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munimula

Why The Boe Is Still Too Optimistic About Inflation

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Anyone looking for a UK interest rate cut this year has had their hopes dashed.

The Bank of England is now predicting that UK consumer price inflation will remain in line with its 2% target in two years’ time.

But here’s the catch.

The Bank's predictions assume that interest rates will follow the path currently expected by the money markets. And at the moment, the market expects that the Bank of England will hike rates by a quarter point before the end of this year.

So it looks like mortgage interest payments could be rising before Christmas rolls around again...

Even respected City consultancy Capital Economics has been forced to revise its bearish outlook for UK interest rates. The group had expected the key rate to fall as far as 4% this year, but now expects the Bank of England to keep the rate frozen at 4.5%.

But even though the latest inflation report has essentially crushed any hopes of a rate cut this year, is the Bank still being too optimistic?

“The inflation report describes a benign central view of steady growth with inflation remaining close to the target,” said governor Mervyn King.

That’s all very well. But as the Governor admits, the risks to that benign forecast “are many and varied. In particular, there are still risks on the downside associated with the impact of strong energy and import price inflation on real disposable incomes and consumer spending.”

In other words, high oil prices are still squeezing consumers’ pockets as rising energy bills and petrol prices bite deep. That's likely to act as a drag on economic growth. But the problem is that the same high oil prices also drive up inflation, which makes it impossible for the Bank to cut interest rates to ease the consumers’ pain.

And the Bank is right to be worried about inflation. It doesn’t yet believe that “second-round effects” – like demands for higher wages – are being seen. But in April, a survey by the Bank showed that consumers have started to notice the squeeze on their earnings. Households now expect inflation to rise to 2.7% over the next 12 months – that’s the highest expectation on record.

And energy costs are also making companies wince. Greggs said that its profits in the year to date remain “materially below” last year’s. Underlying sales – that is, sales at stores open for longer than a year – were flat in the 18 weeks to May 6. Shares in the group fell 2% to £36.23.

The bakery chain, which sells more than one hundred million sausage rolls a year, managed to push through price hikes of 3% during 2005 - and it looks like there will be more to come. Companies can absorb the pain of added costs for so long, but if sales stay flat and costs continue to rise, the only way to improve profits is to raise prices. And that means higher inflation.

And of course, that other great indicator of inflation - the gold price - is screaming red. Gold broke through $700 an ounce recently, equivalent to more than £375 an ounce in sterling. As Brian Durrant of the Fleet Street Letter points out further down this email, the message you should take from the gold price is clear - "inflation is about to take off".

The Bank still seems to be operating on the assumption that the current high price of oil is temporary. The trouble is, that’s exactly what it was thinking last year as well – and yet oil prices are now higher than at almost any point during 2005.

The Bank's predictions assume that interest rates will follow the path currently expected by the money markets. And at the moment, the market expects that the Bank of England will hike rates by a quarter point before the end of this year.

Is this a joke? The BoE follows the markets expectation of what the market thinks the BoE will do? :huh:

This makes no sense. If the BoE is following the markets and the markets are following the BoE then who exactly is making any decisions!!???

"inflation is about to take off"

It had to at some point. Comapanies couldn't keep on absorbing higher costs without passing them on. This is all fantastic news. I think the BoE is about to be bitten on the **** by inflation for not moving sooner. Higher inflation coming out will force the hand of the BoE and interest rates could be about to take off. This will bring an end to the stupidity of current house prices.

Roll on the crash and may many BTLers lose everything.

Edited by munimula

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But here’s the catch.

The Bank's predictions assume that interest rates will follow the path currently expected by the money markets. And at the moment, the market expects that the Bank of England will hike rates by a quarter point before the end of this year

Money week doesn't have a clue, it really doesn't. I really don't think they have any clue about what they are writing about. They just seem to make stuff up

The BOE give the rates that there predictions are based on (which are at the date the report is starting to be complied), and they even give them in the report and the first rise is expected to be 2Q07 to 3Q07 and may be another 1Q08

May-062Q06	4.53Q06	4.54Q06	4.61Q07	4.62Q07	4.73Q07	4.84Q07	4.81Q08	4.92Q08	4.93Q08	4.94Q08	4.91Q09	4.82Q09	4.8

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Money week doesn't have a clue, it really doesn't. I really don't think they have any clue about what they are writing about. They just seem to make stuff up

But, as MoneyWeek point out there are indicators pointing to inflation pressures and inflation could be about to escape from the bag. If this does happen then all your market forecasts are largely irrelevant because they are based on current inflation projections which to be honest are very unlikely unless the BoE CPI fiddling continues.

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But here’s the catch.

The Bank's predictions assume that interest rates will follow the path currently expected by the money markets. And at the moment, the market expects that the Bank of England will hike rates by a quarter point before the end of this year

Money week doesn't have a clue, it really doesn't. I really don't think they have any clue about what they are writing about. They just seem to make stuff up

The BOE give the rates that there predictions are based on (which are at the date the report is starting to be complied), and they even give them in the report and the first rise is expected to be 2Q07 to 3Q07 and may be another 1Q08

May-062Q06	4.53Q06	4.54Q06	4.61Q07	4.62Q07	4.73Q07	4.84Q07	4.81Q08	4.92Q08	4.93Q08	4.94Q08	4.91Q09	4.82Q09	4.8

And you pretend to be the one who has all the clues. Only a couple of weeks ago you were convincingly telling me that the next move in interest rates will be downwards :D

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And you pretend to be the one who has all the clues. Only a couple of weeks ago you were convincingly telling me that the next move in interest rates will be downwards :D

kingofnowhere is chartist - he posts figures and stats and tries to claim that they determine what will happen.

personally I prefer looking at fundamentals.

the future predictions of interest rates by the markets IMO are worthless, it's all about what is going to happen with inflation.

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And you pretend to be the one who has all the clues. Only a couple of weeks ago you were convincingly telling me that the next move in interest rates will be downwards :D

I don't pretend anything. The BOE inflation report gives the numbers the BOE work on. However it seems either moneyweek can't read, or they don't want to.

Indeed, but then the economy is doing better than expected, and the housing market is doing much better (3% last month for the halifax, and up £12K since Jan), and even today manuafactoring is stronger. Against this renewed strength in the economy, then you would expect interest rate expectations to rise.

So yes, the probability is moving towards the next move being up rather than down.

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But here’s the catch.

The Bank's predictions assume that interest rates will follow the path currently expected by the money markets. And at the moment, the market expects that the Bank of England will hike rates by a quarter point before the end of this year

Money week doesn't have a clue, it really doesn't. I really don't think they have any clue about what they are writing about. They just seem to make stuff up

The BOE give the rates that there predictions are based on (which are at the date the report is starting to be complied), and they even give them in the report and the first rise is expected to be 2Q07 to 3Q07 and may be another 1Q08

May-062Q06	4.53Q06	4.54Q06	4.61Q07	4.62Q07	4.73Q07	4.84Q07	4.81Q08	4.92Q08	4.93Q08	4.94Q08	4.91Q09	4.82Q09	4.8

My guess is that those numbers were the money market expectation when the inflation report went to press a week or two ago. The market has moved to expecting a rate increase sooner in the last couple of weeks. Yesterday, after the report was published the market moved back to its position of a week or two ago. This morning, short sterling is down again reversing yesterday morning's gains. Looks to me that today's market expects a 0.25% rise in August and another next March/April.

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kingofnowhere is chartist - he posts figures and stats and tries to claim that they determine what will happen.

personally I prefer looking at fundamentals.

the future predictions of interest rates by the markets IMO are worthless, it's all about what is going to happen with inflation.

Ha ha ha, me a chartist, blimey I wouldn't give TA the time of day!

I Like fundementals as well.

1) House prices are expensive but not in a bubble (And please don't quote HPER ratio twaddle at me)

2) Interest rate expectations are benign

3) the economy is growing and growth is expected to pick up

4) Repos are historically very low

5) Employment is rising 76K last quarter and 147K over the year (Highest number of people ever employed in the UK)

6) Inflation is low and predicted to be within target over the period, with only one (Next year) and Maybe another one the year after

What Fundementals do you think are showing housing crash on the horizon?

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I don't pretend anything. The BOE inflation report gives the numbers the BOE work on. However it seems either moneyweek can't read, or they don't want to.

Indeed, but then the economy is doing better than expected, and the housing market is doing much better (3% last month for the halifax, and up £12K since Jan), and even today manuafactoring is stronger. Against this renewed strength in the economy, then you would expect interest rate expectations to rise.

So yes, the probability is moving towards the next move being up rather than down.

A small correction though. Wasn't it 2% last month for halifax?

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However it seems either moneyweek can't read, or they don't want to.

Could you please explain clearly which part of the report you disagree with.

Are MoneyWeek not just pointing out that the risks to inflation are likely to mean that the BoE is out on it's inflation target. Is it this that you disagree with?

Ha ha ha, me a chartist, blimey I wouldn't give TA the time of day!

I Like fundementals as well.

1) House prices are expensive but not in a bubble (And please don't quote HPER ratio twaddle at me)

2) Interest rate expectations are benign

3) the economy is growing and growth is expected to pick up

4) Repos are historically very low

5) Employment is rising 76K last quarter and 147K over the year (Highest number of people ever employed in the UK)

6) Inflation is low and predicted to be within target over the period, with only one (Next year) and Maybe another one the year after

What Fundementals do you think are showing housing crash on the horizon?

How are we not in a bubble? (FTB properties 8-10 X FTB wages in most of the UK)

Who expect the economy growth to pick up? I don't, downturn in consumer spending will return especially when interest rates move up. Consumption is 2/3rds of GDP so don't see how economy will continue to pick up. Manufacturing - same problems, it's cheaper to make stuff everywhere else.

Unemployment is going up.

Inflation projections, IMO are wrong.

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Did anyone anywhere in the world correctly predict that US rates would be at 5% today a couple of years ago?

Very good point.

Inflation and interest rate projections are very difficult to make.

Looking at all the fundamental evidence though would suggest that inflation will start ticking up above 2% if companies start passing on costs.

Oil has gone from $10 ('98) to $70 ('06) so inflation had to come out of the bag at some point.

Perhaps it has started?

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I don't pretend anything. The BOE inflation report gives the numbers the BOE work on. However it seems either moneyweek can't read, or they don't want to.

Indeed, but then the economy is doing better than expected, and the housing market is doing much better (3% last month for the halifax, and up £12K since Jan), and even today manuafactoring is stronger. Against this renewed strength in the economy, then you would expect interest rate expectations to rise.

So yes, the probability is moving towards the next move being up rather than down.

So basically what you're saying is. Rates may go up, or down, or remain the same?

I could have told you that :rolleyes:

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Want to give me odds that they will be 6% by the end of next year?

The US have gone from 1% to 5% to try and control inflation and it's not over yet.

4.5% - 6% would seem perfectly reasonable.

I always calculated whether I could afford a mortgage if rates went to 7%. I thought this a prudent and sensible thing to do. How many of those that have bought in the last 5 years have done that? I know, from first hand evidence that most people only factor in their payments staying the same. :blink:

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The US have gone from 1% to 5% to try and control inflation and it's not over yet.

4.5% - 6% would seem perfectly reasonable.

I always calculated whether I could afford a mortgage if rates went to 7%. I thought this a prudent and sensible thing to do. How many of those that have bought in the last 5 years have done that? I know, from first hand evidence that most people only factor in their payments staying the same. :blink:

The US rates were lower than needed, because of Spet 11, they are now only getting back to what would be neutral for them. The markets in 2004 were expecting a large upward movement. The BOE has already reached the neutral level. Here are the real rates, and as you can see the US rates were highly stimulative.

	UK	US2001	3.1	0.62002	2.3	0.12003	0.7	-1.22004	1.6	-1.32005	1.6	-1.3Mar06	2.7	1.3

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I'm no expert but...

1) House prices are expensive but not in a bubble (And please don't quote HPER ratio twaddle at me)

It's just that no one who hasn't already got a house to secure against or isn't prepared to lie on a mortgage application form can't afford to buy.

2) Interest rate expectations are benign

But interest rate expectations are usually wrong - they seem to have been wrong for a couple of years now

3) the economy is growing and growth is expected to pick up

While interest rates stay low? It's those darn expectations again!

4) Repos are historically very low

But are along with bankruptcies rising almost vertically

5) Employment is rising 76K last quarter and 147K over the year (Highest number of people ever employed in the UK)

The population is rising AND unemployment is rising

6) Inflation is low and predicted to be within target over the period, with only one (Next year) and Maybe another one the year after

Just don't try and buy anything that's going up in price. Like a house?

What Fundementals do you think are showing housing crash on the horizon?

I have no idea, but something is definately up when the price of energy, commodities and property are rising at double digit rates, yet inflation is supposed to be at 2%.

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All I know is that rates are more likely to move up than down over the next couple of years. How much is anyones guess, so from that point of view 6% isn't beyond the realms of possibility.

By any rational standard they should be over 6% already. The only real question is how long the BoE can ignore reality.

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By any rational standard they should be over 6% already. The only real question is how long the BoE can ignore reality.

BY what rational, inflation is below the central target, and gowth is below trend.

What rational reason should interest rates be at 6%?!?

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BY what rational, inflation is below the central target, and gowth is below trend.

Inflation is huge, and US rates are higher than ours: something that's happened only for brief periods a handful of times in the last few decades.

But of course you believe the CPI ********, don't you?

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Inflation is huge, and US rates are higher than ours: something that's happened only for brief periods a handful of times in the last few decades.

But of course you believe the CPI ********, don't you?

The BoE report yesterday stated that import inflation was at it's highest for 5 years.

It is largely import inflation that has been keeping a lid on inflation - cheap imported goods. And the fact that companies are aborbing some very large input price inflation, energy costs etc. As the MoneyWeek articles shows, companies can't go on absorbing these costs indefinitely and, like Greggs will eventually pass on the costs. The surge in gold prices is also a good indicator of the professional view of inflation - that it is about to take off. And we haven't even had the secondary inflation push of higher wages yet but if peoples expectation of inflation is high (currently 2.7%) then this could also start to be reflected in wage demands and cause even more inflation.

Services inflation is through the roof

IMO a lot of what happens now rests with what happens to inflation.

It starts to go up a lot, the BoE will be forced to increase interest rates, as in the US. When this starts to happen and IMO it is a matter of time then there is simply no knowing of where interest rates could go. But you certainly don't want to be taking on a mortgage at 5-6 X your salary today.

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Ha ha ha, me a chartist, blimey I wouldn't give TA the time of day!

I Like fundementals as well.

1) House prices are expensive but not in a bubble (And please don't quote HPER ratio twaddle at me)

2) Interest rate expectations are benign

3) the economy is growing and growth is expected to pick up

4) Repos are historically very low

5) Employment is rising 76K last quarter and 147K over the year (Highest number of people ever employed in the UK)

6) Inflation is low and predicted to be within target over the period, with only one (Next year) and Maybe another one the year after

What Fundementals do you think are showing housing crash on the horizon?

you muppet...these are VI opinions, not fundamentals.

please do try again...fundamentals please :rolleyes:

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What Fundementals do you think are showing housing crash on the horizon?

Suddenly it all makes sense. You're Gordon Brown, aren't you? Hence the 'kingofnowhere' user name.

Sorry Gordon, the crash you created is coming, and you'll never get to change that user name to 'PMofBritain'.

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Ha ha ha, me a chartist, blimey I wouldn't give TA the time of day!

I Like fundementals as well.

1) House prices are expensive but not in a bubble (And please don't quote HPER ratio twaddle at me)

2) Interest rate expectations are benign

3) the economy is growing and growth is expected to pick up

4) Repos are historically very low

5) Employment is rising 76K last quarter and 147K over the year (Highest number of people ever employed in the UK)

6) Inflation is low and predicted to be within target over the period, with only one (Next year) and Maybe another one the year after

What Fundementals do you think are showing housing crash on the horizon?

This has got to be the biggest con of the biggest bubble in history.

Somehow making people believe that low interest rates make a massively expensive house cheap.

This is the type of sleight of hand that would make Shenandoah and Blue Ridge Corporation Proud.

Edited by BandWagon

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The surge in gold prices is also a good indicator of the professional view of inflation - that it is about to take off.

I agree with much on this forum and I agree with this statement too but just be careful, it sounds a little VI in flavour. The surge in gold prices can also be attributed to Asian central banks switching from Dollar assets - I would describe them more as "political" rather than "professional" (and by that I'm not calling them amateur!).

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1) House prices are expensive but not in a bubble (And please don't quote HPER ratio twaddle at me)

The signs of bubble behaviour are everywhere. You can choose to ignore them if you wish. The killer for me is that most first time buyers are getting substantial help from parents, in the form of "equity" withdrawn from the parental home. This has created a feedback loop where equity extracted from parental homes feeds price rises, which in turn translates into more equity to be extracted. The other one is people not selling their houses when they move but letting out their original house and using the extracted "equity" as a deposit on the next one. It's a debt bubble.

"Expensive" is such a useless term. I prefer value. I could take out a £10,000 loan to buy a plastic bag and my repayments would not be expensive, in historical terms. But £10,000 is not good value for a plastic bag.

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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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