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Guest wrongmove

Rates Are Heading Higher....

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Guest wrongmove

Jeremy Warner's Outlook: Rates are heading higher, but that doesn't mean the Bank has lost control of the rudder

" Mervyn King's inner hawk has returned with a vengeance since I went away on holiday two weeks ago. The Bank of England has unexpectedly increased interest rates, while the Bank's quarterly Inflation Report published last week left little doubt that there will need to be at least one more hike if the inflation target of 2 per cent is to be met two years out.

The Bank of England Governor has meanwhile conceded that in the short to medium term inflation may breach 3 per cent, forcing him to write a formal letter of explanation to the Chancellor....

...There is in any case a growing body of opinion which disputes the credibility of the official measure of inflation. Many of us are experiencing much greater inflation in our cost of living than the Consumer Price Index reflects. Unless you happen to be buying a new car, a flat screen TV, or are indulging in lots of low-cost air travel, you would be more than justified in believing that the inflationary genie is well and truly out of the bottle.

The CPI is based on average spending patterns, so it ought to be as good a measure as there can be of prices in the wider economy. Yet it still contains no element to reflect house prices - for the vast majority, the biggest purchase of the lot. In any case, perception is nine-tenths of reality, and if growing numbers think prices and charges are rising more rapidly than the CPI says, the official inflation target may no longer carry much weight....

...Interest rates at 5 per cent, inflation at 3 per cent! The shock horror of the headline writers suggests a return to the pandemonium of past economic cycles where rip-roaring inflation would prompt dramatic increases in interest rates, plunging the whole economy into deep recession.

The fact that everyone can get so worked up at the prospect of inflation rising a "mere" 1 per cent above target shows how far we have travelled since the bad old days of boom and bust which characterised much of Britain's post-war history...."

Edited by wrongmove

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Guest wrongmove

Does anyone have any commenys on this statement:

"The fact that everyone can get so worked up at the prospect of inflation rising a "mere" 1 per cent above target shows how far we have travelled since the bad old days of boom and bust which characterised much of Britain's post-war history"

It does have some truth in it, although I know the CPI figure is not widely trusted (to put it mildly :) ). Back in the last crash, inflation was at 1% a month !

We can get excited by a 0.25% rise in IRs and argue whether a further 0.25% or maybe 0.5% is in the pipeline. Compare this to the 12% IRs at the time of the last crash.

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Does anyone have any commenys on this statement:

"The fact that everyone can get so worked up at the prospect of inflation rising a "mere" 1 per cent above target shows how far we have travelled since the bad old days of boom and bust which characterised much of Britain's post-war history"

It does have some truth in it, although I know the CPI figure is not widely trusted (to put it mildly :) ). Back in the last crash, inflation was at 1% a month !

We can get excited by a 0.25% rise in IRs and argue whether a further 0.25% or maybe 0.5% is in the pipeline. Compare this to the 12% IRs at the time of the last crash.

It's because of the high level of gearing and margin borrowing. With many borrowing on exaggerated multiples a .50% hike represents a great deal more in out of pocket terms. Further, with IR at historic lows a .50% hike on a 5% loan is an increase of 10%. In the good old days of the Great Crash of '89 a 1% hike on a loan at 12% was a much smaller percentage increase and wages were rising to meet the additional cost.

The other aspect to factor in is sentiment. We are at the end of the longest bull run in HPI in recorded history. The market is tired. FTBs no longer exist and middle level OOs cannot afford to move up. Stagnation is setting in as indicated by the large number of SSTC signs that appear and remain in place for months on end. Any increase in IR is just more bad news to burden the stretched OO with who is already unable to meet the extra cost of gas and electricity let alone the next round of council tax which everyone expects to hit the government cap of 5%. A 10% increase in a mortgage repayment (5% to 5.50%) is looking like the straw that will break the camel's back.

:(

Edited by Realistbear

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Guest wrongmove

It's because of the high level of gearing and margin borrowing. With many borrowing on exaggerated multiples a .50% hike represents a great deal more in out of pocket terms. Further, with IR at historic lows a .50% hike on a 5% loan is an increase of 10%. In the good old days of the Great Crash of '89 a 1% hike on a loan at 12% was a much smaller percentage increase and wages were rising to meet the additional cost.

The other aspect to factor in is sentiment. We are at the end of the longest bull run in HPI in recorded history. The market is tired. FTBs no longer exist and middle level OOs cannot afford to move up. Stagnation is setting in as indicated by the large number of SSTC signs that appear and remain in place for months on end. Any increase in IR is just more bad news to burden the stretched OO with who is already unable to meet the extra cost of gas and electricity let alone the next round of council tax which everyone expects to hit the government cap of 5%. A 10% increase in a mortgage repayment (5% to 5.50%) is looking like the straw that will break the camel's back.

:(

A 0.5% hike on a five percent loan in 10%, not 20% (you are an investment manager !!??). A 1% hike on a 12% loan is an 8.25% rise - not much different really.

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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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