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After Two Years Of Record Low-Cost Borrowing, Interest Rates Rises Are On The Way Back

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http://www.dailymail.co.uk/news/article-1386089/Interest-rate-rises-way-2-years-low-cost-borrowing.html

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An interest rate rise to halt rampant inflation is imminent, experts warned last night. The Bank of England governor yesterday signalled that families should prepare for a rise, ending two years of historic lows. Higher borrowing costs could be a major problem for homeowners, who have been lulled into believing that their monthly mortgage repayments would stay this low for years.

Bank of England chief Mervyn King has predicted a gloomy outlook which will see interest rates rise, affecting millions of families across the country A rate rise to 1 per cent would increase monthly repayments on an average £150,000 variable rate mortgage by £43 a month or £516 a year.

Two-thirds of homeowners have a variable rate mortgage, meaning nearly eight million households would pay more.

On top of the rate rise warning, the Bank painted a bleak picture of soaring inflation, rising energy bills and sluggish economic growth.

In addition, in its quarterly inflation report, the Bank revealed that the squeeze on household incomes - currently the worst in 80 years - is expected to continue for longer than previously predicted.

Until now, Bank of England Governor Mervyn King has urged caution because an early rate rise could plunge the economy back into recession. But yesterday he gave a heavy hint that the rise in inflation – which the Bank said could hit 5 per cent in the final months of the year – has tilted the balance of opinion towards an early increase.

Money worries: Interest rate increases will affect millions as mortgage repayments rise - and are part of a bleak picture of soaring bills affecting homeowners across the country

He said: ‘Bank rates cannot stay at this level indefinitely and at some point it will return to more normal levels.’

Inflation of 5 per cent would be more than double the Government’s target. Just three months ago the Bank said inflation would only hit 4.5 per cent this year. It is now described as ‘volatile’ and the Bank’s quarterly inflation report notes: ‘There is a great deal of uncertainty about the outlook for inflation.’

It comes as household gas bills are set to jump by an average of £100 and electricity bills by £50 in the next nine months – with no respite for a further two years. At present, the average gas bill is £666 a year and the average electricity bill is £473.

In its report, the Bank also downgraded its economic growth forecasts for this year from around 2 per cent to 1.75 per cent, and said the squeeze on living standards would last longer than initially thought. But an interest rate rise would come as a relief to Britain’s army of savers, who have lost out since rates were pushed down during the depths of recession in March 2009.

While borrowers would be hit almost immediately by an interest rate rise, savers often have to wait two or three months for the increase to be passed on.

Sources say members of the Bank’s Monetary Policy Committee, which sets interest rates, are now ‘more hawkish’ about a rate rise when they meet on June 9. Insiders revealed that the Bank nearly voted in favour of a 0.25 per cent interest rate rise in February, but stepped back when figures showed that the economy plunged into negative growth in the last quarter of 2010.

Mr King said yesterday: ‘There is no doubt that we are facing a difficult time ahead with a slow and prolonged adjustment to the consequences of the banking and financial crisis. There is a good chance that, if utility prices rise further later in the year, inflation will reach 5 per cent before falling back through 2012 and into 2013.’

Senior Government sources admitted yesterday that ‘inflation is a bigger worry than growth’.

The warnings follow an unprecedented squeeze on take-home pay from tax rises, record fuel prices and paltry pay rises or pay freezes. Una Farrell, from the debt advisers Consumer Credit Counselling Service, said: ‘I am concerned that mounting pressures on family budgets will force many to choose between heating their homes and putting food on the table.’

Chancellor George Osborne yesterday admitted that there will be ‘choppy’ times ahead, but insisted he had rescued Britain from a ‘moment of real economic danger’ a year ago.

However, shadow chancellor Ed Balls said: ‘By cutting too deep and too fast George Osborne has delivered the worst of all worlds – higher unemployment, higher inflation and zero growth.’

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People living on the edge of financial ruin aren't going to spend, and especially not speculate.

And as we mostly agree or at least suspect, the majority of working age Britons are running threadbare at full flank speed.

The property market has to crash in order for the UK to have any chance of re-vitalizing it's domestic economy.

Sure, there will be a lot of losers, but some winners. Such is life.

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Is that a giant Mervyn King they've used there?

King size ;)

Seriously they show the effect of .75 and 1% rates as though they're extremes?. Bring back 5-10%. (Yes I know they can't).

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King size ;)

Seriously they show the effect of .75 and 1% rates as though they're extremes?. Bring back 5-10%. (Yes I know they can't).

The extremes are in the effect of IR rises on IO mortgages (sounds like a Devon farmer - OIIR). The graphic seems to be based on repayment mortgages.

Merv knows that a huge number of debtors are on that knife edge, and therefore the banks as well. So no base rate rise in prospect. He's praying the commodities bubble will burst this summer.

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I could imagine him running rampage along the rooftops in Threadneedle Street, throwing biscuits at passers by...

...or is it just me?

Edited by Dave Beans

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RE: Millions on Knife edge

Global speculators use a zero sum gamemodel. Someone elses pain is the speculators gain. When these traders move in, (the George Soros's) to collect, these debtors won't have much room to put up much of a fight. Don't expect the BOE to defend the £ either they're in a box.

"After you sir" - Isn't that why we see Jim Rogers periodically come out every now and again to nudge the markets into the right direction?

It's just a waiting game. The Greeks are the easy pickings at the moment.

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King size ;)

Seriously they show the effect of .75 and 1% rates as though they're extremes?. Bring back 5-10%. (Yes I know they can't).

Yeah lightning hitting the BOE but looking at the numbers in their range they should be manageable.

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I can never quite understand why "poor homeowners" (should be homedebtors) are complaining that rates may rise from historic lows. Do they think that 0.5% rates can be here forever with RPI inflation approaching 6%? Surely when they signed up for their mortgages they factored in average rates of 5 to 7%?

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Is that a giant Mervyn King they've used there?

Could be a cardboard cutout , would make better decisions than the real deal.

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An interest rate rise to halt rampant inflation is imminent, experts warned last night. The Bank of England governor yesterday signalled that families should prepare for a rise, ending two years of historic lows.

I listened to Merv yesterday and to my ears, gave no indication of an imminent rate rise.. if anything he asserted his belief they should stay low for the forseeable.

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I listened to Merv yesterday and to my ears, gave no indication of an imminent rate rise.. if anything he asserted his belief they should stay low for the forseeable.

of course, banks lending will raise their rates, as they have till mortgages are generally at around 5% for most normal people.

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People living on the edge of financial ruin aren't going to spend, and especially not speculate.

And as we mostly agree or at least suspect, the majority of working age Britons are running threadbare at full flank speed.

The property market has to crash in order for the UK to have any chance of re-vitalizing it's domestic economy.

Sure, there will be a lot of losers, but some winners. Such is life.

Aye, but these "losers" made their bed when they paid over the odds for their house from 2001 onwards. Anyone who says with a straight face that property prices only ever go up should indeed be shown the door IMO.

IR's at 10% would do the job that's required.

Edited by Wait & See

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I also listened to the press conference. They were setting out the case for leaving rates alone for the foreseeable future. I feel that they were also setting a case that should sterling come under-pressure then they'd not interfere. I couldn't bear to watch to the bitter end as it was too obvious that King is just going to kick this down the road till he retires and then dumps it on his successor.

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King size ;)

Seriously they show the effect of .75 and 1% rates as though they're extremes?. Bring back 5-10%. (Yes I know they can't).

And it's because they can't that they won't be able to tame inflation (interests rates have to be above inflation to reign it in) and therefore sterling is ultimately for the knackers yard.

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A Wall St Journal blog:

1 http://blogs.wsj.com/source/2011/05/11/boe-raises-risk-profile-of-its-inflation-outlook/

there are only three ways for this burden of debt to be lifted: households can default, which the Bank has prevented by slashing borrowers’ interest payments with historically low interest rates; they can pay the debt back as their incomes grow—but because growth is so subdued, this doesn’t look to be a very short-term solution or the central bank can inflate their debt away. The latter is what the Bank of England is aiming for, while also trying to maintain its precarious credibility as a bank that will control inflation once the recovery happens

2 Guardian "Rates won't rise" http://www.guardian.co.uk/business/2011/may/11/bank-of-england-inflation-report-analysis

So-called experts saying the Bank of England's prediction that inflation will hit 5% means interest rates must go up have been wrong before – and they are now

3 Guardian "Rates may rise" http://www.guardian.co.uk/business/2011/may/11/bank-of-england-cuts-economic-growth-forecasts

Some City economists said that there was now slightly more chance of the Bank raising borrowing costs during 2011.

"The Bank of England's inflation report suggests that in the Bank's view, the market has perhaps gone a little too far in not expecting an interest rate rise this year. While lowering their growth forecast, the BoE have actually increased their CPI profile," said James Knightley of ING.

4 Reuters "Hmmm" http://uk.reuters.com/article/2011/05/12/uk-boe-focus-idUKLNE74B00820110512

The increase in the BoE's medium-term inflation forecasts did much to lift market expectations of a rate rise by November, but King's repeated reference to the high cost banks face to raise funds prompts doubts.

5 FT - "King signals early rate rise likely this year" http://www.ft.com/cms/s/0/7824e6a8-7c16-11e0-a386-00144feabdc0.html#axzz1M8ECj3Iq

The governor stuck to tradition by refusing to predict when a rate rise was likely, but said the quarterly inflation report “does suggest that the Bank rate cannot stay at this [0.5 per cent] level indefinitely”. He added: “I don’t think it tells you which month it will rise.”

If the PIIGS were not squealing, would the bondholders have their attention on the UK and by now have decided King was trying to inflate away? Is King opportunistically making inflationary hay while the others draw bondholders' fire? Anyone think King is not deliberately inflating? If he's not deliberately inflating, what's he up to then?

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Aye, but these "losers" made their bed when they paid over the odds for their house from 2001 onwards. Anyone who says with a straight face that property prices only ever go up should indeed be shown the door IMO.

IR's at 10% would do the job that's required.

Of course, I totally agree.

Same goes for any asset though.

Unfortunately, the gubmint has seen fit to waste billions of the taxpayers intake in a vain and hopeless effort at keeping the bubble inflated.

It isn't working of course.

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More from Wall Street Journal: http://online.wsj.com/article/SB10001424052748703992704576305200942767960.html?KEYWORDS=bank+of+england#articleTabs%3Darticle

These negative interest rates are iniquitous for Britain's prudent savers and pensioners, who held back from the speculative mania of the years leading up to the financial crisis, a mania to which the MPC contributed by encouraging the biggest debt binge in history. The bank is now forcing these savers to pay most of the cost of the post-crisis adjustment.

/

In essence, Mr. King says the U.K. is too heavily indebted for the Bank of England to even consider raising interest rates and so will not raise them until nominal debt levels relative to nominal gross domestic product have fallen sufficiently.

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A Wall St Journal blog:

they can pay the debt back as their incomes grow—but because growth is so subdued, this doesn’t look to be a very short-term solution or the central bank can inflate their debt away. The latter is what the Bank of England is aiming for

Unfortunately, this won't work. Inflating the debt away only works if wages are inflated at the same time. As the author notes, this isn't happening. So inflation actually means increasing the other calls on the borrowers' money, which makes it harder to pay the debt back.

Peter.

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  • 284 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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