"shadow" Mpc Votes To Raise Ir

[sce8]

"Some MPC members are expected to vote for a rate hike. The "shadow" MPC, which meets under the auspices of the Institute of Economic Affairs, ahead of each MPC meeting, voted 5-4 to increase base rate to 4.75%, its members being concerned about high rates of money-supply growth and above-target inflation.

The last time the shadow MPC voted for a hike was in July 2004, ahead of the Bank's last rate hike in August that year. Two of the four members who voted for a hike said it was only a matter of time before base rate would have to increase."

The whole article is about why the MPC is likely to keep IRs at 4.5% but slipped into the article is the "shadow" MPC rise. They reckon there is only a 25% chance of an IR increase this week. Guess we'll find out soon enough.

MPC "likely to keep base rate on hold"

[TwentyOneEleven]

At last!!! There can't be a diference between the sentiment of the Shadow MPC and the MPC Proper for too long!!! I think perhaps though that this bit does confirm that there probably won't be an IR hike this week...

"the majority opinion is that the Bank’s monetary policy committee (MPC) will not hike, partly because it has not prepared the markets to do so."

...but watch out for much more news coverage over the next few weeks and a tick upwards in September!

[Guest grumpy-old-man]

"Some MPC members are expected to vote for a rate hike. The "shadow" MPC, which meets under the auspices of the Institute of Economic Affairs, ahead of each MPC meeting, voted 5-4 to increase base rate to 4.75%, its members being concerned about high rates of money-supply growth and above-target inflation.

The last time the shadow MPC voted for a hike was in July 2004, ahead of the Bank's last rate hike in August that year. Two of the four members who voted for a hike said it was only a matter of time before base rate would have to increase."

The whole article is about why the MPC is likely to keep IRs at 4.5% but slipped into the article is the "shadow" MPC rise. They reckon there is only a 25% chance of an IR increase this week. Guess we'll find out soon enough.

MPC "likely to keep base rate on hold"

that's good news.....

btw, what's your pic in your avatar ?

[RandomWalk]

Prof. Patrick Minford, of Cardiff University Business School, who had previously voted regularly to cut rates, was now sufficiently nervous about the situation to decide against cutting rates

[dnd]

I don't think .25 IR raise is going to be enough - people are still going to have to borrow to close the gap between their income and real inflation

The BOE underestimates how people's standard of living has changed in recent years - they are not going to give it up easily...

[TwentyOneEleven]

I don't think .25 IR raise is going to be enough - people are still going to have to borrow to close the gap between their income and real inflation

The BOE underestimates how people's standard of living has changed in recent years - they are not going to give it up easily...

I agree that one .25% IR hike will not cause a HPC on it's own, but it's a step in the right direction IMO ... and if it leads to one or two more in the coming months/years, then all the better. I think though that it'll do quite a bit to change sentiment ... we've been hearing about a rise for so long but haven't actually seen one, so perhaps don't believe they exist (a bit like badgers!), so carry on spending as usual. The rate hike won't just affect mortgage repayments either ... it'll increase the interest payable on all these debts, feed into consumables with regards to business costs, etc, and along with rising fuel/energy bills, people are quickly going to have a lot less money to play with. The house of cards is wobbling!

[bobed]

More information can be found on the David Smith blog site where the minutes of the meeting are shown...

Shadow MPC votes 5-4 for rate hike

It's an interesting read.

[dnd]

I agree that one .25% IR hike will not cause a HPC on it's own, but it's a step in the right direction IMO ... and if it leads to one or two more in the coming months/years, then all the better. I think though that it'll do quite a bit to change sentiment ... we've been hearing about a rise for so long but haven't actually seen one, so perhaps don't believe they exist (a bit like badgers!), so carry on spending as usual. The rate hike won't just affect mortgage repayments either ... it'll increase the interest payable on all these debts, feed into consumables with regards to business costs, etc, and along with rising fuel/energy bills, people are quickly going to have a lot less money to play with. The house of cards is wobbling!

It's a difficult one - they don't want to raise IR too much to crash the housing market - but they've got raise them enough to stop people spending and headline inflation rising (in addition to importing inflation as a result of global energy prices)

IMO they're going to either redefine headline inflation or slacken up their inflation boundries/tolerances in the near future

Edited July 30, 2006 by dnd

[TwentyOneEleven]

More information can be found on the David Smith blog site where the minutes of the meeting are shown...

Shadow MPC votes 5-4 for rate hike

It's an interesting read.

Definitely ... thanks for that Bobed! Interesting to see that even 2 of the 4 people who voted for a hold this time see an increase in the not too distant future! All talk of a cut completely abolished!

[JohnG]

Ibut they've got raise them enough to stop people spending.....

Nah, that's Brown's job when he tries to sneak in the next bunch of tax rises in November and steal even more money from us. :angry:

[AwaitingFairPrices]

More information can be found on the David Smith blog site where the minutes of the meeting are shown...

Shadow MPC votes 5-4 for rate hike

It's an interesting read.

Thats a great read.

Whilst slightly more theoretical/technical than some of the discussions in the forum, its good to see these respected professionals/professors talking about issues in much the same way as many our the members on here.

A pat on the back to all contributing posters is in order I think

AFP

[echapps]

I think perhaps though that this bit does confirm that there probably won't be an IR hike this week...

"the majority opinion is that the Bank’s monetary policy committee (MPC) will not hike, partly because it has not prepared the markets to do so."

Last time I looked, the markets were pricing in a rate increase, so perhaps they're prepared enough...

[IamSpartacus]

US developments will have a major impact on Britain

In conclusion, the outlook for the domestic economy remains fragile and highly dependent on the evolution of the US economy, US financial markets and on the path of global real bond yields. A US economic deceleration appears to be unfolding and its likely impact will be deflationary for the UK.

Thought that was particularly interesting as I've seen a number of posts on here suggesting that a US recession would spark off a recession and then a HPC in the UK. If in fact the effect on the UK economy was deflationary it could allow the BoE to hold or even cut rates. Maybe the US position isn't the trigger for HPC that some people are claiming it might be...

Edited July 30, 2006 by IamSpartacus

[padders]

It is surprising how much a small interest rate change can actually mate. A 1/4% increase at current rates results in a 5.6% increase in an interest only mortgage. A 1% increase results in a 22% rise in interest only payments.

Thought that was particularly interesting as I've seen a number of posts on here suggesting that a US recession would spark off a recession and then a HPC in the UK. If in fact the effect on the UK economy was deflationary it could allow the BoE to hold or even cut rates. Maybe the US position isn't the trigger for HPC that some people are claiming it might be...

But ... a recession does not mean deflation. In fact it is likely to mean the opposite for the US. If the US goes into recession that $US will fall and imports will get more expensive further increasing inflation. The dire situation for the US is if the value of the $ falls so much that oil sellers decide to start pricing in other currencies. The US then looses a couple of % of GDP it currently makes on exporting inflation and not having to pay for it.

A US recession will be pretty horrendous all round. The economic system is so interconnected a recession in the world's biggest economy will be very contagious.

It seems the Fed cares a little more about inflation (party because of the importance of the $US dollar) than it does about a recession. It remains to be seen if the BOE does or does not.

[Sledgehead]

Thought that was particularly interesting as I've seen a number of posts on here suggesting that a US recession would spark off a recession and then a HPC in the UK. If in fact the effect on the UK economy was deflationary it could allow the BoE to hold or even cut rates. Maybe the US position isn't the trigger for HPC that some people are claiming it might be...

Indeed, your analysis is correct and in line with Capital Economics view. However, in my experience, the etiology of asset price swings is always more obscure than we imagine. Just as stocks crashed when interest rates fell in 2000-03, it is perfectly feasible to envisage lower property prices without higher interest rates. There are many reasons for this. To name a few:

1 . the cost of credit in the UK and elsewhere has become decoupled from official interest rates due to debt securitisation and the carry trade. Rising interest rates overseas may reduce the effect of the carry trade and make investors in the debt markets more cautious;

2 . the market has risen in spite of fundamentals, rather than because of them. Sentiment has been a much greater driver of prices. Indeed ARLA show a huge proportion of "investors" looking to capital gains rather than income for returns on their investments;

3 . a lack of rising prices will undermine the MEW machine, causing widespread economic weakness (borrowing against homes has been the driver of consumption and that makes up roughly 2/3rds of our GDP. In otherwords, soft prices could have a feedback effect.

What might lead to a softening of prices here? Softening in the US perhaps. In otherwords, rate rises in the US may already have been sufficient to set in train those events necessary to hit UK property prices.

[IamSpartacus]

it is perfectly feasible to envisage lower property prices without higher interest rates. There are many reasons for this. To name a few:

1 . the cost of credit in the UK and elsewhere has become decoupled from official interest rates due to debt securitisation and the carry trade. Rising interest rates overseas may reduce the effect of the carry trade and make investors in the debt markets more cautious;

2 . the market has risen in spite of fundamentals, rather than because of them. Sentiment has been a much greater driver of prices. Indeed ARLA show a huge proportion of "investors" looking to capital gains rather than income for returns on their investments;

3 . a lack of rising prices will undermine the MEW machine, causing widespread economic weakness (borrowing against homes has been the driver of consumption and that makes up roughly 2/3rds of our GDP. In otherwords, soft prices could have a feedback effect.

I take your point that property prices and the BoE base rate are not perfectly coupled and that external events can move one while the other stays still. However, that also means that by simply reversing each of your three scenarios it is valid to argue that it is feasible to envisage higher property prices with higher interest rates:

1) Falling rates overseas (another economy 'doing a Japan' and having to fight rapid deflation) would make investors in the debt market less cautious, allow mortgage lenders to continue offering credit at high multiples and mean mortgage rates could stay low even if the BoE base rate increased.

2) Because investors are 'in it for the long-term' they may be more willing to tolerate periods where the rental income doesn't cover the mortgage payments. They then don't sell up, keeping supply restricted and prices up.

3) Softening prices could mean households no longer needing to MEW as things are cheaper, so overall mortgage debt would start to fall putting the country back on a surer economic footing. Consumption could stay at the same level while borrowing fell.

As it happens I agree that the risks to house prices are more on the downside but think that the complexities of the market make it very difficult to say for sure what a change in one part of the economy will have on other parts. You pays your money and takes your chances...

[Sledgehead]

As it happens I agree that the risks to house prices are more on the downside but think that the complexities of the market make it very difficult to say for sure what a change in one part of the economy will have on other parts. You pays your money and takes your chances...

as I said:

.. in my experience, the etiology of asset price swings is always more obscure than we imagine.

[IamSpartacus]

Especially when those 'assets' are also illiquid large-ticket durable consumption goods being bought by amateur investors... i.e. houses...

Edited July 30, 2006 by IamSpartacus

[Badlad1967]

Especially when those 'assets' are also illiquid large-ticket durable consumption goods being bought by amateur investors... i.e. houses...

Very very good point!

But won't the amateur inventor be more incline to panic when the going gets tough? After a few voids and the collection calls start?

[IamSpartacus]

Very very good point!

But won't the amateur inventor be more incline to panic when the going gets tough? After a few voids and the collection calls start?

Who knows. There's good evidence for stocks and shares that actually many investors tend to hang onto falling shares longer than they should because they don't want to turn a paper loss into a real one. The same psychology might apply to BTL investors...