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It is different this time

Interest Rates Set To Rise To 6% By October 2007

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Rates set to rise to 6% by October

Yesterday the 'official' measure of UK inflation the Consumer Price Index (CPI) fell from 2.5% to 2.4%, and thus trending in the right direction towards the 2% target after a scare earlier in the year when the CPI breached the upper limit of 3%, prompting the Governor of the Bank of England to write a letter to the former Chancellor Gordon Brown explaining why the Bank had failed to control inflation.

So if inflation has continued to fall from 3.1% to 2.4% , then why is this articles title suggesting further rises in UK interest rates ?

nadeem_walayat_18_7_07b.jpg

Simply put, the CPI measure is not as an important indicator of inflation in the economy despite being the preferred measure for inflation. Taking UK inflation trends as a tight three part story, where the CPI Index plays second fiddle to the Retail Prices Index which actually rose from 4.3% to 4.4% against expectations of a fall to 4.2% and the key indicator of future inflationary pressures, the money supply expansion (M4) which on the last figures rose to an annualised rate of 13.9% (below).

The strong upward trend in the money supply indicates that a further interest rate rise is likely to 6%, with the most probable date for the next rise in UK interest rates to be at the October MPC Meeting. Given the continuing upward trend, it is a little early to call 6% as the probable peak, especially since the rate rises to date have so far failed to have any significant impact on the UK housing market.

The graph confirms that fiddled CPI figures will not save the miracle economy nor the housing market. The longer upward trend in the money supply continues the higher the rates will have to go up. Nice trap & catch 22

The money supply has to be reduced in order to fight against inflation

or

The rates will have to go up as long as the money supply continues.

Take your pick as either option will crash gordon's miracle economy & house prices!

Edited by It is different this time

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Given the continuing upward trend, it is a little early to call 6% as the probable peak, especially since the rate rises to date have so far failed to have any significant impact on the UK housing market.

err I thought that it wasn't within the remit of the BoE to target HPI. oh yes, silly me - that was all bol lox :lol:

(Edited to add: either way, the market is toast)

Edited by DoctorJ

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Rates set to rise to 6% by October

The graph confirms that fiddled CPI figures will not save the miracle economy nor the housing market. The longer upward trend in the money supply continues the higher the rates will have to go up. Nice trap & catch 22

The money supply has to be reduced in order to fight against inflation

or

The rates will have to go up as long as the money supply continues.

Take your pick as either option will crash gordon's miracle economy & house prices!

Could you, or someone, please explain exactly what message M4 is telling up through the progress of the chart?

Cheers, AFP.

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Could you, or someone, please explain exactly what message M4 is telling up through the progress of the chart?

Cheers, AFP.

The message is clear, the strong upward trend in the money supply is a signal that rates are not high enough to bring inflation back under control. The rates have been artificially kept low to fuel money supply & HPI and BOE will not hit their 2% artificial inflation target when M4 is 14%

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Could you, or someone, please explain exactly what message M4 is telling up through the progress of the chart?

Cheers, AFP.

I m no expert, but I guess if it leveled off at 14% then in 5 years time there will be double the amount of money sloshing around the system. Sounds like high inflation coming to me.

Edited by Lord Lister

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The strong upward trend in the money supply indicates that a further interest rate rise is likely to 6%, with the most probable date for the next rise in UK interest rates to be at the October MPC Meeting. Given the continuing upward trend, it is a little early to call 6% as the probable peak, especially since the rate rises to date have so far failed to have any significant impact on the UK housing market.

It's because inflation is out of control that IR's need to rise EVERY MONTH. If 5.75% is having no effect, lets see 8%.

The answer is simple - get rates to a point where no one can spend any more money on rubbish that they don't need,

it's just because the BOE are corrupt that we keep getting these useless 0.25% rises. :blink:

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The answer is simple - get rates to a point where no one can spend any more money on rubbish that they don't need...

Given that a significant proportion of jobs in the UK are in the provision of goods and services that people don't need, hiking rates to that point would kick off economic Armageddon.

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Given that a significant proportion of jobs in the UK are in the provision of goods and services that people don't need, hiking rates to that point would kick off economic Armageddon.

Well, lets have rampant inflation then. Either way, the pain will come.

(And anyway, where is it in the BOE's remit to avoid a resession by letting inflation kill the whole economic system.)

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It's because inflation is out of control that IR's need to rise EVERY MONTH. If 5.75% is having no effect, lets see 8%.

The answer is simple - get rates to a point where no one can spend any more money on rubbish that they don't need,

it's just because the BOE are corrupt that we keep getting these useless 0.25% rises. :blink:

I think the 0.25% rises are because their hands are tied by what they have done in the past.

Their view is that they have created and maintained the miracle economy and are a steady hand on the ship. If they raise rates by more than 0.25 it will be seen as a sign by the City that they are panicking and so will cause everyone else to panic too, which the country can't afford.

Even though we all know it is coming (and probably the BoE do as well), they just cannot be seen to be the ones that pulled the trigger that killed the Housing market, and the economy with it.

Also they are probably hoping that by doing the small increments they will generate the first ever soft landing of a burst bubble.

Steady as she goes...

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Given that a significant proportion of jobs in the UK are in the provision of goods and services that people don't need, hiking rates to that point would kick off economic Armageddon.

Well, lets have rampant inflation then. Either way, the pain will come.

(And anyway, where is it in the BOE's remit to avoid a recession by letting inflation kill the whole economic system.)

Sorry for posting this again - a crash just happened. :lol::lol:

Edited by Wait & See

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Well, lets have rampant inflation then. Either way, the pain will come.

(And anyway, where is it in the BOE's remit to avoid a resession by letting inflation kill the whole economic system.)

I see what you are saying, but politicians set the remit in the first place, so in the aftermath, I can see the remit changing to cater for a "balanced view" to include economic growth. "Learning the lessons of the past", {Insert your own meaningless rhetoric here}

Besides, a few years of 10% inflation and large salary increases will soon melt all the horrible debt away, just like it did in the economic miracle of the 1970s. :)

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I see what you are saying, but politicians set the remit in the first place, so in the aftermath, I can see the remit changing to cater for a "balanced view" to include economic growth. "Learning the lessons of the past", {Insert your own meaningless rhetoric here}

Besides, a few years of 10% inflation and large salary increases will soon melt all the horrible debt away, just like it did in the economic miracle of the 1970s. :)

A few years of high wage rises will also completely destroy our ability to be competitive in the global economy. There are already huge wage disparities between the UK and countries like India and China. We need to have inflation below such countries so that our competitiveness increases as they become aligned to the rest of the western world.

Too much looking that the short-term is creating huge problems that have been coming to light over the last couple of years and will only continue.

AFP

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A few years of high wage rises will also completely destroy our ability to be competitive in the global economy. There are already huge wage disparities between the UK and countries like India and China. We need to have inflation below such countries so that our competitiveness increases as they become aligned to the rest of the western world.

Too much looking that the short-term is creating huge problems that have been coming to light over the last couple of years and will only continue.

AFP

Do you think our wages will go down (in real terms)to meet theirs or visa versa, I cant for the life or me get my head round how globalisation can work.

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Do you think our wages will go down (in real terms)to meet theirs or visa versa, I cant for the life or me get my head round how globalisation can work.

Our wages are going down in real terms for the UK, but just think of it in practical terms.

At the moment, we know that wages in China and India are cheaper. This is a big part of what leads to the out-sourcing of staff to India and what helps China to be so cheap in its manufacturing of goods.

As they develop into the consumer economies as a product of the wealth generation they are currently seeing, inflation will rise and wage levels will increase further. Whilst we cannot look to on level-par with them, a period of high wage inflation in the UK will just accelerate the dangers of UK service and manufacturing jobs being off-shored.

We do not seem to have a national strategy for our own protection in the global economy. If we can get inflation low, reign in our consumption of goods(lots of it just want/greed) and this keep wage inflation low, then over time some of the imbalances will be eroded which will increase our relative competitiveness and also lessen the wealth we are transferring to other Countries.

I don't know why we don't have a national strategy on these type of issues, as to me, they are very important. China clearly has a national strategy and are positioning themselves very carefully.

AFP

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Well, lets have rampant inflation then. Either way, the pain will come.

(And anyway, where is it in the BOE's remit to avoid a resession by letting inflation kill the whole economic system.)

I think you'll find that in a globalised economy, inflation is present only for goods and services where either the supply is naturally limited and without alternative (some 'prime location' buildings, precious metals ... etc.. ) or the supply is constrained by unforeseen shortage (drought/pest causing poor harvest, natural disasters, terrorist attacks ....)

For most products and services, globalised competition is simply too intense for inflation to get out of control (ie way above interest rates).

Should food/energy prices shoot up due to actual constraints on supply, I think the BOE would simply argue that as the root causes are not monetary, raising IR to precipitate a recession on over-indebted consumers would simply not be economically sensible. They would simply come up with a new new index to take account of 'uncontrollable' inflationary factors .......

I still firmly believe though that there will be a near-*** in the next 12/18 months, but I can't see BOE setting IR beyond 6%. In any case, excessive debt is starting to have a serious impact on the economy, and it's too late to do anything about it ......

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I think you'll find that in a globalised economy, inflation is present only for goods and services where either the supply is naturally limited and without alternative (some 'prime location' buildings, precious metals ... etc.. ) or the supply is constrained by unforeseen shortage (drought/pest causing poor harvest, natural disasters, terrorist attacks ....)

For most products and services, globalised competition is simply too intense for inflation to get out of control (ie way above interest rates).

Should food/energy prices shoot up due to actual constraints on supply, I think the BOE would simply argue that as the root causes are not monetary, raising IR to precipitate a recession on over-indebted consumers would simply not be economically sensible. They would simply come up with a new new index to take account of 'uncontrollable' inflationary factors .......

I still firmly believe though that there will be a near-*** in the next 12/18 months, but I can't see BOE setting IR beyond 6%. In any case, excessive debt is starting to have a serious impact on the economy, and it's too late to do anything about it ......

If you're the kind of person who wants to pay a million for a one bed flat come 2012, then the BOE must be heroes. :blink::blink:

Crashing the economy is the only way to stop the nutters spending money that they don't have. (Great Brown, the BOE or the banks, who cares where the trigger comes from, lets just see some action.)

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Guest Yeahbutnocrash

I see the Mail today on it's inside page has the headline:

House price rises 'will grind to a halt' as interest rates bite

The forecasts they are reporting are from the Ernst & Young ITEM Club forecasts

In it they are reporting that the IR increases could reduce yoy HPI by the end of this year to 7% and to a mere 1% by the end of 2008!

So in reality that means many areas should be yoy 'flat' or -ve during next year if they are right

An ITEM spokesman says 'One thing you can be sure of is that the housing boom has got to stop'

So it's obviously bearish news but no prediction af an actual crash

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If you're the kind of person who wants to pay a million for a one bed flat come 2012, then the BOE must be heroes. :blink::blink:

Crashing the economy is the only way to stop the nutters spending money that they don't have. (Great Brown, the BOE or the banks, who cares where the trigger comes from, lets just see some action.)

I agree with your analysis and am sure that the economy is going to crash. My point is simply that the BOE is not going to blindly hike IR to bring the CPI back down to 2% as the wheels are coming off ......

IR at 6% and petrol at over £1 /litre by the end of the summer will cause a big drop in consumer spending (about 65% of the economy ....) as disposable income are sucked dry.

Tesco and Asda are incidentally well aware of this, hence their current renewed emphasis on price cuts to secure a bigger share of retail spending as volumes are set to go down and foodstuff costs go up. Asda's ruthless use of Harry Potter's latest book as a loss leader is a good exemple.

An abrupt fall in consumer spending will be the main trigger in my opinion, as it will cause unemployment to rise sharply and result in massive drop in the all-important 'feelgood factor'.

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