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Interest Rates Please Help

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I'm currently arguing with my flat mate (trader at DB) that interest rates are looking increasingly likely to rise while he believes there will be a cut.

I know we've been through it all several times, but I'd like to compile a set of bullet points in favour of both directions .... can you add/amend anything you can think of as a factor or possibly change the order based on items that place most pressure on BoE.

Interest Rate Increase:

1) Sterling v low

2) To Cool the housing market again (reported to be rising again by VIs)

3) Threat of Importing inflation from US, Europe etc

4) Rising factory gate prices

Interest Rate Decrease:

1) Rising unemployment

Ok - I admit i dont have very many so far

Edited by sich

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I'm currently arguing with my flat mate (trader at DB) that interest rates are looking increasingly likely to rise while he believes there will be a cut.

I know we've been through it all several times, but I'd like to compile a set of bullet points in favour of both directions .... can you add/amend anything you can think of as a factor or possibly change the order based on items that place most pressure on BoE.

Interest Rate Increase:

1) Sterling v low

2) Cool housing market again (reported to be rising again by VIs)

3) Threat of Importing inflation from US, Europe etc

4) Rising factory gate prices

Interest Rate Decrease:

1) Rising unemployment

Ok - I admit i dont have very many so far

Sounds about right. IOW, not many reasons to lower the rates. Gordon can't admit to rising unemployment (doesn't happen in miracle economies) so it looks more likely that rates will have to rise to track the US and ECB moves.

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I'm currently arguing with my flat mate (trader at DB) that interest rates are looking increasingly likely to rise while he believes there will be a cut.

I know we've been through it all several times, but I'd like to compile a set of bullet points in favour of both directions .... can you add/amend anything you can think of as a factor or possibly change the order based on items that place most pressure on BoE.

Interest Rate Increase:

1) Sterling v low

2) To Cool the housing market again (reported to be rising again by VIs)

3) Threat of Importing inflation from US, Europe etc

4) Rising factory gate prices

Interest Rate Decrease:

1) Rising unemployment

Ok - I admit i dont have very many so far

1) The pass through rate of inflation is low, (so sterling low doesn't come really into the equation, despite the views of some here

http://www.bankofengland.co.uk/publication...2/speech171.pdf

2) Housing market isn't part of the remit

3) Again see 1

4) Indeed, but this is being absorbed by the retailers Note the retail sales deflator is still about -1.9

For a cut

1) Rising unemployment

2) Inflation is a bit below target, (If oil starts to fall out, or growth is lower than this might fall more than expected

3) After last years slow year, there appears to be an output gap so growth could be stimulated by a cut without adding to inflation

Personally I think it's finely balanced at present, with a slightly higher chance of a cut being the next move than a rise, but keep an eye on the CPI , Wage inflations (Signs of second round inflation), and growth (If that come in below the BOE estimate than it could indicate a greater chance of a cut.

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1) The pass through rate of inflation is low, (so sterling low doesn't come really into the equation, despite the views of some here

http://www.bankofengland.co.uk/publication...2/speech171.pdf

2) Housing market isn't part of the remit

3) Again see 1

4) Indeed, but this is being absorbed by the retailers Note the retail sales deflator is still about -1.9

For a cut

1) Rising unemployment

2) Inflation is a bit below target, (If oil starts to fall out, or growth is lower than this might fall more than expected

3) After last years slow year, there appears to be an output gap so growth could be stimulated by a cut without adding to inflation

Personally I think it's finely balanced at present, with a slightly higher chance of a cut being the next move than a rise, but keep an eye on the CPI , Wage inflations (Signs of second round inflation), and growth (If that come in below the BOE estimate than it could indicate a greater chance of a cut.

The problem FTB's have is that whatever rates do they are shafted. Rates up = more unemployment so less job security, Rates down = HP boom.

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great link - thanks moosetea

You have to remember to adjust these, for credit risk. 6months out tends to settle 0.15% below the rate projected (Longer more risk, shorter less)

So the market expects interest rates in Feb to be 4.63% less 0.15% or 4.49%

Here are the live numbers (Ok 20mins out

http://www.futuresource.com/quotes/custom....us=LSS&t=Future

Spet o6 95.38. So 100-95.38 is 4.62 less .15% gives a base rate of 4.48%

Sorry one more point.

If you want to try to avoid all the adjustments look here.

http://www.bba.org.uk/bba/jsp/polopoly.jsp?d=228&a=1451

14-MarGBP	1W	4.538332W	4.488333W	4.468331M	4.450002M	4.445003M	4.443336M	4.473339M	4.516671Y	4.55500

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Its different this time

No its not, at some point due to an improving world economy and rising rates in all the major economies inflation WILL start to feed through to the UK and we will have to raise our rates to the neutral level, around 5.5%, which will in turn cause a dramatic slowdown in the property market. And its already starting to show with a hugely expanding service sector, which dont forget accounts for 70% of the economy.

PS ask your city friend why

1. in 2004 they all said rates would go to 5.5%ish by early 2005

2. for the last 6 to 8 months they all predicted rates would fall further

The city have called rates wrong twice now so why listen to them.

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When America sneezes we catch a cold.

Whikst its nice to think that our econmy could do with a stimulus the reality is that we compete in the global marketplace for foreign investment. This is particularly acute if we have a trade deficit. The £ and $ are similarly placed.

The US needs to attract £2bn every day simply to pay the interest on what they owe. High interest rates makes the dollar more attractive. With the competition (euro and yen) gradually increasing both the £ and the $ need to also raise to keep the spread the same. In fact the US ( as a low regulation free trade economy) historically has an IR averaging 1% lower than UK.

There is no way that the BoE can even contemplate lowering IR's while this situation remains.

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The MPC target three things

  1. CPI Inflation
  2. Financial/Monetary Stability
  3. Stable economic growth

Effects on CPI inflation:

  • Sterling falling against other currencies resulting in more costly imports. Thus increasing inflation. The BoE have said they will let sterling fall (numerous times), although if this resulted in a higher CPI they will act.
  • Wage inflation (Doesn't seem to be picking up too much)
  • Increasing global prices, i.e. Oil/Gas (A big problem for inflation IMHO)

Effects on Financial Stability

  • Debt: Lending is still unsustainable. M4 Lending is still well over 10% (12.6%) (Still a big problem)
  • Housing Market. (The BoE raised interest rates to end the boom, so they may act again if the housing market threatens stability.)

Effects on Stable Economic Growth

  • Unemployment. (Picking up, which is a problem)
  • Particular sectors struggling, eg retail (Although the BoE have said the economy can't rely on consumer spending, and a shift from this should/will occur)
  • The BoE has said the last 10 years (or somthing like that) has been "stable" years, and cannot guarantee this over the next 10 years (or so).

Thats the way I see it (I'm sure they are things I have missed off)... and they are clearly forces pulling in both directions. The money markets know whats going on: http://www.futuresource.com/quotes/quotes.jsp?s=LSS

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  • 301 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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