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Interest Rate Rise Scenarios?

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Hi all, simple question really - what kind of scenario(s) could force up UK interest rates? I have a vague notion that a sterling crisis could, but not sure of the exact mechanism. Why couldn't the Bank of England just printy printy?

It all feels quite like 2007 in ways I cannot quite put my finger on. Can feel something brewing...

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Hi all, simple question really - what kind of scenario(s) could force up UK interest rates? I have a vague notion that a sterling crisis could, but not sure of the exact mechanism. Why couldn't the Bank of England just printy printy?

It all feels quite like 2007 in ways I cannot quite put my finger on. Can feel something brewing...

middle east regional conflict..plain and simple.(and russia would quite enjoy too from the sidelines as it's a way to artificially crank up the prices again)

iran v saudi arabia in the main(ie clerics v royalty in their version of the pope v henry viii.)

all respective hangers on join their respective cliques, and sectarian bloodbath ensues, oil supply from the entire region comes to screeching halt,all commercial shipping in the region suspended for being blown out of the water.

scenario gives oil price of maybe $500 bbl, and food, commerial products rising horiffically because they have to take the long way round via the cape of good hope in south aftrica- which incidentally is a highly dangerous stretch of water because of the inclement weather....severe inflation shock and supply crunch, sort of 1970's oil crisis on steroids.

government left with no choice but to crank up rates to stop inflation, irrespective of the terrible consequences on our overly consumer-driven economy.

the ONLY solution is to rapidly invent and deploy new INDIGENOUS eco-technology to loosen the grip of dependence on foreign oil/oil products.

just in time shipments become just too late.

Edited by oracle

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The pound falls dramatically, which in turn drives up inflation, interest rates get pushed up.

Oil/commodity prices rise dramatically, which in turn drives up inflation, interest rates get pushed up.

Wages rise dramatically due to labour/skills shortages or strong unions, interest rates get pushed up.

Government bond sales fail, bond investors worried about UK default risk or chase better/safer yield elsewhere, interest rates get pushed up.

All possible, none very probable. I can't see much likelihood of base rates exceeding 2% this side of 2020.

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Hi all, simple question really - what kind of scenario(s) could force up UK interest rates? I have a vague notion that a sterling crisis could, but not sure of the exact mechanism. Why couldn't the Bank of England just printy printy?

It all feels quite like 2007 in ways I cannot quite put my finger on. Can feel something brewing...

Unlikely that anything will happen that will force the UK to raise interest rates alone.

I think the current most possible eco-doom scenario is a grexit, which may lead to some turmoil. It's almost guaranteed that something is going to kick off in Russia, but this will probably be of much less significance than a grexit.

Aside from crisis, if you look at the UK and US interest rates they are strongly correlated. So if the US raises rates the UK is probably not going to be far behind.

Whether the US will raise rates or not is a tricky one to call. Obviously you've got the downturn in the oil business. This is probably well matched by an upturn in business and lowering of costs for businesses that depend on oil.

Looking at the UK independently I think more QE is unlikely. To me the UK only gets away with QE in the context of world QE. For the UK to print while the US doesn't is quite risky and IMO unlikely to happen. To me this largely explains why they haven't expanded the QE pot.

If you really want to see where the UK economy is going, your best bet is keeping an eye on the States, and to a lesser extent Europe.

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I don't think IRs will head towards 10%.

I do think they'll be around 5% - ~2% growth + ~2-3% real interest rates.

Its wishful thinking to expect the UK economy to pan out like Japan's.

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Oil/commodity prices rise dramatically, which in turn drives up inflation, interest rates get pushed up.

yup, that's basically the case I've mentioned.

it's not necessarily down to roaring global trade, more of a supply crunch and lack of available product and /or ability to ship product to end user.

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The UK will tag along behind the US and the eurozone interest rates and continually claim that it's leading the way and they should run their economies the way the UK does.

The contents of the inflation indices will be adjusted to suit.

Edited by billybong

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The only thing with the oil/inflation scenario is that in the 70s oil, inflation and interest rates all went up pretty much hand in hand but when a similar thing happened after year 2000 the connection wasn't so strong - maybe due to fuel tax policies, globalisation and indices manipulation etc.

So it might indeed need an oil price much higher than say $140 a barrel to reassert the inflation connection.

inflation-1918-2011.png

chart1_blog21.jpg

Oil-Shock-since-1973.png

Edited by billybong

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yup, that's basically the case I've mentioned.

it's not necessarily down to roaring global trade, more of a supply crunch and lack of available product and /or ability to ship product to end user.

Anything's possible, but I'm sceptical this will happen for all sorts of reasons.

Firstly there's currently over supply of oil and many non food commodities, even if supply is mothballed because of current low prices, that supply would be quickly re-instated if prices rise.

Another point to remember as far as the UK is concerned, oil consumption in particular is a far less significant component of the UK economy today than it was during the oil price shocks of the 1970's, so any given percentage increase in oil prices today has less inflationary impact than it did during the 1970's.

Like I say, anything's possible, but for the foreseeable future my guess is that the inflation genie is well and truly back in the bottle.

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The pound falls dramatically, which in turn drives up inflation, interest rates get pushed up.

Nope.

If that happens you get a one time move on inflation followed by massive stagnation from demand destruction. IRs would not be moved up in that scenario.

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Its wishful thinking to expect the UK economy to pan out like Japan's.

Except the policy actions and our conditions are very similar to those of the Japanese in the 90s and 00s

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Except the policy actions and our conditions are very similar to those of the Japanese in the 90s and 00s

trade deficit is a bit different isn't it ?

Although I don't fully subscribe to the theory that unless you're hitting stuff with hammers your country must be in dire trouble.

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The only thing with the oil/inflation scenario is that in the 70s oil, inflation and interest rates all went up pretty much hand in hand but when a similar thing happened after year 2000 the connection wasn't so strong - maybe due to fuel tax policies, globalisation and indices manipulation etc.

So it might indeed need an oil price much higher than say $140 a barrel to reassert the inflation connection.

inflation-1918-2011.png

chart1_blog21.jpg

Oil-Shock-since-1973.png

nice chart at the bottom, but do you have one in base 24 log?

it's way more accurate.

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The UK will tag along behind the US and the eurozone interest rates and continually claim that it's leading the way and they should run their economies the way the UK does.

The contents of the inflation indices will be adjusted to suit.

Boom. We have a winner.

It is also my hope that a Labour win in May, sets of the biggest pant shitting known to man, and we have to pay more for our debt.

It is my understanding that Iceland could print at will. Didn't help them in the end did it?

Happy new year all.

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trade deficit is a bit different isn't it ?

Although I don't fully subscribe to the theory that unless you're hitting stuff with hammers your country must be in dire trouble.

Partially. If you importing more than you are exporting then you are out on a limb.

Japan - cabbage it is - has sunk all debts within the country and is an export earning machine.

With a bit of bit of de-reg (mainly to agri) and a guess-worker setup (mainly Fillipino home helps) Japan could be pretty impressive.

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Japan needs to allow massive immigration. It's far too small just now to help them.

But if - big if - there were liberalisations then yes indeed Japan would be great.

I pity the poor SMEs whose input costs have gone stratospheric but they can;t raise their prices. SME bankruptcies up 140% at last count I saw. The real people f'd again.

The financial, political and multinational exporter elite are ok...

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Apart from a "normal" rising gdp, rising (lagged) rate cycle on the back of stronger wages.........

Brexit - which goes horribly wrong.

If inflation were to start to get out of hand Carney has the thick end of £400billion in govt bonds he can start to offload.

Really can't see it happening for next 20+ years

More pertinent question I suspect is what happens if growth falters again, we enter another recession at zlb, EZ fails to sort itself out etc.

How long before they start to seriously consider a higher inflation target or fiscal helicopter money ? We're 6 years into zlb after all.........

Edited by R K

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Boom. We have a winner.

It is also my hope that a Labour win in May, sets of the biggest pant shitting known to man, and we have to pay more for our debt.

It is my understanding that Iceland could print at will. Didn't help them in the end did it?

Happy new year all.

Thanks very much shindigger.

Indeed happy new year all.

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none... All scenarios can be justified by ... 'it could be resolved only if we printed more..' Once you are hooked on printed money .. You don't stop

Once the printing press has been discovered it's never ever been turned off because it would reveal losses for the rich. Far better just to carry on and have a total collapse of the monetary system.

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none... All scenarios can be justified by ... 'it could be resolved only if we printed more..' Once you are hooked on printed money .. You don't stop

Why wait for "it" to be resolved. If they can print with impunity, just do it now, print a few hundred billion or a nice neat trillion and party!

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For governments there's the added problem if they have short term debt or are still running a large deficit increasing interest rates causes all sorts of fiscal problems. Either govt spending is cut to ensure debt service costs can be met or you increase the deficit to meet the interest payments. At some point you will either have to default or the govt will provide no services with the tax revenues.

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