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Bank Rate Could Hit 3%

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Charlie Bean says bank rate could hit 3% by 2019,

http://www.bbc.co.uk/news/business-27563346

Don't see it myself, 3% would plunge the country back into a deep recession. I'll stick with my previous forecast, won't exceed 2% by 2020 and at the first whiff of recession rates will be back at or below 1%.

depends what you mean by recession.

If you mean shipments of rubber dogturds are going to see less demand, then you are right.

As for spending in the real economy, savers will have more to spend, the banks will suck more, and assets, previously priced only on the available credit crutch, will fall in price.

Demand will return as and when prices adjust to the new headwinds.

There are always headwinds, whatever the interest rate.

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Don't see it myself, 3% would plunge the country back into a deep recession.

I don't see that. Only a third of households have mortgages, and it will only be a proportion of those that bought within the last 10 years and so could have jumbo mortgages.

Savers will get their income back and spend more. When prices fall under 40s won't have to put aside every penny for a deposit, they can afford to spend again.

I can see it benefiting more than it harms, a net gain.

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It might not operate in quite the same way as before the crisis. So that's an argument if you like for being a bit cautious, moving in baby steps to avoid making mistakes.

I read this as confirmation that the increases will come in increments of 0.25% or less, rather than the traditional 0.5% As for the rest of Bean's predictions, he knows no more than anyone else what interest rates are going to be in 2020.

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I don't see that. Only a third of households have mortgages, and it will only be a proportion of those that bought within the last 10 years and so could have jumbo mortgages.

Savers will get their income back and spend more. When prices fall under 40s won't have to put aside every penny for a deposit, they can afford to spend again.

I can see it benefiting more than it harms, a net gain.

He's thinking more about the government + gilts position rather than Mr + Mrs Over-leveraged.

Im off out. Ill comment later today.

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It depends what happens in the US - and now to some extent in the eu. If the US increases rates to whatever level then it's difficult to see the UK doing much else than follow along - as usual.

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Mark, just raise the rate already. You know the economy is buggered either way. 10% tomorrow - we survived Black Wednesday. Get it over with, flush out the reckless and the parasitical, and maybe we can finally start to move on from this lost decade of fake growth.

It's the right thing to do.

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'Average' of 3%.

In other words the neutral rate for the next cycle.

So the peak rate would (by definition) be higher than that. But if PIMCO are right about FED neutral rate being 0% real i.e. 2% then Bean looks to be a little on the high side I'd have thought. Unless he expects UK inflation to be marginally higher.

In terms of commercial lending rates I'm not convinced it makes much difference due to the massive spreads over base rate which ought to shrink. If spreads tighten as rates rise it'll make little difference to mortgage rates. If spreads don't tighten then there's something seriously wrong and I'm not sure why they'd raise base rates in the first place.

Edited by R K

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That old chestnut, there are a number of ways of effecting how people think when it comes to IRs.

1. Change IRs

2. Say you expect IRs to be something

Its not as powerful, but it still has a big effect ;-p Back in the day Merv was great at doing this. Just the threat of changing IRs will slow the housing market down (along with MMR Regs). Its a powerful tool to change peoples behaviour as if it was going to rain just by saying you think it may rain more people will stay indoors. Its as if you have the skills to actually make it rain without needing enact a change in IRs

Edited by AteMoose

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It's also interesting that he says interest rates will "settle" at an average of 3%.

3% is a figure that was mentioned by the BoE a few weeks ago - now they've decided to wheel it out again. Then it was implied to be a ceiling.

Now it's a figure it'll "settle" at, an average, implying it will go above 3% and it's not a ceiling anymore - and for some reason announced just after the election results (eu results still to come today of course). Another change in Forward Guidance even if apparently only a slight change.

For sure maybe interest rates might settle at that level for a while but their record on predictions of any kind is so poor it's as likely to be settling at almost any figure rather than 3%.

Even if only within the Forward Guidance future interest rates have now gone up. What their prediction might be in another few weeks is anyone's guess.

Edited by billybong

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Let's not forget all those who were encouraged to re-mortgage during the Brown years, not to improve their homes as of old, but to fund a life-style. Re-mortgaging at its peak added 3% to GDP - great for politicians and the banks, but not so great for the country long term. It is these people, many who bought at low prices before 2003, who will also be caught out by any interest rise, not just bubble-price house purchasers.

Edited by tinker

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Unless they finally intend to flush the phantom equity out of the housing market there's no way the base rate will get anywhere near 3%. Even a 1% hike will put the country back into recession. The UK is a basket-case, the rest of the world isn't doing much better.

World-Trade-merchandise-2010-2014_03-cha

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Even a 1% hike will put the country back into recession.

How? Seriously id like to understand the mechanism. The over leveraged are surely a minority considering only a third of households have mortgages at all.

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Charlie Bean says bank rate could hit 3% by 2019,

http://www.bbc.co.uk/news/business-27563346

Don't see it myself, 3% would plunge the country back into a deep recession. I'll stick with my previous forecast, won't exceed 2% by 2020 and at the first whiff of recession rates will be back at or below 1%.

I know he's said that but the government pays the same rate of interest on debt issued to fund the deficit as the base rate.

There is no way interest rates will rise while there is a large deficit. One of the jobs of the Bank of England to maintain confidence in the pound. So if they said that low interest rates will continue indefinitely then the value of the pound would plummet as no end would be seen to the inflationary QE that is funding the deficit.

I've said it many times before: You will hear a lot from the BoE about potential future rises in the base rate but you won't ever see any rise in the base rate until the deficit is greatly reduced.

Edited by JonathanR

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How? Seriously id like to understand the mechanism. The over leveraged are surely a minority considering only a third of households have mortgages at all.

Quite....it will be 3%, that is why they are preparing people for the slow increase over the next four or five years...pay debt down now whilst cheaper so that when the time comes it won't be such a shock for the over leaveraged highly indebted.

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depends what you mean by recession.

If you mean shipments of rubber dogturds are going to see less demand, then you are right.

As for spending in the real economy, savers will have more to spend, the banks will suck more, and assets, previously priced only on the available credit crutch, will fall in price.

Demand will return as and when prices adjust to the new headwinds.

There are always headwinds, whatever the interest rate.

Good post. Says it all for me really

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I don't see that. Only a third of households have mortgages, and it will only be a proportion of those that bought within the last 10 years and so could have jumbo mortgages.

Savers will get their income back and spend more. When prices fall under 40s won't have to put aside every penny for a deposit, they can afford to spend again.

I can see it benefiting more than it harms, a net gain.

Agreed.

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By the by, the only reason we (or at least me) want higher rates is to increase the cost of borrowing so people can borrow less leading to cheaper housing, requiring more responsible borrowing, with the many and varied benefits that brings.

The cost of borrowing of course can move independently of the base rate, so does it matter if it doesn't move anyway? Providing the cost of borrowing does.

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Let's not forget all those who were encouraged to re-mortgage during the Brown years, not to improve their homes as of old, but to fund a life-style. Re-mortgaging at its peak added 3% to GDP - great for politicians and the banks, but not so great for the country long term. It is these people, many who bought at low prices before 2003, who will also be caught out by any interest rise, not just bubble-price house purchasers.

Yep. If it was just about the minority who paid too much, or even have a mortgage, they would have probably eased the base rate up a bit by now? The problem is that property was used as a Golden Cash Machine that never runs dry. Well folks, I think it just run dry :P

Edited by dances with sheeple

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'could' at some point in the future which isn't imminent. Where have we heard this before in the last 8 years.

Could is a great word to use. Interest rates could be at their current level for 10 years. They could go to 0% in the next 12 months.

I could win the lottery and be debt free.

An asteroid could hit the BoE building.

We could reduce the national debt in the next decade.

I could get my mates wife pregnant.

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