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I Told You So

Us Interest Rates V Uk

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Now that Bernanke has said that the chance of a US rate cut in the near future is pretty much nil where does that leave the UK?

Let me tell you;

UK rates have consistantly been 1% - 2% higher than the US over a 50 year period, apart from a few short lived exceptions (6mths roughly)

Therefore using the 'regression to the mean' theory UK rates will soon hit 6.25% at the very minimum.

Yes I've said this many times before but its always worth reminding people that its not different this time. ;)

Edited by I Told You So

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Now that Bernanke has said that the chance of a US rate cut in the near future is pretty much nil where does that leave the UK?

Let me tell you;

UK rates have consistantly been 1% - 2% higher than the US over a 50 year period, apart from a few short lived exceptions (6mths roughly)

Therefore using the 'regression to the mean' theory UK rates will soon hit 6.25% at the very minimum.

Yes I've said this many times before but its always worth reminding people that its not different this time. ;)

Yes, 6.25%. Highest rate since 1998. Higher than the previous peak. It's coming.

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Now that Bernanke has said that the chance of a US rate cut in the near future is pretty much nil where does that leave the UK?

Let me tell you;

UK rates have consistantly been 1% - 2% higher than the US over a 50 year period, apart for a few short lived exceptions (6mths roughly)

Therefore using the 'regression to the mean' theory UK rates will soon hit 6.25% at the very minimum.

Yes I've said this many times before but its always worth reminding people that its not different this time. ;)

When is soon? This year or next year?

My guess is that when they hit 5.75%, they could be on hold for some time. Many financial markets are currently over-heating and there are plenty of downside risks to energy and commodity costs, so any serious cooling could significantly lower inflation risks in the longer run, thus reducing pressure for higher rates. Also, it is worth bearing in mind that the US is coming out of a serious lull while the UK is currently performing above its longer run potential growth rate which it cannot sustain indefinitely, so looking beyond the end of this year, rate differentials should begin to narrow again between the two countries.

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6 to 12 months

Why over analyse, thats the whole point of the theory you can always find reasons why its different this time but ultimately rates will revert to the mean.

Inflation is out the bag and there is only one possible outcome up up and away.

Edited by I Told You So

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Guest grumpy-old-man
6 to 12 months

why over analyse, inflation is out the bag and there is only one possible outcome up up and away

exactly, it's so obvious isn't it. :blink:

historical cycles, you can't beat them.

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Many financial markets are currently over-heating

Well, duh.

They're 'overheating' because of vast amounts of cheap credit. To stop them overheating requires significantly increasing the cost of credit. Which means significant rises in interest rates.

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6 to 12 months

Why over analyse, thats the whole point of the theory you can always find reasons why its different this time but ultimately rates will revert to the mean.

Inflation is out the bag and there is only one possible outcome up up and away.

There are plenty of events that could change the whole scenario. My point is you have to weigh up risks on both sides. There are a number of factors that could mean lower inflation in the longer run that will have a bearing on the BoE policy going forward:

1) Global or UK economic slowdown - reduced demand leading to lower prices

2) Cooling of China's growth leading to a lowering of global commodity prices

3) Higher influx of immigrant workers reducing overall UK wage costs.

4) Interest rate increases of past year beginning to take toll on UK consumption and thus prices

5) Higher value pound finally reflected in lower prices for imported products, helping to reduce inflation

6) Higher value pound hurting exporters and leading to fall in demand for UK products, resulting in a gradual slowdown in economy

etc.

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There are plenty of events that could change the whole scenario. My point is you have to weigh up risks on both sides. There are a number of factors that could mean lower inflation in the longer run that will have a bearing on the BoE policy going forward:

1) Global or UK economic slowdown - reduced demand leading to lower prices

2) Cooling of China's growth leading to a lowering of global commodity prices

3) Higher influx of immigrant workers reducing overall UK wage costs.

4) Interest rate increases of past year beginning to take toll on UK consumption and thus prices

5) Higher value pound finally reflected in lower prices for imported products, helping to reduce inflation

6) Higher value pound hurting exporters and leading to fall in demand for UK products, resulting in a gradual slowdown in economy

etc.

You are right, but I think these things are at least a year or so away.

We'll see.

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Well, duh.

They're 'overheating' because of vast amounts of cheap credit. To stop them overheating requires significantly increasing the cost of credit. Which means significant rises in interest rates.

Yes, but investor funds take their borrowings from lower interest rate regimes and banks like Japan. The higher interest rates simply encourage them to buy higher interest yielding instruments like sterling, thus making the situation worse.

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There are plenty of events that could change the whole scenario. My point is you have to weigh up risks on both sides. There are a number of factors that could mean lower inflation in the longer run that will have a bearing on the BoE policy going forward:

1) Global or UK economic slowdown - reduced demand leading to lower prices

2) Cooling of China's growth leading to a lowering of global commodity prices

3) Higher influx of immigrant workers reducing overall UK wage costs.

4) Interest rate increases of past year beginning to take toll on UK consumption and thus prices

5) Higher value pound finally reflected in lower prices for imported products, helping to reduce inflation

6) Higher value pound hurting exporters and leading to fall in demand for UK products, resulting in a gradual slowdown in economy

etc.

I think the high pound (points 5 and 6) is an upside risk in the medium term.The pound has now been shadowing a $2 rate for most of 2007.What happens come 2008?either Merv keeps the pound up in the clouds or we start to import inflation as YOY comparisons will be unfavourable if the pound falls

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You are right, but I think these things are at least a year or so away.

We'll see.

Well, if they are only a year away then it should be reflected in UK interest rate policy now. Remember, it is the Bank of England that tell us that changes in interest rates can take a year or even up to 2 years to be fully realised in prices. There may well only be one more hike left in this BoE current cycle and even that is not necessarily guaranteed yet.

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Well, if they are only a year away then it should be reflected in UK interest rate policy now. Remember, it is the Bank of England that tell us that changes in interest rates can take a year or even up to 2 years to be fully realised in prices. There may well only be one more hike left in this BoE current cycle and even that is not necessarily guaranteed yet.

You are making some very sensible, well considered points.

However, the BOE is (fortunately for us) leaderless, divided and reactionary. They could wait and see, but they know if inflation takes off they will come in for a world of criticism. Those hikes are going to come.

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I think the high pound (points 5 and 6) is an upside risk in the medium term.The pound has now been shadowing a $2 rate for most of 2007.What happens come 2008?either Merv keeps the pound up in the clouds or we start to import inflation as YOY comparisons will be unfavourable if the pound falls

I personally don't think sterling is going to stay up at its dizzy heights for much longer, particularly against the dollar, the yen and the Swiss franc. The dogs on the street know the yen and the franc are grossly under-valued, so it is not a question of if but when they appreciate against sterling. With no rate reduction likely in the US this year and the US economy beginning to pick up, it is really going to be difficult for sterling to hold up against the dollar, particularly once it begins to look that there is at most one more rate hike in the BoE (and that hike is already priced in). Market doubts will start to creep in even before tomorrow's announcement and sterling will do well not to decline a couple of cents before the end of the week, in my view.

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Guest grumpy-old-man
I personally don't think sterling is going to stay up at its dizzy heights for much longer, particularly against the dollar, the yen and the Swiss franc. The dogs on the street know the yen and the franc are grossly under-valued, so it is not a question of if but when they appreciate against sterling. With no rate reduction likely in the US this year and the US economy beginning to pick up, it is really going to be difficult for sterling to hold up against the dollar, particularly once it begins to look that there is at most one more rate hike in the BoE (and that hike is already priced in). Market doubts will start to creep in even before tomorrow's announcement and sterling will do well not to decline a couple of cents before the end of the week, in my view.

is it?

you don't think they are headed for recession then ?

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You are making some very sensible, well considered points.

However, the BOE is (fortunately for us) leaderless, divided and reactionary. They could wait and see, but they know if inflation takes off they will come in for a world of criticism. Those hikes are going to come.

I agree with you entirely. The MPC are pretty clueless about the direction inflation is taking. In fact, had they acted when they should have, which is last year, we would not even be discussing this now. Mervyn King is in my view the weakest of all the major Central Bank leaders (with the exception perhaps of Fukui). He seems to hold too little sway with the members of his own MPC and he has wrong-footed markets and been wrong-footed by the numbers once too often for a man in his position.

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Itoldyouso

I have for a long time thought that was the case but have never seen a graph to prove it

Do you have anything to prove this from a web site or something please

Thanks

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is it?

you don't think they are headed for recession then ?

No, I don't. In fact I expect quarter 2 GDP to pick up significantly to over a 2.5% rate from the lowly 0.6% rate in quarter 1. If one looks solely at the housing sector, one might believe the US is in a recession right now, but there are many facets to the US economy. US manufacturing rose to its highest level in 11 months in April and that has now been exceeded in May. The services sector also rose by its highest level in 13 months in May. US employment grew by its highest number this year in May, so despite the the chronic housing sector, the wider economy is going to perform well this quarter.

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Guest grumpy-old-man
No, I don't. In fact I expect quarter 2 GDP to pick up significantly to over a 2.5% rate from the lowly 0.6% rate in quarter 1. If one looks solely at the housing sector, one might believe the US is in a recession right now, but there are many facets to the US economy. US manufacturing rose to its highest level in 11 months in April and that has now been exceeded in May. The services sector also rose by its highest level in 13 months in May. US employment grew by its highest number this year in May, so despite the the chronic housing sector, the wider economy is going to perform well this quarter.

I do understand the fact that some states can still be getting hpi whilst others are dropping fast (with regards to housing), as for the economy I wasn't sure, but looking at their debt stats, money growth, dollar fragility etc, I thought recession was a done deal & they would be going into it back end of 2007, early 2008 ?

my economic knowledge is not very good btw, especially on the USA. :unsure:

Edited by grumpy-old-man

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I do understand the fact that some states can still be getting hpi whilst others are dropping fast (with regards to housing), as for the economy I wasn't sure, but looking at their debt stats, money growth, dollar fragility etc, I thought recession was a done deal & they would be going into it back end of 2007, early 2008 ?

my economic knowledge is not very good btw, especially on the USA. :unsure:

Recession is where economic growth is in contraction rather than expansion (growth < 0%). The US had a tiny 0.6% (annual) growth rate in quarter one this year, which was pretty appalling, but still expansionary. Low dollar value should in essence help economic growth because it should stimulate exports (from US they are now cheaper) and stimulate domestic production (because US can now produce goods cheaper than the more expensive imports). Some economies are still doing very well, even with weaker currencies, such as Switzerland and Japan. Once could argue that the only reason Japan is managing to grow at all is because of their weaker currency. Money growth is a factor everywhere and is a bit more complex to deal with, but ultimately in countries where there are significant current account deficits like in the US and the UK, money growth problems will persist.

If the US were on the cusp of a recession, the economy should continue to slow down through quarters 2 and 3. But the evidence now points to an economy that is beginning to pick up pace again, albeit with a dragging housing sector which is going to cap potential growth probably through the remainder of this year.

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The US had a tiny 0.6% (annual) growth rate in quarter one this year, which was pretty appalling, but still expansionary.

Except inflation is significantly understated, so 0.6% 'growth' is actually a contraction. And even that growth is reliant on ever-increasing government spending, which can't be sustained much longer.

Remove several percent credit growth from MEW as well, and they're ******ed.

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Except inflation is significantly understated, so 0.6% 'growth' is actually a contraction. And even that growth is reliant on ever-increasing government spending, which can't be sustained much longer.

Remove several percent credit growth from MEW as well, and they're ******ed.

Mark,

Well, that is your view, but real GDP is measured on a current dollar formula. The labour market is a good indicator, because if an economy was truly in recession, the economy would be shedding jobs and unemployment would be on the increase. That has not happened in the US - unemployment has remained near record lows and has only moved marginally. You might also be interested to know that federal government spending in quarter one actually declined from the previous quarter and contributed negatively to GDP. Most people would argue that Government spending must surely grow and not decline, so that can only improve matters in the coming quarters.

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Guest grumpy-old-man
Mark,

Well, that is your view, but real GDP is measured on a current dollar formula. The labour market is a good indicator, because if an economy was truly in recession, the economy would be shedding jobs and unemployment would be on the increase. That has not happened in the US - unemployment has remained near record lows and has only moved marginally. You might also be interested to know that federal government spending in quarter one actually declined from the previous quarter and contributed negatively to GDP. Most people would argue that Government spending must surely grow and not decline, so that can only improve matters in the coming quarters.

iirc, there appear to be a lot of downsizing restructuring, relocating etc etc lately. ;)

I have a friend who works for a small (but specialised) american company, he runs the European (&UK :rolleyes: ) sales division. I asked him in sept 2006 how business was, all was hunky dorey , I told him that his business would see a large downturn this year. We spoke last week, guess what, they are restructuring....h'mmmm

ok, small anecdotal, but I think a world recession is looming, flation is being vastly underestimated here & I for one just don't believe the figures.

edited to add - the UK employment figures tell a completely different story to what you see on the street, I would imagine it's the same in the US imo. :ph34r:

all imho with absolutely no stats or economic background to substanciate anything I have said, but based on what I have read on here from some of the more knowlegable posters.

Edited by grumpy-old-man

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Itoldyouso

I have for a long time thought that was the case but have never seen a graph to prove it

Do you have anything to prove this from a web site or something please

Thanks

As you can see US Irs have risen massivly....

UkUs.JPG

post-552-1181142826_thumb.jpg

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Guest grumpy-old-man
is it?

you don't think they are headed for recession then ?

No, I don't. In fact I expect quarter 2 GDP to pick up significantly to over a 2.5% rate from the lowly 0.6% rate in quarter 1. If one looks solely at the housing sector, one might believe the US is in a recession right now, but there are many facets to the US economy. US manufacturing rose to its highest level in 11 months in April and that has now been exceeded in May. The services sector also rose by its highest level in 13 months in May. US employment grew by its highest number this year in May, so despite the the chronic housing sector, the wider economy is going to perform well this quarter.

manufacturing & employment. :lol:

a dramatic reversal in both, oh dear.

economists eh. ;):D

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