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Mr_Sminty

Sterling Weakness

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In the FT today a good article about the very strong facts and reasons that predict sterling fall and hence import inflation and why interest rates might rise. If theres a fall of 10% against the Euro then you would see a rise to around 5-6% in Sterling rates

A nobel prize economist reasearch says a currency fall offsets slower consumer consumption, a fall in sterling of 4-5% would be the equivalent to a interest rate cut for manufacturers and help on the global competitiveness front in the short term

Therefore my conclusions is the following not to improbable result. BOE decides the economy can be rebalanced by a devaluation in the pound to keep the manufacturing sector providing some puff to the economy, consumer spending is pretty much debted up to the eyeballs and a further cut in rates will do little anyway, interest rates rise up over 2007-2008 to 6% prevent the pound going into free fall and therefore CPI at 2%.

Throw into the mix low wage inflation and low growth for the UK 2007-2008, and an increase of mortgage payments of 33% come the end of 2008 and we will see how affordable these houses really are. Even if they do turn out to be marginally so, I think it will be the final end to HPI for a long while.

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a fall in sterling of 4-5% would be the equivalent to a interest rate cut for manufacturers and help on the global competitiveness front in the short term

But, uh, manufacturers are shifting jobs abroad to compensate for increased costs due to the low pound and the general rise in commodity prices. A lower pound is the last thing most of them need.

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But, uh, manufacturers are shifting jobs abroad to compensate for increased costs due to the low pound and the general rise in commodity prices. A lower pound is the last thing most of them need.

Still it'll make us a cheaper tourist destination. The weak dollar worked wonders for US retail and tourism.

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None of which air unique to this sceptered isle.

But hardly conducive to attracting tourists here.

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But, uh, manufacturers are shifting jobs abroad to compensate for increased costs due to the low pound and the general rise in commodity prices. A lower pound is the last thing most of them need.

Wonder what percentage of manufacturing jobs have gone abroad in last year. Is most manufacturing these days specialized and done by small companies?

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In the FT today a good article about the very strong facts and reasons that predict sterling fall and hence import inflation and why interest rates might rise. If theres a fall of 10% against the Euro then you would see a rise to around 5-6% in Sterling rates

A nobel prize economist reasearch says a currency fall offsets slower consumer consumption, a fall in sterling of 4-5% would be the equivalent to a interest rate cut for manufacturers and help on the global competitiveness front in the short term

Therefore my conclusions is the following not to improbable result. BOE decides the economy can be rebalanced by a devaluation in the pound to keep the manufacturing sector providing some puff to the economy, consumer spending is pretty much debted up to the eyeballs and a further cut in rates will do little anyway, interest rates rise up over 2007-2008 to 6% prevent the pound going into free fall and therefore CPI at 2%.

Throw into the mix low wage inflation and low growth for the UK 2007-2008, and an increase of mortgage payments of 33% come the end of 2008 and we will see how affordable these houses really are. Even if they do turn out to be marginally so, I think it will be the final end to HPI for a long while.

The problem with this theory is that the MPC must look to the possible future CPI figure. Interest rates that the economy can't handle will result in a low future CPI (in a recession for example) which prevents the MPC from acting too strongly. Also, any hint that they will act, results in sterling firming up, which removes the imported inflation.

So a lot of what we see now is the result of the markets opinion rather than the action of the MPC. IMO the impact is generally neutral because the market tries so hard to beat the MPC to their decisions. Of course what can reduce that neutrality somewhat is excessive rate rises in other countries.

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In the FT today a good article about the very strong facts and reasons that predict sterling fall and hence import inflation and why interest rates might rise. If theres a fall of 10% against the Euro then you would see a rise to around 5-6% in Sterling rates

A nobel prize economist reasearch says a currency fall offsets slower consumer consumption, a fall in sterling of 4-5% would be the equivalent to a interest rate cut for manufacturers and help on the global competitiveness front in the short term

Therefore my conclusions is the following not to improbable result. BOE decides the economy can be rebalanced by a devaluation in the pound to keep the manufacturing sector providing some puff to the economy, consumer spending is pretty much debted up to the eyeballs and a further cut in rates will do little anyway, interest rates rise up over 2007-2008 to 6% prevent the pound going into free fall and therefore CPI at 2%.

Throw into the mix low wage inflation and low growth for the UK 2007-2008, and an increase of mortgage payments of 33% come the end of 2008 and we will see how affordable these houses really are. Even if they do turn out to be marginally so, I think it will be the final end to HPI for a long while.

All sounds feasible.

However, the pound is already falling isnt it, and interest rates are stable?

So why do rates have to rise at all to help manufacturing?

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John Plender: It’s the carry trade that differentiates

By John Plender

Published: April 2 2006 19:42 | Last updated: April 2 2006 19:42

The conventional wisdom may be correct in assuming that the financial problems of Iceland and New Zealand, both suddenly cold-shouldered by international capital, are not particularly contagious. Yet something important is afoot in the markets. After a protracted period in which money has chased yield, regardless of fundamentals, investors are beginning to discriminate. The question is how and why.

A reversion to normality, in a freakish economic cycle where the world’s two biggest economies have generated a flood of global liquidity, ought to mean that markets are distinguishing once again between sheep and goats. That is, between countries that have used liquidity to improve economic fundamentals and those that have used it to run big fiscal deficits, or let rip housing booms and consumer spending sprees, at the cost of burgeoning current account deficits.

To some extent this is happening in the emerging markets where, for example, Hungary is now out of favour while the Polish and Czech currencies find some support. Yet the same is not true of the anglosphere economies where growth has been driven by credit expansion and rising household debt.

New Zealand’s current account deficit may be larger, as a percentage of its relatively tiny gross domestic product, than that of the US. But the Organisation for Economic Co-operation and Development reckons it was running a fiscal surplus of more than 3 per cent of GDP last year. The US, whose current account deficit in 2005 was more than a hundred times larger, in absolute terms, was running a fiscal deficit of more than 4 per cent of GDP. Probity in the antipodes has nonetheless been severely punished in the currency market while the US dollar refuses to plummet.

Discrimination in the new market climate is thus largely about financing. Small countries whose currencies have been buoyed by carry trading, whereby speculators have borrowed in big low-interest economies to invest in small high-interest ones, are the new global pariahs. Those like the US or UK, less affected by big carry trade inflows while enjoying a continuing inflow of Asian and Opec official funds that are largely insensitive to rates of return, sail on regardless. So do countries such as Spain and Portugal whose membership of the eurozone provides immunity to currency weakness.

So while a market turning point has probably been reached, it is not like the Asian financial crisis in 1997. Tighter money across the world is forcing carry traders to unwind some positions. But in a low-inflation environment where central bankers signal their intentions very clearly in advance, the tide of liquidity retreats only slowly - subject to any unexpected financial market shocks. And because the corporate cost of capital remains low relative to earnings, a huge carry trade is still under way in the mergers and acquisitions market.

For the moment, the band plays on.

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Interest rates that the economy can't handle will result in a low future CPI (in a recession for example) which prevents the MPC from acting too strongly.

Why will interest rates affect CPI, other than by increasing or decreasing the value of the pound?

If rates went up but the pound stayed the same, what impact would that have on the cost of Chinese DVD players, or natural gas, or copper, or any of the other bazillion things that we have to import? This isn't like the old days where Joe Bloggs went to the factory to build widgets that his neighbour bought, when raising rates would directly control the profitability of the factory and the prices they could charge. The factory is now in China, and the price is controlled by global demand.

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In the FT today a good article about the very strong facts and reasons that predict sterling fall and hence import inflation and why interest rates might rise. If theres a fall of 10% against the Euro then you would see a rise to around 5-6% in Sterling rates

A nobel prize economist reasearch says a currency fall offsets slower consumer consumption, a fall in sterling of 4-5% would be the equivalent to a interest rate cut for manufacturers and help on the global competitiveness front in the short term

Therefore my conclusions is the following not to improbable result. BOE decides the economy can be rebalanced by a devaluation in the pound to keep the manufacturing sector providing some puff to the economy, consumer spending is pretty much debted up to the eyeballs and a further cut in rates will do little anyway, interest rates rise up over 2007-2008 to 6% prevent the pound going into free fall and therefore CPI at 2%.

Throw into the mix low wage inflation and low growth for the UK 2007-2008, and an increase of mortgage payments of 33% come the end of 2008 and we will see how affordable these houses really are. Even if they do turn out to be marginally so, I think it will be the final end to HPI for a long while.

If the £ falls 10% against the Euro there will be moves to join the Euro (with IR's of 2.5%). The pound has been overvalued against the Euro for 4 years and is one of the main reasons why joining has been kept on the back burner. No government faced with the alternative of raising IR's or facing a run on the £ would have any choice and you would hardly expect the 70% of owwner occupying public to vote for higher IR's when they could have 2.5% IR's in the Eurozone would you?.

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Why will interest rates affect CPI, other than by increasing or decreasing the value of the pound?

If rates went up but the pound stayed the same, what impact would that have on the cost of Chinese DVD players, or natural gas, or copper, or any of the other bazillion things that we have to import? This isn't like the old days where Joe Bloggs went to the factory to build widgets that his neighbour bought, when raising rates would directly control the profitability of the factory and the prices they could charge. The factory is now in China, and the price is controlled by global demand.

Hmm, okay, but the final retail price of something is only partly dependent on the wholesale import price. There are a lot of people in between import and retail which get the goods to the end user, and those workers and companies are part of the uk economy. Lowering interest rates will have the effect of inflating the economy relating to those workers and companies, irrespective of the trade situation, I would guess.

frugalista

If the £ falls 10% against the Euro there will be moves to join the Euro (with IR's of 2.5%). The pound has been overvalued against the Euro for 4 years and is one of the main reasons why joining has been kept on the back burner. No government faced with the alternative of raising IR's or facing a run on the £ would have any choice and you would hardly expect the 70% of owwner occupying public to vote for higher IR's when they could have 2.5% IR's in the Eurozone would you?.

The UK public is overwhelmingly against the Euro (perhaps unfortunately IMHO). Lower IRs haven't converted them to being pro-Euro in the past so why will it do so in the near future?

Could NuLab survive politically trying to introduce the Euro? And how long would it take? I would be very surprised to see it in place before the next election (2009 / 10).

frugalista

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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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