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Start Planning Now For Interest Rate Rises, Top Economist Warns British Families

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http://www.dailymail.co.uk/news/article-1389436/Inflation-threat-warning-Vince-Cable-says-public-gird-painful-times-ahead.html

A top economist has warned that the UK's financial recovery is still extremely fragile - and could be scuppered at any moment by the threat of rising inflation. And the bleak economic outlook was shared by Government minister Vince Cable, who said that the public is ill-prepared for the impending financial squeeze. In an interview in today's Financial Times, the Bank of England's chief economist, Spencer Dale, urged the bank to raise interest rates in a bid to counter rising inflation.

Mr Dale acknowledged that a rise in rates could impact some families.

'I'm not particularly happy about voting to raise interest rates and doing it for nasty reasons,' he told the Financial Times.

'I don't take lightly the impact this could have on some families,' he added. "But I think the cost to our economy as a whole - were inflation to persist for longer and our credibility start to be eroded - would be even worse.

'I am not at all confident that the recovery has taken hold and will definitely power away. However, I am even more worried about what is going on in terms of inflation.

'The sustained period we've see of such high inflation over the past five years... could cause inflation to persist for longer,' he added. The broad direction for UK interest rates has changed since the Bank of England released its quarterly Inflation Report earlier this month, he added.

'But the key thing is what we know is things will change and the economy will evolve differently... As a result, the interest rate path will differ as well.'

The bank has kept interest rates at a record low 0.5 percent for more than two years, despite inflation rising to more than double its target. Meanwhile, Business Secretary Vince Cable has warned the public there will be 'painful' times ahead as the UK battles to reduce its record budget deficit. And he rounded on Labour leader Ed Miliband and his Chancellor, Ed Balls, for being in a state of denial.

'I think it is not understood that the British economy has declined by six or seven per cent - it is now ten per cent below trend,' Mr Cable said in an interview in today's Guardian newspaper.

'We are actually a poorer country, mainly because of the banking crash, the recession that followed it, and partly due to the squeeze we are under due to the changing balance of the world economy. Britain is no longer one of the world’s price setters.

'It is painful. It is a challenge to us in government to explain all that, and it is a pity that the political class is not preparing the public for it to understand how massive the problem is.'

Referring to Mr Miliband and Mr Balls, the Business Secretary went on: 'They are in a state of denial that there is a big structural problem with the UK economy.

'There is a genuine debate we should be having about how radical the reforms of the financial sector should be - but there is not from the progressive wing of politics a sustained critique or pressure and argument.

'Ultimately it comes back to this defensiveness and an unwillingness to accept that Britain was operating a model that failed.'

A GRIM OUTLOOK FOR HOUSEHOLD INCOMES

The pressure on household incomes is 'likely to persist for some time,' says Spencer Dale in an interview with the Financial Times. The squeeze on household incomes is a result of the rebalancing of the economy but Dale also puts it down to misfortune as higher commodity prices 'act to further squeeze households' incomes

Another reason according to Mr Dale for low household income growth is the absence of productivity growth 'which has held back households' incomes and hence households' consumptions.

Employees cannot expect to get richer if the output per worker is not growing. Dale goes on to say that savers are absolved of blame - 'They were saving before the financial crisis. They weren't in any way contributing to the factors which led to that build-up and they've been affected very substantially by the very substantial reductions in interest rates.'

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IR rises? I'll believe it when i see it - we've had this 'IR are going to rise' crap for the last 4 years - IR havent moved in that time, i don;t think IR will be going up till the 2nd quarter next year

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Threat of inflation and an impending financial squeeze?

Hey goons what do you think paying 3-5 times as much on housing has done to finances you mental cripples.

Inflation is already wrecking finances - just as the housing/land ponzi scheme did for personal finances and those of busineses trying to operatied in this HYPERINFLATED cost environment. The businesses (well the larger ones) had an escape valve - they just shipped all their production abroad, the public were left on the hook eother swinging by the neck from higher debt load or higer rents.

"The squeeze on household incomes is a result of the rebalancing of the economy but Dale also puts it down to misfortune as higher commodity prices 'act to further squeeze households' incomes"

Noting to do with shitting on sterling, shoving hundreds of billions of cheap money into the system and encouraging resource usage across the rest of the world that would not otherwise have occured then?

Edited by OnlyMe

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IR rises? I'll believe it when i see it - we've had this 'IR are going to rise' crap for the last 4 years - IR havent moved in that time, i don;t think IR will be going up till the 2nd quarter next year

Who cares, the longer they leave it, the higher they'll go :D.

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Is that a little like the longer they leave it, the quicker they'll have to move?

Not really. The longer they leave it, the higher inflation will go and the higher they'll have to raise rates to control it.

Mortgage rates peaked at over 15% when I had a mortgage ;).

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So the BOE's chief economist is publicly saying that IRs need to rise? You know what, if the BOE does not raise them in June he should either resign immediately or be fired.

well - the act of talking about IR rises from such a senior chap will push market rates up anyway by decimal points, which is a poliocy tool in itself...

Edited by Si1

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So, let me try and understand this.

The economy isn't going to recover while real wages are falling...

So major expenses like the cost of housing need to come down...

The cost of housing wont come down until there are interest rate rises...

But interest rate rises can't be risked until the economy is recovering...

Hmm.

Edited by rantnrave

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Why is ir assumed that interest rates are the only way to combat inflation. Isn't the point of higher interest rates to siphon disposable income to the banks, why not increase taxes instead and siphon money into government cofers?

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So, let me try and understand this.

The economy isn't going to recover while real wages are falling...

So major expenses like the cost of housing need to come down...

The cost of housing wont come down until there are interest rate rises...

But interest rate rises can't be risked until the economy is recovering...

Hmm.

IR rises, or their equivalent, wage deflation in real terms against cost of living

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IR rises, or their equivalent, wage deflation in real terms against cost of living

House prices come down anyway - there is nothing that can stop that when housing elsewhere around the world is unbubbling itself. You then have a choice - screw the earnings and savings of the population at the same time or not.

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Why is ir assumed that interest rates are the only way to combat inflation. Isn't the point of higher interest rates to siphon disposable income to the banks, why not increase taxes instead and siphon money into government cofers?

No. Higher interest rates don't transfer money to commercial banks. In fact, it has been the opposite - the ultra-low interest rates have resulted in money being syphoned off by banks.

Banks have to pay to borrow (either from customers in the form of deposits, or from major investors or money markets - or from the BoE in return collateral).The interest rate that they pay to borrow is related to the base rate. (e.g. if a bank wants £10 million cash, they can go to the BoE, hand over £10 million of gilts, and receive £10 cash. They will be charged interest on the cash at base rate, compounded daily). The banks make their money by charging a 'spread' - they charge a higher interst rate on loans than they pay on savings/investments. The availability of profit comes from the spread, which is dictated by competition in the market.

In the recent super-low-IR environment, the banks have been able to borrow money at virtually zero cost - but they have not reduced IRs to customers by anywhere near as much. As a result, they have widened their spreads to record levels.

If the BoE puts rates up, the banks have to pay more for their money, which means that they have to pass that increased cost onto their borrowers.

However, higher interest rates do transfer money to the BoE (as interest payments) resulting in the money being destroyed. In effect, it is the reverse of QE.

Edited by ChumpusRex

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People should have started planning for interest rate rises the very day that they dropped them to 0.5%.

They should have done this by downsizing to a cheaper property or else by building up a war-chest based on the saving that many made on their lower mortgage payments.

To say that people should start planning only now is somewhat perverse.

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They offered NS&I indexed linkers again and the msm are talking of impending rate rises.

2+2= No rate rises.......just hidden inflation that empties your pockets daily.

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People should have started planning for interest rate rises the very day that they dropped them to 0.5%.

They should have done this by downsizing to a cheaper property or else by building up a war-chest based on the saving that many made on their lower mortgage payments.

To say that people should start planning only now is somewhat perverse.

At the very least people should have been spending any surplus income because of low mortgage IRs on paying off debts.

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At the very least people should have been spending any surplus income because of low mortgage IRs on paying off debts.

Most people that I know, in spite of them not knowing wtf was going on, have done exactly this.

I think that mortgage holders have never had it so good.

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well - the act of talking about IR rises from such a senior chap will push market rates up anyway by decimal points, which is a poliocy tool in itself...

And good business for the banks as it it scares more people onto the fixed rates (which are more profitable).

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No. Higher interest rates don't transfer money to commercial banks. In fact, it has been the opposite - the ultra-low interest rates have resulted in money being syphoned off by banks.

Banks have to pay to borrow (either from customers in the form of deposits, or from major investors or money markets - or from the BoE in return collateral).The interest rate that they pay to borrow is related to the base rate. (e.g. if a bank wants £10 million cash, they can go to the BoE, hand over £10 million of gilts, and receive £10 cash. They will be charged interest on the cash at base rate, compounded daily). The banks make their money by charging a 'spread' - they charge a higher interst rate on loans than they pay on savings/investments. The availability of profit comes from the spread, which is dictated by competition in the market.

In the recent super-low-IR environment, the banks have been able to borrow money at virtually zero cost - but they have not reduced IRs to customers by anywhere near as much. As a result, they have widened their spreads to record levels.

If the BoE puts rates up, the banks have to pay more for their money, which means that they have to pass that increased cost onto their borrowers.

However, higher interest rates do transfer money to the BoE (as interest payments) resulting in the money being destroyed. In effect, it is the reverse of QE.

I don't understand.

The banks variable rate loans are linked to BOE base rate or LIBOR generally. If the BOE base rate is increased the borrower with a variable rate loan pays more to the lender. The lender, presumably, has already obtained the funds to finance the loan and simply gets a larger amount of interest on the existing loan. My simplistic understanding I know.

I suppose for some funding they are borrowing short and lending long, so they may have to obtain some funding at a higher rate when base rates increase. But from retail deposits the interest paid doesn't typically increase by the same amount as the base rate increase so there's an extra spread for the banks there.

Sure at the moment by being able to borrow from the BOE at 0.5% they are making generous spreads.

I don't follow how higher interest rates counter inflation by reducing the money supply.

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The banks variable rate loans are linked to BOE base rate or LIBOR generally. If the BOE base rate is increased the borrower with a variable rate loan pays more to the lender. The lender, presumably, has already obtained the funds to finance the loan and simply gets a larger amount of interest on the existing loan. My simplistic understanding I know.

I suppose for some funding they are borrowing short and lending long, so they may have to obtain some funding at a higher rate when base rates increase. But from retail deposits the interest paid doesn't typically increase by the same amount as the base rate increase so there's an extra spread for the banks there.

That's correct. Don't forget that customer deposits are a major source of cash for banks. These are variable rate accounts linked to base/LIBOR.

Banks can also borrow from money markets and bond markets. Most borrowings are short - for the simple reason that long-term borrowing is expensive; higher risk of default, higher interest risk for the lender, etc. Therefore, banks can be more profitable if they borrow short and lend long. However, this is also an unstable arrangement as seen in NR and HBOS.

Increased base rates will also, in time, feed through into fixed rates - e.g. business loans, mortgages, etc.

Increased rates reduce money supply by allowing the BoE to destroy money. E.g. They lend £10m one day, by printing £10m. The next day the money is paid back with interest - say £10,000,250 - which is then shredded. The result is that £250 has been removed. This is a relatively minor effect. The main effect is by reducing the 'velocity' of money (how many hands £1 actually circulates through in a certain period of time). By making borrowing more expensive, people are less likely to borrow, so the money passes through fewer hands, and generates less economic activity. In effect, the money supply is reduced.

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That's correct. Don't forget that customer deposits are a major source of cash for banks. These are variable rate accounts linked to base/LIBOR.

Banks can also borrow from money markets and bond markets. Most borrowings are short - for the simple reason that long-term borrowing is expensive; higher risk of default, higher interest risk for the lender, etc. Therefore, banks can be more profitable if they borrow short and lend long. However, this is also an unstable arrangement as seen in NR and HBOS.

Increased base rates will also, in time, feed through into fixed rates - e.g. business loans, mortgages, etc.

Increased rates reduce money supply by allowing the BoE to destroy money. E.g. They lend £10m one day, by printing £10m. The next day the money is paid back with interest - say £10,000,250 - which is then shredded. The result is that £250 has been removed. This is a relatively minor effect. The main effect is by reducing the 'velocity' of money (how many hands £1 actually circulates through in a certain period of time). By making borrowing more expensive, people are less likely to borrow, so the money passes through fewer hands, and generates less economic activity. In effect, the money supply is reduced.

Borrowing is still expensive because more debt is required to get the same result/benefit....less people want large debts, it greatly reduces their disposable income...repaid debt destroys money, repaid debt reduces velocity, repaid debt = more wealth and freedom. ;)

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  • 276 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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