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Interest Rates Of 2.5% Will Be "the New Normal"

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http://www.bbc.co.uk/news/business-28053045

Bank of England governor Mark Carney has suggested the "new normal" for interest rates is likely to be about 2.5% when rates start to increase.

Speaking to BBC Radio 4's Today programme he also suggested the rates could reach this level in early 2017.

Mr Carney suggested a return to "normal" interest rates of 5% was unlikely in the medium term.

He said things had changed to the point that it was almost impossible to raise rates to their pre-recession level.

He also added that rate rises would be more gradual and limited than in the past.

The Bank governor said the timing of an interest rate rise was less important than the average level at which they would settle in the future.

End Quote Mark Carney Bank of England governor

"The big picture," he said "Is not whether the Bank Rate goes from 0.5% to slightly above that lowest ever level.

"That's not the big picture, the big picture is where interest rates go in the medium term, because if I am taking out a mortgage and if I am thinking of investing in a new plant, if I'm thinking about taking on new people. That's what I'm thinking about."

Mr Carney added: "The guidance we are giving is... the time will come to raise interest rates... but when we raise interest rates we expect to do so in a gradual and limited fashion,"

The Bank governor explained the reason for a more gradual increase in interest rates was that rate movements were likely to have a much bigger impact on household spending than in the past.

And he said household debt levels and a fundamentally altered financial system also meant it was virtually impossible to raise interest rates much above 2.5%.

He said: "What I am telling you is that the old normal is not the new normal."

The Bank has announced plans to cap riskier mortgage lending amid fears of a housing bubble

"Normal was a much higher level than we will get to in order to bring the economy back to full employment and inflation at target.

"So the Bank of England [rate], which is at half a percentage point would have historically moved to somewhere akin to 5%.

"If you look at financial markets their estimation about the next three years is around... let's call it 2.5% - slightly lower or it can be slightly higher - we see that as not inconsistent with returning the economy to where it was before."

Mr Carney added: "Why is that the case? Because things have changed. Households have a lot of debt, the government is still consolidating its financial position, Europe is weak, the pound is strong and the financial system has been fundamentally changed.

Mortgage cap

"[The financial system] has to carry a lot more capital, it has to carry a lot more of what is called liquidity insurance and it will pass on those costs to borrowers.

"And as a consequence of those factors, in order to bring the economy back to full employment, in order to get inflation back to target, the new normal is materially lower than the old normal."

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Mr Carney added: "Why is that the case? Because things have changed. Households have a lot of debt, the government is still consolidating its financial position, Europe is weak, the pound is strong and the financial system has been fundamentally changed.

Well perhaps there should be some f*cking deleveraging then! Clowns.

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For a couple of years I put in my signature Rate will not go over 2.5% in my life time Carney seems to agree.

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Bless................ He thinks he says a Rate and it works, we all know he talks Horseshit, possibly some more.

Agree. I love how all these central bankers think that they tell the markets what they will do. The thing is most people I speak to also think this is true. At some point there will be a rude awakening!

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How old are you?!

50

I know this is back tracking a little bit. Rates may of course go over 2.5% but you have to make a bold statement other wise it's a bit pointless. I put it in my signature about 3years ago when people were talking about rates going up in May.

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Not far off what I said a couple of days ago

"Materially lower" than 5% in 5 years. What can that mean?

Id call half of 5% a generous figure to give to that definition, so a 2% rise from the current 0.5% over 5 years. A 'gradual' rise also implies consistency in the amount of increase over time.

Now we know more, by 2017 we're looking at 2.5% base. So in 3 years we have a 2% rise.

Interest only suckers on trackers at 4% or so will find that becomes 6% or so, a 50% increase in repayments. Buy to letters (who are on interest only mostly) breaking even just about on 800 a month rentals in the hope of capital appreciation are set to lose 400 a month while they await this capital appreciation… which won't come now of course as I cant see many new entrants lining up to buy from them to lose 400 a month as well. Good luck to any trying to pass that on to a tenant.

Repayment mortgages once off fixed will be up a similar proportion roughly I would expect, so thats these savvy buyers also looking for another 400 a month from their stagnant wages after paying the rising cost of essentials… which continue to rise as the pound remains low and we import price inflation.

I would expect recent buy to let entrants to be looking to sell now.

All in all, as tame as some of you think this to be, the current situation is a house of cards and this is actually quite a big nudge in my opinion.

Edited by cybernoid

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Not far off what I said a couple of days ago

Now we know more, by 2017 we're looking at 2.5% base. So in 3 years we have a 2% rise.

Interest only suckers on trackers at 4% or so will find that becomes 6% or so, a 50% increase in repayments. Buy to letters (who are on interest only mostly) breaking even just about on 800 a month rentals in the hope of capital appreciation are set to lose 400 a month while they await this capital appreciation… which won't come now of course as I cant see many new entrants lining up to buy from them to lose 400 a month as well. Good luck to any trying to pass that on to a tenant.

Repayment mortgages once off fixed will be up a similar proportion roughly I would expect, so thats these savvy buyers also looking for another 400 a month from their stagnant wages after paying the rising cost of essentials… which continue to rise as the pound remains low and we import price inflation.

I would expect recent buy to let entrants to be looking to sell now.

All in all, as tame as some of you think this to be, the current situation is a house of cards and this is actually quite a big nudge in my opinion.

Well it's 2 years really isn't it since there won't be a rise this year - except maybe as a token gesture. He's made it clear it's notthe 1st increase that's important it's the path thereafter.

So c. 1% p.a. in the context of their expectation of 4% p.a. wage rises and assuming credit spreads don't narrow. They seem to think they won't but I suspect as we move off ZIRP and with banks recapped and with new entrants they will start to. But perhaps they're right for some reason.

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Agree. I love how all these central bankers think that they tell the markets what they will do. The thing is most people I speak to also think this is true. At some point there will be a rude awakening!

Back in the mid 2000s I thought the same, but since 2007 and all the state interference I had to completely change my mind.

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Not far off what I said a couple of days ago

Now we know more, by 2017 we're looking at 2.5% base. So in 3 years we have a 2% rise.

Interest only suckers on trackers at 4% or so will find that becomes 6% or so, a 50% increase in repayments. Buy to letters (who are on interest only mostly) breaking even just about on 800 a month rentals in the hope of capital appreciation are set to lose 400 a month while they await this capital appreciation… which won't come now of course as I cant see many new entrants lining up to buy from them to lose 400 a month as well. Good luck to any trying to pass that on to a tenant.

Repayment mortgages once off fixed will be up a similar proportion roughly I would expect, so thats these savvy buyers also looking for another 400 a month from their stagnant wages after paying the rising cost of essentials… which continue to rise as the pound remains low and we import price inflation.

I would expect recent buy to let entrants to be looking to sell now.

All in all, as tame as some of you think this to be, the current situation is a house of cards and this is actually quite a big nudge in my opinion.

To paraphrase...the bankers will continue to bleed us dry.

It would have been better for all, debtor and creditor alike if these parasites had been taken to task in 2008.

I really wish had voted for Gordon Brown, he'd have saved us :lol:

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To paraphrase...the bankers will continue to bleed us dry.

Not renters, mortgage holders. The group who will feel the biggest impact is landlords, as most of those are on interest only, and they cannot put their rents up by 50% within the next few years. They are also the group that can exit the quickest.

I expect something positive from this.

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So, no one had a Scooby ******ing doo what was going on for years and now suddenly I'm supposed to take their word for what is going to happen in the future?

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So basically, raising house prices mean that there is so much debt around that raising the interest rates would screw everyone royally. Perfect :-)

Not everyone, just overstretched mortgage holders and landlords. Perfect.

He identified how much rates WILL rise and in what time span. 3 years. Bit shorter than a mortgage term.

Id expect more happiness from this on here

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I think they would like interest rates to rise, back to way below old style normality but not as they are at the moment lowered as an emergency messure five years ago.....now some equity has been built up for the most recent large debt holders and measures have been put into place so that new high risk entrants will be priced out of buying for now or else will hit them the hardest when the time comes, helping to save both the banks (high doses of neg equity) and the what could have been some very vulnerable borrowers.....then the time will be right considering all other factors in place, employment, growth, inflation etc.

Low/negitive interest rates mean a bad unhealthy economy.......how many times do they keep saying we are on the mend? well prove it, do something about it, not keep talking it up, take it up. ;)

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Anyone got any record of what Mark 'Gypsy Rose-Lee' Carnage had to say in 2002 about what would happen in 2007?

Anyone? Anything? Thought not.

The UK is running a deficit of ~7% - the highest in the developed world.

The UK government debt is getting to the point of no return.

Does this look like a low rate economy to you?

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"And he said household debt levels and a fundamentally altered financial system also meant it was virtually impossible to raise interest rates much above 2.5%."

How unlucky is that? Household debt and then the need for lower interest rates for longer seem to follow Carney around.

Canada 2012

Meanwhile, he is seriously worried about the side effects of low rates, repeatedly citing household debt as the biggest domestic risk to Canada. Households have an average debt load of 154% of income, according to Statistics Canada. Twenty years ago, that figure stood at only 95%. Canadians aren’t just using cheap credit to take on mortgages, either. The average non-mortgage debt reached $26,221 in the summer, the most in eight years, according to TransUnion. Car loans accounted for most of the recent increase.
What’s particularly worrying is that since the financial crisis, more households are veering toward extremes. Benjamin Tal, an economist with CIBC, reported in a study earlier this year that heavy borrowers, those with household debt-to-gross income ratios above 160, accounted for 34% of all borrowers compared to 26% in 2007. That group now holds an astounding 70% of outstanding debt.
Carney’s approach has been to bleat warnings about the perils of too much debt, a stance that lacks credibility so long as he keeps rates low. How can he tell Canadians not to borrow more when everyone knows he pushed rates down and kept them there in a deliberate effort to get Canadians to borrow more? Few households are listening, in any event. The longer Carney keeps rates low, the bigger the problem gets.
The same is true of the housing market. Canadians are taking advantage of low rates to buy real estate, leading to a huge surge in home prices. Carney warned as early as last year that many cities in Canada are “severely unaffordable” and there is a “possibility of an overshoot” in condo markets. In a June 2011 speech in Vancouver, he pointed out that some real estate markets are at risk of being driven by not just supply and demand, but “greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition.” The federal government and the banks hold considerable sway over the housing market, of course; the central bank’s benchmark rate is a clumsy tool for trying to moderate volatile real estate markets. But low interest rates are still the catalyst for people to act on the very greed and fear that Carney railed against.
Madani with Capital Economics is firmly predicting a hard landing, given how far the market has been allowed to overshoot. “When all the dust settles five or 10 years from now, I think we will look back on this and realize rates were too low for too long,” he says. Carney had room to tighten past 1% back in 2010, according to Madani. That may have reduced some, certainly not all, of the exuberance for debt and real estate.

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hate the expression 'the new normal' when what is espoused is not normal or new but a sop to the feckless of this country.

normal rates are circa 5%

what is abnormal is the amount of capital (i.e. the actual mortgage debt) tied up in a loan which is just about being serviced at 'low' interest rates.

if the only way to keep the plates spinning is to invent a 'new normal' low interest rate - this cannot go on indefinitely.

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Not far off what I said a couple of days ago

Now we know more, by 2017 we're looking at 2.5% base. So in 3 years we have a 2% rise.

no, its a 500% rise in the cost of target lending at the central bank.

To maintain margins on the lenders capital, lending rates will most likely rise much more.

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So, no one had a Scooby ******ing doo what was going on for years and now suddenly I'm supposed to take their word for what is going to happen in the future?

That was when Mystic Merv was in charge.

Mystic Mark is a different kettle of fish.

MysticMark.jpg

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Stress test at 7% but bank rate at 2.5%. Sounds a lot of difference. Is spread the word I want? When say the MPC increase bank rate by 0.1% or whatever it is will the banks pass on a bit extra on the rate? Recent fixed rate products were starting a lot less than 7% so imagine the remortgages are exclusions on the MMR. I suppose they could be affordable but if not I guess a term extension would be required.

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Stress test at 7% but bank rate at 2.5%. Sounds a lot of difference. Is spread the word I want? When say the MPC increase bank rate by 0.1% or whatever it is will the banks pass on a bit extra on the rate? Recent fixed rate products were starting a lot less than 7% so imagine the remortgages are exclusions on the MMR. I suppose they could be affordable but if not I guess a term extension would be required.

MMR regulations apparently stress testing at 7%

The extra stress tests announced yesterday are at 3% above the rate on the original mortgage - just 0.5% above the suggested 2.5 'new normal' base rate. So someone taking a mortgage at 4% will be tested at 7%. Someone taking on a mortgage at 5% stress tested at 8% etc.

A tightening of lending, surely, unless I've misunderstood?

Surely this could be a nail in the coffin of HTB? HTB mortgages given out at 5.5%, stress tested at 8.5%? Are people who need to take out HTB going to be able to afford 8.5%?

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