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Independent: Hamish Mcrae: Why We May Be Moving Into A Period Of Higher Interest Rates.

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'Hamish McRae: Why we may be moving into a period of higher interest rates':


...what about the supply/demand balance in money? We are living with an overhang of supply, for following the 2001 US recession, the Fed pumped money into the system. Interest rates in real terms are still very low, which was reflected in the surge in asset prices, particularly house prices, in many markets. Now the supply is being checked but demand is still strong. There is a lot of cash swishing around the world hunting for somewhere that brings a decent return. There are some signs that higher interest rates in the US are taking the momentum out of the housing market (see second graph) but as yet these are still quite muted. But outside the US, particularly in Asia, there is no huge intention to borrow. Asia saves even at these low interest rates.

So in the global money market there is lots of supply and unbalanced demand. The question seems to me to be at what stage rising global confidence will suck up the liquidity that has been created, and force interest rates up further.

Within the developed world there is a rising appetite among businesses to invest more. Business confidence in the main European economies has risen very strongly (next graph). It is also strong in the UK, a relationship which Credit Suisse has spotted and which would seem to suggest that the next movement in UK interest rates will be up, not down (final graph).

Intuitively this makes sense. The central banks create a huge amount of cash and Asia saves like mad. But gradually both the cash and the savings are absorbed by rising asset prices and rising economic activity. Just as the world economy copes for a while with more expensive oil and raw materials, so too it copes for a while with more expensive money. But gradually inflationary pressures mount and the price of money is forced up. So the world gets higher interest rates. If central banks try to resist that trend, they find their currency depreciates, they impose more inflation on their people and that inflation mops up the cash.

In the case of oil, if $75 a barrel does not correct the imbalance in the supply/demand of the stuff, then the price has to go to $100 a barrel. In the case of money, if 5 per cent interest rates do not bring supply/ demand into balance then rates have to go to 6 per cent.

The easiest way to see this is to look at the UK. We have discovered that mortgage rates of 4.5 to 5.5 per cent do not seem to have checked the rise in house prices, even though prices are within a whisker of an all-time high in relation to earnings. So maybe mortgages will have to be 5.5 to 6.5 per cent.

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'Hamish McRae: Why we may be moving into a period of higher interest rates':


Central banks around the world appear to be targeting inflation. But in Britain our economy depends nigh on exclusively on ever rising house prices, hence the BOE is hamstrung. But there again how long can Britain act out of step with the rest of the world? Surely the pound will collapse, and thus inflation will increase as our imports outstrip our exports in part due to our decling oil and gas production.

When we look back at the heady days of 10% mortgage rates, a 1% increase would have add 10% to monthly payments on an IO mortgage [if such a think ever existed] In todays world of historicaly low rates, new buyers are stretched out on massive debt that they have had to take out on IO mortgages. And if rates were ever to rise 1% on a 5% mortgage rate, that would add 25% to the monthly mortgage payments.

Considering the implications of rising rates and considering the fact housing costs have never been as high, can there truely be sustainable house price increases in the pipeline. Unsupported FTB'ers are nigh on extinct at current house prices and current mortgage rates, so where is demand going to come from to sustain rising house prices.?

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  • 302 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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