant on the global interbank market for daily funding: read Peston's blog on "Funding Overhang"), then it is that market which determines rates: not Call me Dave; Nick Clegg or Uncle Tom Cobbley.

Governments and central banks can try to steer things their way; however as of now, what with?

Since the essential disconnect between LIBOR and B of E's Base Rate has been a reality for some little time, then that ought to provide a wee clue.

That and the bond markets and sovereign risk.

[gf3]

I'm also surprised. I think they will creep up slowly to 2 or 3% by intent, but there is a risk that something significant happens and they are forced to go much higher, much quicker, into double figures. I suppose the poll reflects that to a degree.

I'm sticking with the tracker - i'd pay an immediate premium if i switched it now. Also i think people do overestimate the impact of rates on repayment mortgages - if interest rates went up by a factor of 20 to 10%, my payments would roughly double, from c£500 to c£1000. When i took the thing out, rates were about 6% and i was paying about £800.

I'd be almost happy for rates to go up a bit if it pushed petrol prices down... i'm going to be spending more on unleaded than i do on my mortgage soon

I think your wise staying with the tracker I don't think you will regret it. This is quite a good article that encapsulates why I think rate wont be going up any time soon.

http://www.telegraph.co.uk/finance/economics/8267834/Bank-of-England-under-pressure-to-raise-interest-rates-after-inflation-rockets.html

The thing that I keep beating the drum over is:- if I did a pole and asked if Britain going to be poorer in the future most on here would vote yes.

so if we are going to get poorer that gives two options either pay cuts or price increases. To me that really is only one option price rises and the BofE should not do any thing to stop them.

[Number79]

also the idea that interest rates musnt go up because it will affect the recovery is flawed.

if they dont get a grip on inflation the cost to the country will be significant.

whats the point securing x amount of new jobs if the cost of living rises 10% for everyone.

new jobs will essentially be subsidised by everyone else being forced to pay more for their goods and services.

if high inflation costs the average family an extra £1000 a year, youre paying the cost of creating an easier environment for someone else to get a job.

They dont care about the cost of living for the peasants.

If rates rise then our debt holders (bond/gilt buyers) will expect higher interest rates. More money will then have to be spent each year just to service our debt interest. Things spiral from there exponentially.

They will not raise rates unless their hand is forced. That is why the cpi and rpi figures are fudged and we are told that there is no inflation despite being poorer every day.