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Fed Vice-president Kohn Says Global I R Must Rise

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http://today.reuters.com/investing/finance...MY-FED-KOHN.XML

LONDON, July 6 (Reuters) - The vice chairman of the U.S. Federal Reserve, Donald Kohn, said on Thursday he was aware of the risk of raising rates more than necessary but saw a need for higher global interest rates to maintain stability.
"A rise in global interest rates is a necessary condition ... for stability going forward," Kohn told a seminar arranged by the European Economic and Financial Centre in London.
"Global interest rates have been very low for a number of years. We have had strong global growth for several years now," he said. "If low rates were allowed to persist then we would risk inflation."

Fed is mirroring the observation of the world banking system--there is too much liquidity and European IR are far too accomodative. Gordon must stop manipulating the CPI data and come clean on inflation before the market raises rates for him.

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http://today.reuters.com/investing/finance...MY-FED-KOHN.XML

LONDON, July 6 (Reuters) - The vice chairman of the U.S. Federal Reserve, Donald Kohn, said on Thursday he was aware of the risk of raising rates more than necessary but saw a need for higher global interest rates to maintain stability.
"A rise in global interest rates is a necessary condition ... for stability going forward," Kohn told a seminar arranged by the European Economic and Financial Centre in London.
"Global interest rates have been very low for a number of years. We have had strong global growth for several years now," he said. "If low rates were allowed to persist then we would risk inflation."

Fed is mirroring the observation of the world banking system--there is too much liquidity and European IR are far too accomodative. Gordon must stop manipulating the CPI data and come clean on inflation before the market raises rates for him.

Try as I did, I just couldn't find the bit that suggests that Gordon is under intense pressure.

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Try as I did, I just couldn't find the bit that suggests that Gordon is under intense pressure.

He's under pressure, make no mistake. The Fed are more or less calling his (and the ECB's) move today as ill-advised as rates need to rise not stand pat. It's called reading BTL.

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He's under pressure, make no mistake. The Fed are more or less calling his (and the ECB's) move today as ill-advised as rates need to rise not stand pat. It's called reading BTL.

The MPC raised rates several times between Autumn 2003 and August 2005. I'm sure that they will do so again, if necessary in the UK. I'm not sure that "intense pressure" comes into it.

I think you make too much of Gordon's supposed fear of raising rates. And since RPI moves mirror the changes in CPI fairly well, I'm not so sure you can rubbish the latter as much as you do. CPI may under record inflation, but it seems to change in line with other inflation indices. If we used RPI and set a target of 2.5%, the effect on IRs would be the same.

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The MPC raised rates several times between Autumn 2003 and August 2005. I'm sure that they will do so again, if necessary in the UK. I'm not sure that "intense pressure" comes into it.

I think you make too much of Gordon's supposed fear of raising rates. And since RPI moves mirror the changes in CPI fairly well, I'm not so sure you can rubbish the latter as much as you do. CPI may under record inflation, but it seems to change in line with other inflation indices. If we used RPI and set a target of 2.5%, the effect on IRs would be the same.

The pressure is political. Gordon desperately wants to ascend to No. 10. he must show the party (unless TB calls a GE on the change of leadership) a strong record as Chancellor to do so. The market is turning and his miracle is about to unwravel. He must stall the inevitable and IR are the poison that his BoE are going to have to swallow when the markets start to raise rates for him via bond prices. As Kohn has pointed out, Gordon's (and Trichet's) accomodative rates are doing nothing to address global imblances (excessive spending) and the higher the assets rise the harder they will fall and the greater the problems for the world economy as a result. The binge spending that is going on in the UK must come to a halt and Gordon's refusal to hike is simply adding to the problem--and he knows it.

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If Prescott goes, Blair may well go with him. It is probably that fact that is keeping Prescott where he is. However, there comes a point where Prescott's position will be unsustainable and Brown should be able to use this to extract a date from the P.M for the change over, subsequently allowing our economy to align itself to world trends.(i.e accurate inflation measurement and treatment as well as a re-balancing of the economy in general.)

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If we used RPI and set a target of 2.5%, the effect on IRs would be the same.

Minor point: RPI is currently 3% YoY so a target of 2.5% would mean an increase in IRs.

frugalista

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....have not been on this site for a year and forgive for length and if reiterating other more succint views. However, am returning in earnest and need to get views off chest...Agree with realistbear and want to point out why global interest rate rises so dangerous for UK....STERLING IS THE KEY!

The bull case (or non-bear case) for UK economy depends totally on Sterling strength and the maintainance of international investors remarkably benign view of the UK. So far Sterling has held remarkably steady and even strengthened on Mervyns surprisingly effective PR job (says everything is fine while scratching head, mopping brow, mumbling, erring, saying nothing of any substance and misunderstanding last years slowdown). International investors have shrugged their shoulders on UK slowdown - interest rates respectable at 4.5%, done well in UK over last ten years, totally focused on speculating against dollar and love London (despite the fact that 98% of population live outside central london). Strong Sterling has meant imported deflation + low to minimal income growth for vast majority of UK popluation = low headline inflation = a small cut and then low interest rates, hence a bit of growth...

If Sterling stays strong then inflationary pressures should stay relatively muted and interest rates stay low and possibly even fall next year when they need to (US interest rate cycle will be at an end). NO house price crash .. arguably instead ten to fifteen years of sluggish growth.. However, if Sterling should weaken materially then the UK crash will begin and it will be extreme by international standards. We will enter a vicous cycle with falling Sterling leading to higher inflation, then higher interest rates, falling house prices and weakening consumer, then recession, further falls in sterling, higher interest rates........and for those who believe this is far too pesimistic...

- look at underlying productivity growth - minimal!. We live in an overcrowded island with far too freeriders...recent affluence an illusion

- look at our politics - apart from a labour government increasingly adrit, the tax take has gone through all important 40% of GDP and nearing 45%. The continuing sluggish growth will lead to Labour MPs from the North demanding further tax rises for the south to keep propping up their support for next election). This will drive the rich, both international and londoners, abroad....

- understand MORTGAGE DRAG. simplistically, 2002 saw everybody asset rich (house prices doubled+) but still low level of debt (nobody or very few had bought in at new higher level). Even better, mortgage rates were down and hence not only capital rich but more income to spare. Poorer parts of society - non-home owners benefiting from largesse of labour increasing benefits, public sector pay etc. However, every year since c.5% of the population buy in at the new higher levels of house prices (assuming turnover in housing is once every twenty years); these new buyers have large mortgages (psychologically damaging) and much lower disposable income (due to higher mortgage payments). The catching up of debt to asset values is what has been subduing the consumer since last year and it is a trend that even if house prices dont rise any more will continue to drag the consumer for the next fifteen years, hence there is no theoretical way out of the last 18 months slowdown pre-2015. The tipping point for a crash is however building... I believe c.15-20% of population are now heavily debted after buying in the new higher levels and hence effectively economically strait-jacketed (their consumer spending is only holding up because saving nothing). This number is rising every day and once it goes through 20% I believe create the conditions for serious economic and importantly social/political problems if any external event of any magnitude hits the UK (eg Sterling falls, interest rates rise).

...The key then is whether there will be a fall in Sterling and I believe that STERLINGS FALL WILL BEGIN IN THE RUN-UP TO CHRISTMAS or IN THE NEW YEAR. Further significant rises in rates elsewhere and disappointing UK economic metrics (combination of tougher comps from November and continuing consumer sluggishness due to reasons outlined above) will lead to international investors to switch assets elsewhere and Sterling will become the kicking boy going into 2007, much more so than the dollar.....

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"The key then is whether there will be a fall in Sterling and I believe that STERLINGS FALL WILL BEGIN IN THE RUN-UP TO CHRISTMAS or IN THE NEW YEAR. "

Spot on about Sterling being key to any HPC. I think Sterling is strong right now due to it being higher than the Euro. If Euro rates start to rise in August then look for the slide in the Sterling to start. Too many folk seem stuck on the USD to GBP interest rate comparison. I think the EURO GBP rates are more important.

Once a slide starts then interest rates will rise to defend Sterling. Until then there will be no interest rate hikes or HPC.

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Good post PBear

I agree with most of it and have wondered for the past couple of years why

-sterling has remained so strong relative to the dollar,

-foreign investors has been drawn to theUK, and

-property prices have appreciated so dramatically

Sterling clearly got a boost from the feds interest rate policy which saw rates here fall to 1.2% in 2003 while at the same time rates in the UK were around 3.75%. That's a massive and irresistable premium for sterling at a time when the US was reducing taxes and increasing its deficit. Of course a few things have changed since then. The Fed has increased its rate to 5.25% and will likely increase them once to twice more before the end of the year. It's also clear the the Republican's low tax, easy immigraiton policy is paying off, with corporations sitting on cash mountains which are being used to fund share buy-backs and agressive investment in China and India. Walmart is the perfect example of a corporation that needs cheap labour, has huge cash reserves, and is highly successful in its international expansion program. I've chided Americans for a while now that the USA is becoming a low tax, wage economy and that it's a result of carefull strategic planning aimed at ensuring 'a New American Century' for the rich. Of course, there is one big problem for government and that is the deficit which has grown quicker than they expected - this is a fly in the ointment, and the rest of the world loves to exaggerate the effect on the dollar. My guess is the Fed are hoping to ride out the debt peak in the hope growth and a 10% decline in the dollar will eventually allow the debt to get paid off. Its certainly going to be a tense couple of years but my bet is on the dollar......... I'll tell you all about the trump card in another posting!

PS all do a search on New American Century and enjoy what you find!!

http://www.houseweb.co.uk/house/market/graph.html

http://www.bloomberg.com/apps/news?pid=206...lumnist_gilbert

I believe that STERLINGS FALL WILL BEGIN IN THE RUN-UP TO CHRISTMAS or IN THE NEW YEAR. Further significant rises in rates elsewhere and disappointing UK economic metrics (combination of tougher comps from November and continuing consumer sluggishness due to reasons outlined above) will lead to international investors to switch assets elsewhere and Sterling will become the kicking boy going into 2007, much more so than the dollar.....

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Patientbear. The only thing that is missing from your excellent analysis of the situation is MEW. You are underestimating the indebtedness of our nation by only counting those who have moved or bought new in the past five years. Many people have extended their mortgages to the full current value of their homes without moving and have the same level of debt as as a FTB or someone who has traded up. This has of course been one of the things keeping the economy alive, and the lack of people's ability to MEW any more is one of the reasons that the recession will accelerate once it starts.

Edited by HovelinHove

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Minor point: RPI is currently 3% YoY so a target of 2.5% would mean an increase in IRs.

frugalista

OK, but I was just making the point that they move in tandem, so provided the target is set relative to the figure each produces. the effect on IRs would be the same.

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HSBC are now giving over 5% on USD demnominated accounts. Thing is the US has gone down the same route as the UK. Savers may be looking for higher rates on Euro A/C's when that happens there may be a big shift in deposits, especially if UK banks keep burning the candle at both ends to maintain their profits - cutting savings rates whilst increasing borrowing rates.

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http://today.reuters.co.uk/investing/finan...ERLING-OPEN.XML

Sterling near 2-mth lows vs euro on rates outlook

Fri Jul 7, 2006 8:36 AM BST14

LONDON, July 7 (Reuters) - Sterling held near the previous day's two-month low versus the euro on Friday, weighed down by expectations for steady interest rates in Britain at a time when euro zone policy is expected to be tightened in early August.

Brown is caught in a classic bear trap. He can't hike rates because the economy is weak--GDP more or less stagnant and unemployment rising. If he leaves rates where they are sterling will suffer. The markets are slowly, ever so slowly, waking up to this as this articles points out. I see sterling continuing to weaken to the point where Gordon will be forced to hike rates to protect a sinking pound and all the inflation that will bring with it. It will be sterling that will be the trigger and IR as the secondary cause.

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...It does appear to be starting (interesting that current rate near top of range EUR/GBP - will it break out?) but the process looks very slow at moment. Probably needs a deterioration in economic data to really pick-up and a few more hikes elsewhere, that does not appear likely before the Autumn at earliest given London boom on city affluence and world cup stimulus....expert currency views welcome!

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http://today.reuters.co.uk/investing/finan...ERLING-OPEN.XML

Sterling near 2-mth lows vs euro on rates outlook

Fri Jul 7, 2006 8:36 AM BST14

LONDON, July 7 (Reuters) - Sterling held near the previous day's two-month low versus the euro on Friday, weighed down by expectations for steady interest rates in Britain at a time when euro zone policy is expected to be tightened in early August.

Brown is caught in a classic bear trap. He can't hike rates because the economy is weak--GDP more or less stagnant and unemployment rising. If he leaves rates where they are sterling will suffer. The markets are slowly, ever so slowly, waking up to this as this articles points out. I see sterling continuing to weaken to the point where Gordon will be forced to hike rates to protect a sinking pound and all the inflation that will bring with it. It will be sterling that will be the trigger and IR as the secondary cause.

Even The Times this morning were raising their eyebrows at BoEs inertia: Mess at MPC

IT WAS hardly subtle. Jean-Claude Trichet, President of the European Central Bank, yesterday gave an unmistakable clue that interest rates are going to rise with a vow of “strong vigilance” against inflation. To ram the point home, he said that that the ECB’s August meeting, usually a sleepy affair held by teleconference, would take place in full in Frankfurt. With so much economic writing on the wall pointing to a rate rise, the ECB might have been best advised to get on with it.

In Britain, immediate rate rises do not look likely. But the Bank of England’s Monetary Policy Committee is down by two members, one from a vacancy that appeared back in March. Some may wonder whether decisions to hold rates come about because it is for the best. Some will think that the MPC feels obliged to sit on its hands because it is short-staffed.

City gossip yesterday suggested that David Miles, chief UK economist for Morgan Stanley, the investment bank, has been approached to fill one of the vacant MPC seats. Professor Miles would be an excellent choice. But whoever it is to be, it is vital that these appointments be made rapidly.

Gordon Brown’s only comment is that he will make his pick “soon”. If white smoke does not rise from the Treasury in the next few days, this avoidable mess will start to impinge on the credibility of the way we set interest rates in Britain.

OK the comment was directed at Browns avoidance of filling vacancies, but that is a symptom of Brown having problems finding an acceptable dovish fool as Nickell.

But it all adds fuel to the fire - the credibility of Brown's CPI basket, ONS stats/inflation figures, and BoE 'independence' is being questioned in media/finance circles more and more

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http://today.reuters.com/investing/finance...MY-FED-KOHN.XML

LONDON, July 6 (Reuters) - The vice chairman of the U.S. Federal Reserve, Donald Kohn, said on Thursday he was aware of the risk of raising rates more than necessary but saw a need for higher global interest rates to maintain stability.
"A rise in global interest rates is a necessary condition ... for stability going forward," Kohn told a seminar arranged by the European Economic and Financial Centre in London.
"Global interest rates have been very low for a number of years. We have had strong global growth for several years now," he said. "If low rates were allowed to persist then we would risk inflation."

Fed is mirroring the observation of the world banking system--there is too much liquidity and European IR are far too accomodative. Gordon must stop manipulating the CPI data and come clean on inflation before the market raises rates for him.

You are on the ball !! Dont trust a government that tells so many Lies ie , Immigration numbers, Murderers on the loose, Iraq, i could go on but it just depresses me !!

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The MPC raised rates several times between Autumn 2003 and August 2005. I'm sure that they will do so again, if necessary in the UK. I'm not sure that "intense pressure" comes into it.

I think you make too much of Gordon's supposed fear of raising rates. And since RPI moves mirror the changes in CPI fairly well, I'm not so sure you can rubbish the latter as much as you do. CPI may under record inflation, but it seems to change in line with other inflation indices. If we used RPI and set a target of 2.5%, the effect on IRs would be the same.

I disagree. Brown is terrified of higher IRs. His [waning] credibility as Chancellor is the only thing the miserable f*cker has going for him on his quest for no10, and there are now others queuing in the wings to challenge him.

If BoE and Brown have their way, the BoE will yo-yo between 0.25% hikes, to 'show' they are tough on inflation and house prices, and .25% cuts when MEW driven consumer spending falls through the floor - they still state their 'surprise' at the 'closer than expected' connection between house prices and consumer spending

Unfortunately the inflation targeting remit went out ofthe window a long time ago, The BoE equally target high street spending, despite Kings protestations a few months ago. Not sure if King is trying to do a Greenspan with his speeches here and there, but IMO there is little correlation between Mervyn Kings pronouncemenst on matters and his actions.

I reckon that in next few months, as world inflation and IRs go higher, the BoEs credibility will wane, with a resulting fall in confidence in Sterling. In normal circumstances, a run on Sterling will result in higher IRs - on this occasion, I think we will hear Brown start to trumpet how a weaker pound "can engineer an export led recovery"

We'll import higher inflation which ONS will conveniently remove in the wash

Edited by jp1

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So if you had significant Sterling denominated deposits and were waiting to jump in and take advantage of the coming HPC, what would you do to protect your savings from inflation/weakening sterling, in the above scenario?

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So if you had significant Sterling denominated deposits and were waiting to jump in and take advantage of the coming HPC, what would you do to protect your savings from inflation/weakening sterling, in the above scenario?

Hope Gordon Brown has an 'accident'?

Edited by jp1

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So if you had significant Sterling denominated deposits and were waiting to jump in and take advantage of the coming HPC, what would you do to protect your savings from inflation/weakening sterling, in the above scenario?

I have most of mine in Canadian dollars: I just wish I'd transferred it before the BoE muppets cut the rates last August.

If there's no sign of the BoE getting off their ass and raising rates in the near future I guess I'll have to ship the rest out of the UK too.

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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% +
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      • Even
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      • up 5%



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