Can We Just Get This Straight

[munimula]

They are not necessarily going to go up.

The BoE looks 2 years ahead and predicts what inflation is going to be. This prediction is below 2%, the BoE target. So whilst short term inflation rate may go above 2%, as they did last summer (2.4%) the BoE will not necessarily put up IRs.

Predicting forward inflation is a bit like sticking a finger in the air - it is really anybody's guess but whilst the only desire that the BoE has is to put IRs down you can bet your bottom dollar that the forward predictions will remain below 2%.

Gordon Brown wants to make it to No. 10 - can you honestly imagine him letting the BoE put up rates and jeopardise his chances by crashing the economy. Believe that the BoE is independent if you like but you are fooling yourselves if you do.

I used to believe that rates would go up as inflation rose - I was totally wrong, they went down! There are other forces at play here so I suggest you all spend your time analysing other data.

Edited April 13, 2006 by munimula

[look to the past]

Good post

If interest rates are reduced I think there is a good possibility that HPI will shoot off again

[OzzMosiz]

Gordon Brown is playing with the lives of over 50 million people. If he screws it up just for his own sake, then there will be consequences!!

[I Told You So]

You can come up with all the conspiracy theories you like but the bottom line is you can't beat the market, which is exactly what happened last time when they had to raise rates to 15%.

Now i'm not saying rates will go to much more than 5.5% to 6.0% but I think that will be more than enough to crash the market. In fact 5.0% will be enough to set the wheels in motion.

read my lips "you can't beat the market"

[BearishBull]

They are not necessarily going to go up.

The BoE looks 2 years ahead and predicts what inflation is going to be. This prediction is below 2%, the BoE target. So whilst short term inflation rate may go above 2%, as they did last summer (2.4%) the BoE will not necessarily put up IRs.

Predicting forward inflation is a bit like sticking a finger in the air - it is really anybody's guess but whilst the only desire that the BoE has is to put IRs down you can bet your bottom dollar that the forward predictions will remain below 2%.

Gordon Brown wants to make it to No. 10 - can you honestly imagine him letting the BoE put up rates and jeopardise his chances by crashing the economy. Believe that the BoE is independent if you like but you are fooling yourselves if you do.

I used to believe that rates would go up as inflation rose - I was totally wrong, they went down! There are other forces at play here so I suggest you all spend your time analysing other data.

Whilst there's some merit in debating the degree to which the BoE is independent with respect to monetary policy, the implication that Gordon has total control over UK rates is laughable. Gordon may think he's a finance god but currency markets have other ideas. If, as is happening at present, central bankers around the globe continue to tighten monetary policy, the choice facing the UK monetary policy makers is whether to join in and raise £ rates or see the currency seriously devalued (which amongst other things would result in import price inflation). How do you think Gordon would react to that? Past experience tells us that significant currency devaluations see heads roll at No.11. Does anyone remember Norman Lamont?

[karhu]

Absolute rubbish (I was talking about the first couple of posts). Inflation is all about money supply and money supply has been out of control for a while. The effects of this coming through into CPI are a matter of time. It's a matter of when, not if.

Before Christmas there was a finite chance that interest rates may go down in spring, but that has now passed. The chance of interest rates going down now is so close to zero that it can effectively be ignored. The world economy is well and truly in the tightening half of a liquidity cycle. Even Japan are planning to start raising their interest rates this summer. It's a matter of how long can the MPC hold off hikes, rather than when will they put them down.

Edited April 13, 2006 by karhu

[bubbleturbo]

Good thread with some great comments.

Keep it rolling peeps.

[Magpie]

You can come up with all the conspiracy theories you like but the bottom line is you can't beat the market, which is exactly what happened last time when they had to raise rates to 15%.

Now i'm not saying rates will go to much more than 5.5% to 6.0% but I think that will be more than enough to crash the market. In fact 5.0% will be enough to set the wheels in motion.

read my lips "you can't beat the market"

The jump to 15% was when the BOE was forced to try to prop up the pound because of the artificial ERM currency band.

There's no such thing now, and no really good reason for the BOE to worry about a slight fall in the £ - even if that ever happens (no sign of it yet...). They do have to target inflation but as Munimula points out you can't count on that forcing an increase in the immediate future.

Absolute rubbish (I was talking about the first couple of posts). Inflation is all about money supply and money supply has been out of control for a while. The effects of this coming through into CPI are a matter of time. It's a matter of when, not if.

That's the narrow monetarist view of money supply and inflation, but it's a bit more unpredictable really. And honestly, inflation is probably higher than that now, but they have managed to keep a lid on it through spin. They may not need to increase the rates, or it may take much longer than many here seem to think.

[bears all]

The jump to 15% was when the BOE was forced to try to prop up the pound because of the artificial ERM currency band.

There's no such thing now, and no really good reason for the BOE to worry about a slight fall in the £ - even if that ever happens (no sign of it yet...).

Go to the FT's website, then to Markets and then Currency and have a look at the charts. In the last few weeks the pound has been falling against the dollar.

Assume for a moment that the Fed raises dollar rates by a couple more points. Then assume that in a few months the BoE wants to cut. Doing so would bring the differential in rates to 1%. What would happen to the pound then?

All hypothetical but all highly probable too.

[karhu]

That's the narrow monetarist view of money supply and inflation, but it's a bit more unpredictable really. And honestly, inflation is probably higher than that now, but they have managed to keep a lid on it through spin. They may not need to increase the rates, or it may take much longer than many here seem to think.

Of course it's a bit more complicated than that, but at the end of the day if you move interest rates far below neutral you'll increase the money supply and this will fire up CPI (that's what the MPC attempt to do for goodness sake). However, the long term result will not only be to avoid recession, but eventually to cause rampant consumer price inflation, which need interest rates to be moved back to the long term average and higher.

[Magpie]

Go to the FT's website, then to Markets and then Currency and have a look at the charts. In the last few weeks the pound has been falling against the dollar.

Assume for a moment that the Fed raises dollar rates by a couple more points. Then assume that in a few months the BoE wants to cut. Doing so would bring the differential in rates to 1%. What would happen to the pound then?

All hypothetical but all highly probable too.

I watch the dollar rate all the time as I both buy and sell in dollars regularly in business. It's been down a bit, up a bit. Certainly hasn't fallen significantly in the last couple of weeks as it's still around $1,75. In general it's been around there since the last real movement from the (weak dollar) high of $1.94. A few years ago it was below $1.40. There hasn't been any major recent move since the rates shifted in spite of confident predictions here to the contrary.

Further Fed raises might have an effect, granted. But at this stage there might only be one or two more, and the BOE doesn't care if the £ comes down a bit, so I don't see that would necessarily force a rise here. And the dollar is no longer trusted as it used to be, so the assumption that we need a higher rate than theirs may not be true any more.

I'm not saying rates definitely won't rise - a real slilde in the £ might cause some problems (certainly would for me...). But at this stage I don't think it's about to happen.

[Rodders]

Absolute rubbish (I was talking about the first couple of posts). Inflation is all about money supply and money supply has been out of control for a while. The effects of this coming through into CPI are a matter of time. It's a matter of when, not if.

Before Christmas there was a finite chance that interest rates may go down in spring, but that has now passed. The chance of interest rates going down now is so close to zero that it can effectively be ignored. The world economy is well and truly in the tightening half of a liquidity cycle. Even Japan are planning to start raising their interest rates this summer. It's a matter of how long can the MPC hold off hikes, rather than when will they put them down.

It's good news that Japan is putting up its interest rates at last - they've been trying to achieve inflation through currency devaluation for some time now.

[Time to raise the rents.]

They are not necessarily going to go up.

The BoE looks 2 years ahead and predicts what inflation is going to be. This prediction is below 2%, the BoE target. So whilst short term inflation rate may go above 2%, as they did last summer (2.4%) the BoE will not necessarily put up IRs.

Predicting forward inflation is a bit like sticking a finger in the air - it is really anybody's guess but whilst the only desire that the BoE has is to put IRs down you can bet your bottom dollar that the forward predictions will remain below 2%.

Gordon Brown wants to make it to No. 10 - can you honestly imagine him letting the BoE put up rates and jeopardise his chances by crashing the economy. Believe that the BoE is independent if you like but you are fooling yourselves if you do.

I used to believe that rates would go up as inflation rose - I was totally wrong, they went down! There are other forces at play here so I suggest you all spend your time analysing other data.

I just put you on my buddies list munimula.

[Magpie]

Of course it's a bit more complicated than that, but at the end of the day if you move interest rates far below neutral you'll increase the money supply and this will fire up CPI (that's what the MPC attempt to do for goodness sake). However, the long term result will not only be to avoid recession, but eventually to cause rampant consumer price inflation, which need interest rates to be moved back to the long term average and higher.

I take your point. Actually I think there's a degree to which that has happened already. There has been a disguised level of inflation in the economy, but because it hasn't been acknowledged, wage inflation hasn't kept pace. So we're all a bit poorer.

And part of the way that inflation is disguised is price rises are quite uneven - some things get cheaper because of globalisation (which also makes it harder to devalue or allow high wage inflation), so the real rise in cost of living can be spun. But I don't think they'll be keen to put up IRs in response unless the CPI really starts to go up in a way that can't be ignored.

Edited April 13, 2006 by Magpie

[karhu]

I just put you on my buddies list munimula.

Hawks against Doves then eh? I'd say that after today's news the Hawks are way out in front. Those who talk up equities are about to have their fingers burnt. Fine, someone has to be the patsy.

[IMupNorth]

I watch the dollar rate all the time as I both buy and sell in dollars regularly in business. It's been down a bit, up a bit. Certainly hasn't fallen significantly in the last couple of weeks as it's still around $1,75. In general it's been around there since the last real movement from the (weak dollar) high of $1.94. A few years ago it was below $1.40. There hasn't been any major recent move since the rates shifted in spite of confident predictions here to the contrary.

Further Fed raises might have an effect, granted. But at this stage there might only be one or two more, and the BOE doesn't care if the £ comes down a bit, so I don't see that would necessarily force a rise here. And the dollar is no longer trusted as it used to be, so the assumption that we need a higher rate than theirs may not be true any more.

I'm not saying rates definitely won't rise - a real slilde in the £ might cause some problems (certainly would for me...). But at this stage I don't think it's about to happen.

Absolutely correct, the BoE has no need to raise IRs, it wants to see the pound go down in value so as to boost exports, but it wants it to do so slowly and of its own accord.

The IR Hikers on here are living in cloud cuckoo land and are really just clutching at the last available straw as the hoped for trigger. It ain't happening guys, wake up and smell the coffee.

[BearishBull]

The jump to 15% was when the BOE was forced to try to prop up the pound because of the artificial ERM currency band.

There's no such thing now, and no really good reason for the BOE to worry about a slight fall in the £ - even if that ever happens (no sign of it yet...). They do have to target inflation but as Munimula points out you can't count on that forcing an increase in the immediate future.

That's the narrow monetarist view of money supply and inflation, but it's a bit more unpredictable really. And honestly, inflation is probably higher than that now, but they have managed to keep a lid on it through spin. They may not need to increase the rates, or it may take much longer than many here seem to think.

I disagree. The ERM did indeed clearly illustrate the fact that central bankers can control rates or fx but not both. But just because the UK is in an ERM type mechanism, doesn't mean that this concept (rates or fx not both) has been suspended.

The BoE has every reason to worry about a significant fall in £ if it leaves rates unchanged whilst the world's other major economies hike. So far today, 10yr Gilts have experienced their biggest daily fall in weeks (the yield is up 6bps already), on top of a 40bps increase in yield over the previous six weeks - if the BoE was as sanguine as you suggest on currency, they would be buying up 10yr gilts as well as treasuries at other points of the curve, thus keeping yields in check at low levels. The £ yield curve keeps rising as do those for other major currencies (more major from a global perspective - Euro, Dollar, Yen). Global monetary policy is being tightened and there's nothing G.Brown can do about it. £ rates go up or the pound gets hammered - the BoE's choice...

[karhu]

I take your point. Actually I think there's a degree to which that has happened already. There has been a disguised level of inflation in the economy, but because it hasn't been acknowledged, wage inflation hasn't kept pace. So we're all a bit poorer.

And part of the way that inflation is disguised is price rises are quite uneven - some things get cheaper because of globalisation (which also makes it harder to devalue or allow high wage inflation), so the real rise in cost of living can be spun. But I don't think they'll be keen to put up IRs in response unless the CPI really starts to go up in a way that can't be ignored.

I think you'll find that globalisation is a twin-edged sword and especially with respect to Japan when they start to tighten their monetary policy. Japan is, after all, the third largest economy on the planet.

[Rodders]

Absolutely correct, the BoE has no need to raise IRs, it wants to see the pound go down in value so as to boost exports, but it wants it to do so slowly and of its own accord.

The IR Hikers on here are living in cloud cuckoo land and are really just clutching at the last available straw as the hoped for trigger. It ain't happening guys, wake up and smell the coffee.

Agreed - the forecasts I'm getting point to IRs of 3.75% in Q207.

[karhu]

Absolutely correct, the BoE has no need to raise IRs, it wants to see the pound go down in value so as to boost exports, but it wants it to do so slowly and of its own accord.

The IR Hikers on here are living in cloud cuckoo land and are really just clutching at the last available straw as the hoped for trigger. It ain't happening guys, wake up and smell the coffee.

IMN, from time to time you've had some reasonable points of view, but this time you're just factually incorrect. Wake up and take a look a long term bond prices - this is factual data.

The MARKETS ARE NOW PRICING IN HIKES IN UK INTEREST RATES. Yes, that is real money being gambled on the fact that interest rates are going up at the end of the year.

Edited April 13, 2006 by karhu

[BearishBull]

Absolutely correct, the BoE has no need to raise IRs, it wants to see the pound go down in value so as to boost exports, but it wants it to do so slowly and of its own accord.

The IR Hikers on here are living in cloud cuckoo land and are really just clutching at the last available straw as the hoped for trigger. It ain't happening guys, wake up and smell the coffee.

Do you honestly think the UK is net exporter? A devaluation of the pound will lead to import-led inflation in the UK. Just because the base rate hasn't gone up doesn't mean IRs aren't increasing (see 10yr Gilts for e.g.)...The facts are staring you in the face, you just don't want to look...

[Magpie]

I think you'll find that globalisation is a twin-edged sword and especially with respect to Japan when they start to tighten their monetary policy. Japan is, after all, the third largest economy on the planet.

Actually I meant to write more - my main feeling is that it's not that easy to apply some of the lessons of the past to the current global situation. We've never quite been here before, so I'm not sure anyone quite knows what will happen. It's going to be hard for anyone to turn the clock back and retreat into protectionism or devaluation, but who knows.

[karhu]

Do you honestly think the UK is net exporter? A devaluation of the pound will lead to import-led inflation in the UK. Just because the base rate hasn't gone up doesn't mean IRs aren't increasing (see 10yr Gilts for e.g.)...The facts are staring you in the face, you just don't want to look...

Thanks BB for bringing some reality to this thread. Anyone ever heard of the TRADE DEFICIT?

[BearishBull]

Agreed - the forecasts I'm getting point to IRs of 3.75% in Q207.

Sack your forecaster Rodders, the £ forward curve for 1wk deposits on 1/5/07 (close as you'll get to a forward for base rates) is 4.85% - if your forecaster is willing to fund me forward at 3.75%, I'm a buyer in any size he likes

[karhu]

Sack your forecaster Rodders, the £ forward curve for 1wk deposits on 1/5/07 (close as you'll get to a forward for base rates) is 4.85% - if your forecaster is willing to fund me forward at 3.75%, I'm a buyer in any size he likes

Hhahaha. Money where your mouth is. Some of the guys on this forum would lose money hand over fist and would certainly bankrupt the UK if they were in control. Thank goodness the MPC will know when the time has come to raise interest rates.