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Bank of England signals interest rate rise

By Richard Blackden

Last Updated: 12:41pm BST 08/08/2007

The Bank of England has indicated that interest rates will have to reach 6pc if inflation is to be kept under control over the next two years.

Slide show: How the Bank of England is used to scrutiny on interest rates

The news will come as a blow to homeowners who will be coming off their two-year fixed mortgages over the next six months and will be facing significantly higher monthly bills.

advertisementAccording to economists at Morgan Stanley, 70pc of Britons are now on fixed-rate mortgages compared with just 20pc five years ago.

In its Quarterly Inflation Report, the Bank's charts show that if interest rates remain at 5.75pc then inflation will not come back down to below 2pc within the next two years.

The Bank's Governor Mervyn King, who has presided over five interest rate increases in the past 12 months, has to decide on rates amid mixed signs from the economy.

While recent reports on the housing market suggest that the boom is cooling, the manufacturing sector has remained robust in the face of higher rates and a strong pound.

James Knightley, an economist at ING, said: "The Bank of England's Inflation Report has come in mildly on the hawkish side of expectations, signalling interest rates have further to rise.

"Consequently, with the growth outlook remaining positive we continue to look for UK rates to be raised to 6pc in September with a further rise to 6.25pc three to four months further on."

Economists at Morgan Stanley yesterday warned that UK consumers will slow down sharply in the second half of the year as the effects of five interest rate hikes finally begin to be felt.

The Bank said in its report today: "The scope for further upwards pressure on commodity prices, the limited margin of spare capacity and the continued elevation of some measures of inflation expectations and pricing intentions mean that the balance of risks" to inflation "is judged to be slightly on the upside.''

However, the Bank of England added that economic growth will now be slower than it had previously forecast.

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Short version, BOE have the excuse to raise rates a few times. Next month and we've looked at the recent history of rises and figure it'll keep the upward trend. They aint gonna have the balls to raise two months in a row but figure .25 is a like pissing in a strong wind and they'll bang one in either Nov or Dec followed by more next year but we don't want to say that because it'll cause trouble.

6% Sept, 6.25% Nov, 6.5% Feb. Oh shit they are going down put HPI in the CPI bundle. 6.5% for a while.

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According to economists at Morgan Stanley, 70pc of Britons are now on fixed-rate mortgages compared with just 20pc five years ago.

If this is really the case, no wonder interest rate changes don't seem to have an imediate impact on HPI as we'd of expected in the past. Can almost justify a few holds on rates, but when these fixers start to expire en masse things could get very interesting very quickly. :ph34r:

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Just look at the BoE's performance:

Jul-05 : TARGET MISSED

Aug-05 : TARGET MISSED

Sep-05 : TARGET MISSED

Oct-05 : TARGET MISSED

Nov-05 : TARGET MISSED

Dec-05 : TARGET MISSED

Jan-06 : TARGET MISSED

Feb-06 : TARGET MISSED

Mar-06 : TARGET MISSED

Apr-06 : TARGET MISSED

May-06 : TARGET MISSED

Jun-06 : TARGET MISSED

Jul-06 : TARGET MISSED

Aug-06 : TARGET MISSED

Sep-06 : TARGET MISSED

Oct-06 : TARGET MISSED

Nov-06 : TARGET MISSED

Dec-06 : TARGET MISSED

Jan-07 : TARGET MISSED

Feb-07 : TARGET MISSED

Mar-07 : TARGET MISSED

Apr-07 : TARGET MISSED

How are they still in their jobs? :unsure:

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Bank of England signals interest rate rise

By Richard Blackden

Last Updated: 12:41pm BST 08/08/2007

The Bank of England has indicated that interest rates will have to reach 6pc if inflation is to be kept under control over the next two years.

Slide show: How the Bank of England is used to scrutiny on interest rates

The news will come as a blow to homeowners who will be coming off their two-year fixed mortgages over the next six months and will be facing significantly higher monthly bills.

Can someone answer this.

Why do they always seem to wait for so long before raising rates? For the past few months there has almost almost been the theory that "rates will go up in .......... (insert month name here)" why do they wait? Surely if there are pressures on inflation it would be better to raise asap?

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If you challenged the BoE, they will say they have only failed once (when it went over 3% CPI, and they even tried to play it down as being normal). Their remit is to hit inflation at 2% in two years time, and for it to not currently exceed 1 percentage point either side of 2%.

The 2% target in two years time, is always, two years ahead, and they always forecast that 2% is met. Funny that, eh!

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Can someone answer this.

Why do they always seem to wait for so long before raising rates? For the past few months there has almost almost been the theory that "rates will go up in .......... (insert month name here)" why do they wait? Surely if there are pressures on inflation it would be better to raise asap?

I don't understand this either.

It should be a rise every month until inflation is on target. Who cares whether it gives the punters a dose of fear. :blink:

Fear is what is needed to bring everyone back into line after the HPI years.

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Can someone answer this.

Why do they always seem to wait for so long before raising rates? For the past few months there has almost almost been the theory that "rates will go up in .......... (insert month name here)" why do they wait? Surely if there are pressures on inflation it would be better to raise asap?

A doveish bias,they are scared stiff of over cooking it but couldn't care a s**t if they under cook it.Seems the unofficial target is around 2.75% .

Rather odd this,coming from the Telegraph since their Economics Editor,Liam Halligan (on Sunday anyway)has been rather smug lately(since the CDOs crisis)saying rates had peaked.He's the one with the huge mortgage who lost it after the July increase and wanted heads to roll on the MPC.

Edited by crashmonitor

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where do people get the idea that the target is 2%.

The inflation target is to keep it inside the range of 2-3%. Above 3% is a failure, below 2% is also a failure.

If the rate is above 2.5% the aim is to get it lower (to keep it within band).

If the rate is below 2.5% the aim is to get it higher (likewise).

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where do people get the idea that the target is 2%.

The inflation target is to keep it inside the range of 2-3%. Above 3% is a failure, below 2% is also a failure.

If the rate is above 2.5% the aim is to get it lower (to keep it within band).

If the rate is below 2.5% the aim is to get it higher (likewise).

Edit.

Edited by crashmonitor

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where do people get the idea that the target is 2%.

The inflation target is to keep it inside the range of 2-3%. Above 3% is a failure, below 2% is also a failure.

If the rate is above 2.5% the aim is to get it lower (to keep it within band).

If the rate is below 2.5% the aim is to get it higher (likewise).

I assume you are being ironic since the band is 1-3%,with 2% being the centre.But Lomax and Blanchflower are certainly following that remit.

Edited by crashmonitor

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where do people get the idea that the target is 2%.

The inflation target is to keep it inside the range of 2-3%. Above 3% is a failure, below 2% is also a failure.

If the rate is above 2.5% the aim is to get it lower (to keep it within band).

If the rate is below 2.5% the aim is to get it higher (likewise).

Well, they do have this initiative called Target Two Point Zero: The Bank of England/Times Interest Rate Challenge ;)

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If you challenged the BoE, they will say they have only failed once (when it went over 3% CPI, and they even tried to play it down as being normal). Their remit is to hit inflation at 2% in two years time, and for it to not currently exceed 1 percentage point either side of 2%.

The 2% target in two years time, is always, two years ahead, and they always forecast that 2% is met. Funny that, eh!

I noticed that too. Can we conclude if this is true that the reverse must therefore also be true, ie if they are missing the inflation target now then mistakes were made 2 years ago which led to inflation being higher now than the target. So what did they do 2 years ago with regard to interest rates? They lowered them by mistake.

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Why 2.0% inflation. Why not 0% inflation?

because the nature of a FIAT economy requires a constant growth (more debt in circulation) to be able to perpetrate itself.

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Why 2.0% inflation. Why not 0% inflation?

I was musing about that the other day. Surely the ultimate in price stability is a 0% inflation rate?

The best excuse I can think of is that accidentally undershooting a 0% inflation target leads to deflation, which is bad, whereas undershooting a 2% inflation target just leads to very low inflation, which is good.

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They expect us to use their bits of paper as money so the least they can do is ensure money retains its value.

I'd say the target should be 0%. The index should be RPI, and if it ever reached 1% Merv should write a letter to the Chancellor offering his resignation.

The real answer would be to have a currency backed by something totally tangible, eg land, ie each bill is a title deed to some tiny sliver of land in the UK - an amount fixed forever, eg 1 sq foot. Redeemable in specie in quanta of 1000.

Since they can't print more land the money supply is externally constrained. (Some would suggest precious metals, but gold and silver is forever being dug out of the ground. The supply is not fixed, although it's not as easy to inflate as unbacked paper.)

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Why 2.0% inflation. Why not 0% inflation?

Lots of reasons but the key one is that driving out that last couple of points of inflation means politically unnacceptable levels of unemployment.

Norman Lamont famously (infamously?) said "unemployment is a price worth paying to drive out inflation", a politician might get away with that statement when everyone could see that galloping inflation was eroding real living standards, but not when inflation is at much more modest levels.

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Why 2.0% inflation. Why not 0% inflation?

Precisely the point I raised with my wife at lunch time. Why can we not have stable prices? Why do we have to have some inflation in the economy. For hundreds of years in the past the price of things stayed the same - never went up or down.

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I don't understand this either.

It should be a rise every month until inflation is on target. Who cares whether it gives the punters a dose of fear. :blink:

Fear is what is needed to bring everyone back into line after the HPI years.

This would cripple the country.

It does take time for the effect to hit.

Of course, CPI being a big lie by not including house prices, or the increase in money supply by borrowing means that we have had massive true inflation that was only possible by interest rates being kept artificially low.

Which means now that inflation is hitting areas covered by CPI the interest rates are rising, but not one person is looking at the impact that these rises will have on areas covered by CPI.

Interest Rates are only mentioned in reference to borrowing costs and house prices...

Which were always inflationary..

This IR reaction by the MPC would have protected our economy, house prices would have accelerated in 2001, but IR's would have risen in response to this and gently curbed the inflation.

Of course, Gordon's miracle economy would not have existed were it not for these house prices increases and the related borrowing splurge.....

Which we know....

The sickest minds from history, given an eternity to consider... They would not be able to come up with a slow enough screaming death to match what Gordon Brown deserves. But given the opportunity and the priceless role of executing Gordon after he has been successfully convicted of high treason I would take their best efforts and run with it...

The above comment comes from someone who will take sugar solution to exhausted bumble bees so that they may live...

I would with glee watch a man, a living human being led to their death if convicted of treason under British Law. What hate has been born in me?

 I want my innocence back, I want a stable economy not built on stupidity and I want to have watched the country grow with pride, not driven to its knees under the auspice of success built on the framework of lies and debt.

I want to not be scared for my career in a world seeming moments from economic disaster, I want not to see so many languishing under the weight of debt they can neither afford or escape.

I want to have not been faced with this…

(I know that the death penalty was repealed in the UK for treason, but this was by the Labour party after they had committed it and I am sorry but "Supremacy of Parliament" is infinite, but not retrospectively, he could be hung)

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because the nature of a FIAT economy requires a constant growth (more debt in circulation) to be able to perpetrate itself.

that is not true, because it assumes the banks horde their money, in reality it is spent into the economy via dividends or simply the bankers spend their money.

Precisely the point I raised with my wife at lunch time. Why can we not have stable prices? Why do we have to have some inflation in the economy. For hundreds of years in the past the price of things stayed the same - never went up or down.

Zero inflation would only be possible if the banks could not create money, ie we have a full reserve system. But that would make interest rates market determined which would float and change second by second instead of on the whims of a few powerful central bankers meeting once a month.

So you would have to make it illegal to “create money out of thin air” to truly have zero percent inflation.

That means a lot of rich bankers, traders, “investment gurus” will loose their non-job jobs. They are currently the very rich and have a lot of influence.

Another reason is, the banks cant create money out of think air, so how will the government fund wars? They would have to tax us more which we probably won’t stand for. How would they hire 10k environment ministers that do shit all and get paid 100k each? They would have to tax us more which would piss us off and loose them elections.

So in short, to have zero inflation means no “money out of thin air”. We would have to implement a 100% reserve banking system. Which would limit the power of the government, which would be great for us but well, who in power wants to loose that power?

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Precisely the point I raised with my wife at lunch time. Why can we not have stable prices? Why do we have to have some inflation in the economy. For hundreds of years in the past the price of things stayed the same - never went up or down.

Here's a good article about this. I think the gist is, without some inflation the economy doesn't get stimulated and leads to depression?

http://www.samuelbrittan.co.uk/text18_p.html

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Here's a good article about this. I think the gist is, without some inflation the economy doesn't get stimulated and leads to depression?

http://www.samuelbrittan.co.uk/text18_p.html

not true at all

zero inflation means a 100% reserve banking system, so the banks cant create money from thin air

that has 2 big "problems". Firstly is limits the power of governments.

"Prim Minster, those dam arabs need an **** kicking, lets go to war. BROWN: dam this, we cant borrow to fight this war, we need to rise taxes, will be sheeple stand for higher taxes so we can kill some arabs?"

"Prime minister, my son just graduated from some shit university with a non-degree in environmental protection. Can you pleaser hire another 10k environmental ministers that don’t do anything. BROWN: im sorry buddy, i cant risk rising taxes to pay for people that don’t do anything"

the second big "problem" is , NO BOOM AND BUST.

since in a 100% reserve banking system (zero inflation system) interest rates would be set by the market. Which means that if there are lots of savers interest rates are low, if there are lots of borrowers interest rates are high.

So as soon as a housing boom starts (people borrow money for mortgages) the interest rates would rocket, kicking the boom up its ****.

it would also stop busts, people spending less and saving more, well that would decrease interest rates and stimulate the economy.

Great you may think, no more boom and bust. IT would be great for the nation as a whole. But we would not produce "do nothing" millionaires that ride these booms.

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not true at all

zero inflation means a 100% reserve banking system, so the banks cant create money from thin air

No: 0% price inflation is quite possible in an economy based on fractional reserve banking, just as 10% price inflation is quite possible in an economy based on 100% reserve banking.

Inflation is defined as an increase in the level of prices in the economy. This is determined by many factors, including (if you subscribe to some form of monetarism) the rate of growth of the money supply.

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