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The Masked Tulip

Could Irs Suddenly Jump Like In Iceland?

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Guest grumpy-old-man
I know the economies are supposedly fundamentally different but could we see a sudden jump in UK IRs much like Iceland has seen in the last week?

yes, anything is possbile at times like this, even the unthinkable.

if they do go up a lot & quickly, we will never hear the last of it from 'Charlie & the deflationists', a well known prognosticator of the 70's flares & pop'flation group. ;)

edited - missed the 'pop' off....bu55er, ruined the sarcasm now....it's never the same with an 'edit'

Edited by grumpy-old-man

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I know the economies are supposedly fundamentally different but could we see a sudden jump in UK IRs much like Iceland has seen in the last week?

They should rise significantly to protect the pound and mitigate against rising inflation (from imports) becoming entrenched but raising rates will only choke off the UK economy (particularly the huge retail and financial sector) which is already showing signs of serious distress.

The grim fact is that there are fairly unpalatable consequences to raising rates, dropping rates, or even leaving them where they are. The UK economy, the Treasury, the Bof E are between a rock and a hard place with the spectre of stagflation rearing it's head. Forget US sub-prime, global turbulence and all his other excuses, much of the blame for this dire state of affairs can be laid at the door of Gordon Brown and his mismanagement and profligacy during ten years as Chancellor.

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I think that Gordon and Merv are set on reducing interest rates, even if the pound goes South. It is what the popular press seems to howl for, along with the banks - Fed included. I do wonder what effect lower interest rates for savings will have on tax returns when Alistair does his balancing act.

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If there were a global dumping of sterling then interest rates would have to rise, whether Merv or Gordo or the man from Del Monte wanted them to or not. Same as happened Black Wednesday when the whole world had a one-way bet against sterling.

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gordon has just got his hands on the crown, do you think he will let it be taken from him?

A serious run on Sterling (and consequent rocketing of import prices) would take it off him a damn sight quicker than squeezing certain elements of the population hard with higher IRs. There's a tendancy on this site to assume that everyone loves inflation, and politicians can't survive deflation - I don't understand this at all. As sections of society, the "I feel poorer because everything's rocketing in price" brigade outnumber the "I feel poorer because my mortgage has flown up" brigade by a very substantial margin.

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A serious run on Sterling (and consequent rocketing of import prices) would take it off him a damn sight quicker than squeezing certain elements of the population hard with higher IRs. There's a tendancy on this site to assume that everyone loves inflation, and politicians can't survive deflation - I don't understand this at all. As sections of society, the "I feel poorer because everything's rocketing in price" brigade outnumber the "I feel poorer because my mortgage has flown up" brigade by a very substantial margin.

not true

the man on the street knows the BOE/GOV control interest rates hence their mortgage

majority do not know inflation comes from or what causes it

hence, imo it would be easier for Gorden to take the higher inflation route lower mortgage route

all he would have to do is set the current target for inflation to 4% +- 2% and he could keep base rate at 3% for a few years!

Edited by cells

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Hiking interest rates is a short-term fix, it only boosts a currency as long as the market believes that firstly, the high interest- and exchange-rates are politically sustainable and secondly, the economy concerned can earn enough to service its loans.

So what if the pound weakens and imports get more expensive? Consumption will have to fall, that's all, and in the long run it must fall. We can't continue living beyond our means forever. So an Iceland (or UK 1992) style interest rate hike would be counter-productive and I believe it's most unlikely to happen.

(Hint: if you want any Chinese gadgets or goodies, buy them soon :ph34r:)

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the "I feel poorer because everything's rocketing in price" brigade outnumber the "I feel poorer because my mortgage has flown up" brigade by a very substantial margin.

Herein lies the problem though. The Corporate and State media ALWAYS spin price increases as something external and out of domestic control. It's nasty OPEC restricting oil supply, or a hurricane trashing a refinery, or failing crops, or the Chinese and Indians eating BigMacs. They always spin interest rate cuts as "helping the homeowner" but rarely link it to debasing the currency, which is effectively all lowering interest rates is. Well if there was some honesty, more homeowners might realise that rate cuts actually make them poorer overall, unless they spend half their income on their mortgage, which I sincerely hope is a VERY small group.

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I know the economies are supposedly fundamentally different but could we see a sudden jump in UK IRs much like Iceland has seen in the last week?

yes but not yet.... expect wage/general inflation to be out of control +10% PA before IRs are dramatically risen. Iceland has admitted to rampant inflation

Edited by moosetea

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Herein lies the problem though. The Corporate and State media ALWAYS spin price increases as something external and out of domestic control. It's nasty OPEC restricting oil supply, or a hurricane trashing a refinery, or failing crops, or the Chinese and Indians eating BigMacs.

But these reasons are valid. In particular, two-and-a-half billion Chinese and Indians are working harder, consuming less, and saving more than we do; what does anyone expect to happen?

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Hiking interest rates is a short-term fix, it only boosts a currency as long as the market believes that firstly, the high interest- and exchange-rates are politically sustainable and secondly, the economy concerned can earn enough to service its loans.

So what if the pound weakens and imports get more expensive? Consumption will have to fall, that's all, and in the long run it must fall. We can't continue living beyond our means forever. So an Iceland (or UK 1992) style interest rate hike would be counter-productive and I believe it's most unlikely to happen.

(Hint: if you want any Chinese gadgets or goodies, buy them soon :ph34r:)

So you think IRs are going to down for the rest of this year? In the deflation camp?

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So you think IRs are going to down for the rest of this year? In the deflation camp?

I don't know that they'll be going down, though if I had to guess I would predict a gentle decline as sterling is managed downward while the inflation targets are revised or quietly dropped. I certainly can't see 15%, and if we went to 15% I can't see the markets buying that it was sustainable, i.e. it wouldn't work in any case (c.f. sterling's ejection from the ERM in 1992).

It's going to be instructive to see what the market makes of Iceland's policy, I confess I haven't been following the response.

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I know the economies are supposedly fundamentally different but could we see a sudden jump in UK IRs much like Iceland has seen in the last week?

Do you understand why Iceland is being smacked in the first place? You have to look at what their banks have been doing + the size of the economy relative to the banking sector. If you put it together, you'll probably discover that Northern Rock is not the benchmark or limit for greed and stupidity combined. On the basis of that, my answer would be there is microscopic probability of the UK to experience similar turmoil.

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Something I don't understand is... How can inflation be higher than interest rates? Doesn't that mean that lenders are effectively getting less back than they are lending out? If that were to happen, surely lending in the UK would dry up altogether.

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A serious run on Sterling (and consequent rocketing of import prices) would take it off him a damn sight quicker than squeezing certain elements of the population hard with higher IRs. There's a tendancy on this site to assume that everyone loves inflation, and politicians can't survive deflation - I don't understand this at all. As sections of society, the "I feel poorer because everything's rocketing in price" brigade outnumber the "I feel poorer because my mortgage has flown up" brigade by a very substantial margin.

Depends. If pensions (especially) and government employee wage increses were tied to RPI, the high inflation would be compensated with substantial income increases, and if state sector pay were increasing this is likely to influence private sector pay deals.

VAT and Income tax reciepts should in theory go up with inflation, just from the maths. Debt in nominal pouds effectivly shrinks.

Savers get it in the shorts, of course. Those of us employed by foriegn owned companies (probably most of the private sector) become cheaper due to the pound devaluing. Exports are boosted and Imports become more expensive in relative terms - given the trade deficit, this HAS to happen one way or another.

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Rates up in Ireland ! news to me and are they not tied to european rates now they are in the Euro or has the ECB put the rate up.

Ireland, Spain and the UK are

They should rise significantly to protect the pound and mitigate against rising inflation (from imports) becoming entrenched but raising rates will only choke off the UK economy (particularly the huge retail and financial sector) which is already showing signs of serious distress.

Look dummey we don't need the retail or financial sector all we need is the banking sector cus they can make money out of thin air so i don't see what the problom is :)

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Something I don't understand is... How can inflation be higher than interest rates? Doesn't that mean that lenders are effectively getting less back than they are lending out? If that were to happen, surely lending in the UK would dry up altogether.

http://www.boston.com/news/world/europe/ar...its_48_percent/

Quite easily, Spare a through for Ireland (not iceland), inflation running at 4.8%, Euro IRs at 4% and the irish have no way of combating the inflation, the Irish economy doesn't have a pilot. If Borrowing rates are below inflation your heading down the hyper inflation path as people borrow all that free money, get inflation busting pay rises and jobs start to dry up....

Edited by moosetea

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all he would have to do is set the current target for inflation to 4% +- 2% and he could keep base rate at 3% for a few years!

Yes then EVERYONE gets poorer as inflation eats at their disposable income.

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http://www.boston.com/news/world/europe/ar...its_48_percent/

Quite easily, Spare a through for Ireland (not iceland), inflation running at 4.8%, Euro IRs at 4% and the irish have no way of combating the inflation, the Irish economy doesn't have a pilot. If Borrowing rates are below inflation your heading down the hyper inflation path as people borrow all that free money, get inflation busting pay rises and jobs start to dry up....

Thanks, moosetea.

I suppose we could be in the same situation if we join the Euro.

I'd imagine inflation is a difficult thing to make an exact calculation of, as it depends what you're buying and in what relative quantaties (and the location, as you've pointed out). I guess what it boils down to for the banks is the value of the currency in relation to other major currencies. If the value of the currency is falling, then lenders will presumably want to charge a higher rate of interest to compensate for the falling value of their 'IOU'.

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  • 295 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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