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Lots Of Talk Of Rise In Global Ir's, But Why The Need For Uk To Track Up?

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Been pondering this question: "Why if UK didn't track interest rates on the way down, (US in particular) do we need to track them on the way up."

PM'd 'Jason" and checked if it would be ok to use a reply he recieved from BOE last year regarding "what

effects FED interest rates have on our interest rate policy."

Please see link to that post :


In view of the reply from BOE, could someone explain - in basic easily understood terms/language please :unsure: - why we need to track US/other countries rates? Just something i am wondering about after reading another forum and no-one had responded to that question. Just would like to hear more informed members views. cheers.

***sorry EDIT***** new link to Jason's post should now activate. please see above

Edited by beenhearingthisforyears
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If the BOE wants to prevent the pound from devaluing against other currencies they may have to raise short term IR.

For longer term debt the bond market may force higher rates regardless of the BOEs desires.

It also depends on how much foreign capital the UK want to attract to fund the national debt (public and private). Since the UK currently relies on pretty high inflows of foreign capital to balance the books if this capital starts to demand higher rates (or threatens to go somewhere with higher rates) the BOE may have no choice but to raise short term rates, while the bond market drives long term rates higher.

I'm not saying rates will rise in the UK, but simply that it's not always purely domestic considerations that determine rates.

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Guest Charlie The Tramp

Well as I see it as a simple layman, when our rates are higher than anyone else that is good for foreign investors. When our rates are lower than anyone else we are not such a good attraction, although there are many other reasons which I am sure will be explained to you by the more knowledgeable.

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I can't get the link to work.

My understanding of the basic argument (I'm sure others will correct me if I'm wrong...) is that the way money flows around the world can be strongly affected by IRs - capital is invested at higher rates, borrowed at lower rates, etc. This traditionally has a knock-on effect on currencies - the £ has been pretty strong over the last year or so, maybe reflecting the IRs not having tracked down.

During the last crash, IRs were used as a tool to try and shore up the £ within ERM limits - the success of Soros and other speculators in driving the pound out of the ERM shows how the link between international capital and currencies can work.

One problem with the "higher IRs" theory at this stage is that the govt may not mind the £ falling a bit - they may feel they can pay that as the price for using IRs to other policy ends. And the dollar is so beset by problems that it may not seem such a magnet for capital simply because of a small IR differential. The £ has lost a bit against the Euro, but nothing to panic about yet.

If rates go through the roof around the world, then yes it would make the £ tank and force IR rises here. If they go up only a bit, then it could go either way. The £ might fall slowly but steadily, so that eventually it becomes damaging and rates here rise in the end. Or the markets may adjust to the US/UK rates being out of sync because of other factors - the £ may settle at $1.60 or $1.50 and if it does it won't be any worse than a few years ago - in fact for exporters it will be better.

Honestly it's all hard to predict as there are so many different factors that might push and pull rates and currencies around, so nothing's inevitable.

Edited by Magpie
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The additional factor to mention in relation to Magpie's post is inflation.

I tend to agree with Magpie that the BOE would probably be happy to see the £ fall - especially given the worrying trade deficit data recently. However it will have to weigh this desire against what this might mean for inflation. Downward movements by sterling means increasing inflationary pressures imported into the economy - particularly if the oil price cranks up any higher.

Then the question becomes - how much does the BOE stick to its inflation targetting remit, or abandon it in the 'short term' in order to safeguard growth in the wider economy.

At that point we reach the crunch point for the role of the BOE as an independent central bank - will we have a Montegue Norman OBE inflation nutter line, or will they bend the rules and take a much more self conciously economic managerial role in determining where rates go. The tension will then be between the dove camp (looser interpretation of remit: cut in the short term in anticipation that slowed growth will lead to a lag in inflationary pressure latter) or hawk camp (tighter interpretation of remit: rise in the short term to stamp out all trace of inflationary pressures working there way into expectations) and of course between the BOE and an increasingly concerned government and wider range of pressure groups.

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The additional factor to mention in relation to Magpie's post is inflation.

I tend to agree with Magpie that the BOE would probably be happy to see the £ fall - especially given the worrying trade deficit data recently. However it will have to weigh this desire against what this might mean for inflation.

Good point - inflation is another wild card. We have notionally been in a low IR, low inflation period of history, although many here would be inclined to think that real inflation is being massaged downwards by governments who have subsituted manipulating the image to dealing with reality (GB take a bow). If inflation is perceived to increase that adds another pressure on the situation. But at the same time we have a globalised economy in which it is very hard for an economy to inflate or devalue in isolation. So what happens? Real inflation masked by stagnant wages? (arguably what is happening now). Stagflation? Global inflation once China and India etc move on to the next stage of industrialisation? A return to isolationism? The collapse of the US as a global economic power??? All a bit unclear just now.

In the short term I don't think anything that dramatic will happen, but in the medium term I really wouldn't want to take any bets, as I think we're in a slightly odd phase of history.

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The gov't controlled puppet says inflation is at 2%

The gov't controlled broadcasting corporation says HPI is good.

The gov't changes its own imposed rules (re economic cycle dates)

We all know none of this is right, inflation is not 2%, for gods sake oil is still up near or at its peak of $70, rampant HPI is not good, making up the rules as you go along to suit yourself is called cheating.

What this proves however is the gov't will do everything possible to keep HMS UK afloat, why shouldn't they? As I have always believed, a shock is needed otherwise this whole show will keep on trundling along on three wheels.

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After learning more about the dollar and it's huge deficits I don't think the relationship with Sterling is established as it once was. So, I do think they could have higher interest rates than us, but the question is how much higher?

The bigger question is Sterling in relation with other major currencies like the Euro. I think the BoE will let sterling decline, and it won't move interest rates up to stop this. I can see problems with the carry trade, and if it stops and there is a run on Sterling, then the UK economy will be f@cked - just like Iceland.

With regards to the BoE/MPC in general, I can't get over how they have backed themselves into a corner. In fact, it amazes me. Did the rate cut in August help the UK economy? Not really, there was an up tick in demand but the debt growth far out stripped this, so we are not better off at all.

Inflation is now starting to be mentioned in daily conversations. Inflation is clearly nearer to 10% rather than 2%, and I'm surprised the public haven't started rioting! The only thing that has stopped the public getting angry is house price inflation making most people feel better off, and easy credit so if you can't afford it, borrow to afford it.

But this can't go on forever. There will come a point when people find they can't afford the basics, and lenders will tighten credit as bad debts are so high (which has sort of started with unsecured debt, i.e. credit cards).

I'm not sure what will happen then. Will the UK worker bees start demanding higher wages? If so inflation will spiral upwards meaning interest rates have to rise to stop it. This would result in a HPC. But, this may not happen because of immigration (with the acceptance of lower pay) and the lack of unions in the private sector.

If wage demands don't pick up, you will find the discretionary spending coming to a halt - this is happening with less consumer spending. Eventually this will push us into recession with rising unemployment, which would cause the inevitable credit tightening. Both of which will cause a HPC.

I do worry about some members like Stephen Nickell wanting lower rates because of slow growth. It's akin to giving a drug addict on 'cold turkey' more drugs to calm down - sure it will do the job, but it will be far worse when they eventually come off it.

So far, the BoE has played the balancing act, and I don't think interest rates will move for a long time. If they haven't done anything they can't be blamed!

Either way, I can't see a pleasant way out of this predicament. The only circumstance I can see a recession/HPC to be avoided is if commodities oil/gas fall significantly in price, allowing lower interest rates across the world. But that IMHO, is very unlikely to happen without higher interest rates in the first place.

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