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danlee74

Base Rate And Inflation

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Looking at exchange rates for the end of February when it was 1.1691 EUR to GBP against the end of March when it was 1.1282, this was about a 3.5% strengthening of the EUR against GBP and I would presume that a lot of this was due to the public assertion that their base rate was going to go up in the April ECB meeting.

Now, given a 0.25% rise and if the same happened to the good old GBP against the dollar then surely we could expect a similar strengthening in our currency, leading to decreased import costs and as we are very much an import led economy I would think that this would be good for the average consumer.

Looking at oil alone I have calculated the following:

BASE RATE EXCH RATE £/BARREL £/l

0.50 (current) 1.630 (ish) 76.69 0.482

0.75 1.687* 74.10 0.466

1.00 1.746 71.59 0.450

1.25 1.807 69.18 0.435

1.50 1.870 66.84 0.420

1.75 1.936 64.57 0.406

2.00 2.003 62.41 0.392

* 1.63 x 1.035

Assumptions:

159 litres per barrel

Barrel price = constant $125

Each 0.25% rise has the same effect on the exchange rate

So, each rate rise could knock about 1.5p off each product litre (and the VAT), less any increased profit the retailer/oil company decided to cling onto. This is equivalent to roughly or 1% (1.5p / 133ppl). Bearing in mind that a large amount of a product "cost" is related to oil, two quick base rate rises to 1.00% could bring inflation close to the target (4.4% - 1% - 1% = 2.4%).

Now I realise this is a bit of a simplistic set of calculations and that the assumptions are bit far fetched but I was bored on a lazy Sunday early evening and my mind started to wander about the effects of a slight increase in the base rate.

What do others think of my "back of a cigarette packet" calculations? I think I am prepared to be poo-pooed as I do not think a 0.25% rise would have such a big effect and I think I must have not considered something!!!!

How much do others think a 0.25% rate would effect inflation?

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What do others think of my "back of a cigarette packet" calculations? I think I am prepared to be poo-pooed as I do not think a 0.25% rise would have such a big effect and I think I must have not considered something!!!!

How much do others think a 0.25% rate would effect inflation?

A little... Taylor rule suggests a 4% rate to really squash inflation, so 0.75% is nothing..

The 0.25% will reduce domestic demand further and stop those pesky retailers from putting up prices (which they have been, and then pretend

to do a 20% off or something like that) and stop those floating rate mortgage owners who still have a job from bidding up prices,

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80% of product cost is labour, not oil. Wages are growing at 2%. So you can't control inflation by moving interest rates unless you want to push them much much higher. And you need to take direct and indirect taxation out of your inflation calculation. Also remember that output gap and employment is more important than inflation targeting, I think the MPC has stated that, so forget about the Taylor Rule (for now ;) )

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Looking at exchange rates for the end of February when it was 1.1691 EUR to GBP against the end of March when it was 1.1282, this was about a 3.5% strengthening of the EUR against GBP and I would presume that a lot of this was due to the public assertion that their base rate was going to go up in the April ECB meeting.

Now, given a 0.25% rise and if the same happened to the good old GBP against the dollar then surely we could expect a similar strengthening in our currency, leading to decreased import costs and as we are very much an import led economy I would think that this would be good for the average consumer.

Looking at oil alone I have calculated the following:

BASE RATE EXCH RATE £/BARREL £/l

0.50 (current) 1.630 (ish) 76.69 0.482

0.75 1.687* 74.10 0.466

1.00 1.746 71.59 0.450

1.25 1.807 69.18 0.435

1.50 1.870 66.84 0.420

1.75 1.936 64.57 0.406

2.00 2.003 62.41 0.392

* 1.63 x 1.035

Assumptions:

159 litres per barrel

Barrel price = constant $125

Each 0.25% rise has the same effect on the exchange rate

So, each rate rise could knock about 1.5p off each product litre (and the VAT), less any increased profit the retailer/oil company decided to cling onto. This is equivalent to roughly or 1% (1.5p / 133ppl). Bearing in mind that a large amount of a product "cost" is related to oil, two quick base rate rises to 1.00% could bring inflation close to the target (4.4% - 1% - 1% = 2.4%).

Now I realise this is a bit of a simplistic set of calculations and that the assumptions are bit far fetched but I was bored on a lazy Sunday early evening and my mind started to wander about the effects of a slight increase in the base rate.

What do others think of my "back of a cigarette packet" calculations? I think I am prepared to be poo-pooed as I do not think a 0.25% rise would have such a big effect and I think I must have not considered something!!!!

How much do others think a 0.25% rate would effect inflation?

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Looking at exchange rates for the end of February when it was 1.1691 EUR to GBP against the end of March when it was 1.1282, this was about a 3.5% strengthening of the EUR against GBP and I would presume that a lot of this was due to the public assertion that their base rate was going to go up in the April ECB meeting.

Now, given a 0.25% rise and if the same happened to the good old GBP against the dollar then surely we could expect a similar strengthening in our currency, leading to decreased import costs and as we are very much an import led economy I would think that this would be good for the average consumer.

Looking at oil alone I have calculated the following:

BASE RATE EXCH RATE £/BARREL £/l

0.50 (current) 1.630 (ish) 76.69 0.482

0.75 1.687* 74.10 0.466

1.00 1.746 71.59 0.450

1.25 1.807 69.18 0.435

1.50 1.870 66.84 0.420

1.75 1.936 64.57 0.406

2.00 2.003 62.41 0.392

* 1.63 x 1.035

Assumptions:

159 litres per barrel

Barrel price = constant $125

Each 0.25% rise has the same effect on the exchange rate

So, each rate rise could knock about 1.5p off each product litre (and the VAT), less any increased profit the retailer/oil company decided to cling onto. This is equivalent to roughly or 1% (1.5p / 133ppl). Bearing in mind that a large amount of a product "cost" is related to oil, two quick base rate rises to 1.00% could bring inflation close to the target (4.4% - 1% - 1% = 2.4%).

Now I realise this is a bit of a simplistic set of calculations and that the assumptions are bit far fetched but I was bored on a lazy Sunday early evening and my mind started to wander about the effects of a slight increase in the base rate.

What do others think of my "back of a cigarette packet" calculations? I think I am prepared to be poo-pooed as I do not think a 0.25% rise would have such a big effect and I think I must have not considered something!!!!

How much do others think a 0.25% rate would effect inflation?

A factor operating in the opposite direction is that housing costs are incorporated in the calcultaion of the RPI but not the CPI.

Not all of any increase in the base rate will feed through to mortgage rates because not everyone with a mortgage has a variable rate product but I saw an article some time ago that argued that for every 1% increase in the base rate, there would be a corresponding 0.66% increase in the RPI (for 1 year only).

It's worth a thought.

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Historically it is typically the case that interest rates need to get 2% ahead of inflation to nip it in the bud, higher if inflation has got a real pace on. So as we stand you'd need IR's to be 7.5% to put a stop to the rot (although even that might not be enough with the external pressures on commodity prices caused by Benny and the Inkjets).

So, 15x increase in the interest rate anyone? Sure the economy will just lap it up! :lol:

Edited by General Congreve

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Private banks create new money when they write loans. And conversely money is taken out of the system when loans to the banks are paid back. With lower base interest rates there is more borrowing than otherwise, because people and businesses can manage higher principle amounts.

How that relates to inflation is that with more money in the system, that money compete for items and assets, driving prices higher than otherwise.

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  • 311 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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