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Little Professor

Interest Rates Above 6% Could Spell Disaster

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http://www.fxstreet.com/fundamental/analys...2007-07-16.html

Earlier in the year when it was apparent to us that UK interest rates would get close to 6%, we ran a series of scenarios to gauge what the impact of rates at these levels and higher would do to economic growth. With base rates currently at 5.75% and the financial markets expecting them to reach 6%, and possibly 6.25% before the end of the year, we thought it might be instructive to repeat the exercise. The results are shown in the charts.

A great article - in summary:

  • Base rates above 6% will lead to sub 2% growth in the economy in 2008

  • As growth slows, unemployment rises

  • This leads to car registrations falling

  • Household borrowing drops sharply

  • House Price Inflation will turn negative

  • Retail sales growth drops to zero

  • Consumer spending growth drops below 1%

  • Corporate profits drop sharply, leading to cuts in investment spending

  • Inflation may undershoot the target massively if rates are raised too high.

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A great article - in summary:
  • Base rates above 6% will lead to sub 2% growth in the economy in 2008

  • As growth slows, unemployment rises

  • This leads to car registrations falling

  • Household borrowing drops sharply

  • House Price Inflation will turn negative

  • Retail sales growth drops to zero

  • Consumer spending growth drops below 1%

  • Corporate profits drop sharply, leading to cuts in investment spending

  • Inflation may undershoot the target massively if rates are raised too high.

I think this will come to pass within the next 12 months (or maybe Christmas, if the BOE feel brave).

By July 2008 people will be cursing HPI and the Greed of it all.

It will be SELL OR GO BANKRUPT - but who is going to buy, exactly :blink::blink:

This is why HPI is and always was a bad thing for EVERYONE. :angry:

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Guest Yeahbutnocrash

Yes this is very interesting

I guess they won't want to cause a full blown recession so they'll further adjust IR's as necessary to try and avoid that when the time comes

Edited by Yeahbutnocrash

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Yes this is very interesting

I guess they won't want to cause a full blown recession so they'll further adjust IR's as necessary to try and avoid that when the time comes

yeah but no ;)

They dont get to control the economy like that....you cant just say "nope we wont have a slow down we will grow for ever" The Market will out

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Yes this is very interesting

I guess they won't want to cause a full blown recession so they'll further adjust IR's as necessary to try and avoid that when the time comes

it doesn't really work like that. Fiddling IR will not prevent a recession. They did do that 2 years ago and now the bubble is much much bigger and a lot more likely to burst.

When people start to realise that they have been herded into lifetime indebtment, they will go on bread and water as a reaction and all the house of cards will go down.

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Guest Yeahbutnocrash
yeah but no ;)

They dont get to control the economy like that....you cant just say "nope we wont have a slow down we will grow for ever" The Market will out

As we sometimes get reminded we are now in Gordys miracle economy!

I think you'll find the 'powers that be' won't run the economy to meet bears expectations as was discovered when they lowered IR's a couple of years ago which apparently averted a slow-down then

So we'll have to see if there's room for a rate cut after it goes to 6.25%

Maybe in time for a general election

If not then maybe the problems have merely been delayed...

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Yep.. Someone has to pay the bill for all those super expensive houses and the things that have been mewed off them.

And it aint going to be me. (i hope :blink: )

then. 'dude's here's my house :rolleyes:

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Strangely enough - and I've not seen it mentioned here once - I always had the underlying belief that over time a mortgage was 8% on average.

I am not qualified or knoweldgeable. I have no idea where this belief of mine came from. It was always there in my mind.

So I figured as rates were rising, that 8% wouldn't be out of the question at some future point.

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I think you'll find the 'powers that be' won't run the economy to meet bears expectations.

But the bears have made it clear what the outcome will be and the only thing the 'powers that be' have managed to do is slowdown the outcome. As a result they have made things worse – admittedly they did f**ck up the expectations of a crash in 2005 with their IR cut. ;)

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I'm no economist, and have been wanting to ask for a while.,

if they up the Interest Rates, then people on mortgages have less disposable income, and are more careful with their money. Therefore businesses are less likely to rise prices, so inflation falls. This is the tied and tested theory?

We all know that interest rates two years ago were at a historic low (approx). So why would the BOE have to increase IRs A LOT to stop inflation? We've heard that there's going to be lots of pain soon as fixed rate people come off their fixed rate and onto a higher one, and those on SVR are starting to feel the pain. So wouldn't 5.75 produce the desired effect?

Is this because there are only a reasonable number who bought in the last four years, and the majority of people with mortgages have taken them out previously and still think 5.75 is a cheap deal on a mortgage. So they're all party party party, spend spend spend?

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if they up the Interest Rates, then people on mortgages have less disposable income, and are more careful with their money. Therefore businesses are less likely to rise prices, so inflation falls. This is the tied and tested theory?

Trouble is, people don't use disposable income to buy new Plasma TV's etc. with, they use credit cards and loans. :blink:

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Trouble is, people don't use disposable income to buy new Plasma TV's etc. with, they use credit cards and loans. :blink:

yeah .. disposable income is for binge-drinking, over-eating and adding to the DVD collection.

credit cards and loans are for plasma TVs, weekends away, holidays, Xmas

oooh .... Xmas.... now there's a disaster waiting to happen.

Wonder if anybody's pointed out we've got another one this year that will need paying for - and it's better to save from now towards it rather than putting it on plastic on 22 December when they panic buy because nobody told them it was coming??

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A great article - in summary:
  • Base rates above 6% will lead to sub 2% growth in the economy in 2008

  • As growth slows, unemployment rises

  • This leads to car registrations falling

  • Household borrowing drops sharply

  • House Price Inflation will turn negative

  • Retail sales growth drops to zero

  • Consumer spending growth drops below 1%

  • Corporate profits drop sharply, leading to cuts in investment spending

  • Inflation may undershoot the target massively if rates are raised too high.

Not forgetting the effects on employment of a high pound. Just read that Rolls Royce are hurting due to the unrealistic exchange rate and Novatis are giving profit warnings because of an inability to compete in the all important US market. Merv is in a trap of Brown's making. He is damned either way he moves now.

The above scenario seems about right and HPI should indeed see YoY negative show up very early in 2008. MoM negative has already begun in some regions.

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