Thursday, Jul 06, 2006

MPC keeps interest rates on hold

BBC News: UK interest rates remain at 4.5%

UK interest rates have been kept on hold at 4.5% for the 11th month in a row after the latest meeting of the Bank of England's rate-setting body.

Posted by webmaster @ 12:20 PM (671 views)
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22 Comments

1. Paulrowen said...

The BofE ostrich has spoken from under the sand!

Well, not so much spoken as made its presence known. Let's hope the bad smell of complacency doesn't linger too long around the rising tide of inflation.

Thursday, July 6, 2006 12:53PM Report Comment
 

2. uncle tom said...

Phew!

The big 4 - 0

My luck will run out one day!

Thursday, July 6, 2006 12:54PM Report Comment
 

3. Devil's Advocate said...

Nothing like patting yourself on the back, try answering these questions.

When will the crash happen?
How high do interest rates have to go up?
When will the rates go up and by how much (not just the first 0.25%)
How long will it take for the market to reach the bottom and by what % will the crash be
Why are other economic bodies not predicting the crash (can't all be VIs)
Given the population and the fact that there is an entire generation waiting for prices to drop will they not just rise again
Also, the most important where do I stick my cash until I am ready to buy back into the home ownership dream.

Thursday, July 6, 2006 01:18PM Report Comment
 

4. devil's advocate said...

Nothing like patting yourself on the back, try answering these questions.

When will the crash happen?
How high do interest rates have to go up?
When will the rates go up and by how much (not just the first 0.25%)
How long will it take for the market to reach the bottom and by what % will the crash be
Why are other economic bodies not predicting the crash (can't all be VIs)
Given the population and the fact that there is an entire generation waiting for prices to drop will they not just rise again
Also, the most important where do I stick my cash until I am ready to buy back into the home ownership dream.

Thursday, July 6, 2006 01:19PM Report Comment
 

5. Gregzki said...

DA - UTs provided some cracking insights and a sound view over the years on pretty much all of the above and I think
correctly calling the the IR decision well ahead of time requires a good knowlege of the process and influences involved.

Thursday, July 6, 2006 02:19PM Report Comment
 

6. harold said...

DA - you seem troubled...

When will the crash happen?
No one knows, it might never happen - however, given present economic conditions the chance that the market won't crash is, in my view, vanishingly small.

How high do interest rates have to go up?
To cause a HPC, interest rates don't actually have to go up at all. Of course it would help, but other factors might prove critical. For example, unemployment, debt levels, the number of BTL failures, banks waking up to risk (please, no sniggering), and so on.

When will the rates go up and by how much (not just the first 0.25%)?
If any of us knew the definitive answer to this we would, most likely, be sunning ourselves in the Caribbean, not sitting on our backsides writing blogs in the UK. It all depends on what the Chancellor - sorry, the MPC - thinks we can 'get away with'. By that I mean, the extent to which real inflation can be hidden from the public and money markets in order for the not to come under undue pressure.

How long will it take for the market to reach the bottom and by what % will the crash be?
It could take several years to fully 'crash' (houses, unlike commodities, are not push-button traded). Going by past crashes house prices could fall by as much as 40 to 50%. Given the size of the present bubble, 50% could be a conservative estimate.

Why are other economic bodies not predicting the crash (can't all be VIs)?
Oh but they are! Just have a look at the 'House Price Predictions' table and links on this site (and no, they are not all bears).

Given the population and the fact that there is an entire generation waiting for prices to drop will they not just rise again?
Yes you are right; of course following the next crash (if and when it happens) house prices will undoubtedly rise again. This is because house prices are inextricably linked to economic cycles. (Actually, this is a feature of all dynamical systems, but that's another matter.) In relation to population growth and HPI, my view is that the two are not as positively correlated as people suppose. For example, Bombay (Mumbai) saw a colossal HPC in the late 90's at time when the city's population was growing by over 8%(!!!) per year.

Also, the most important where do I stick my cash until I am ready to buy back into the home ownership dream?
Well, apart from the obvious place DA, I have said a number of times on this site that I think savings in s is vulnerable to inflation and depreciation. I would suggest - and it is only a suggestion, NOT advice - that you also hold s. Nationwide do a savings account, but for gods sake don't change your money through a bank (they'll give you a cr*p rate), try a specialist exchange house, for example: http://www.customhouse.com/

...and relax - "soon come", as they say in the Caribbean.

Thursday, July 6, 2006 02:49PM Report Comment
 

7. denzil said...

Well done UT!
How are you seeing August?

Thursday, July 6, 2006 02:58PM Report Comment
 

8. Doomwatch said...

I hope these "experts" realise that by keeping rates at 4.5%, they are effectively tightening the noose for people (especially MEWs)
later down the line to hang on.

Thursday, July 6, 2006 03:24PM Report Comment
 

9. Miniftse said...

Id stick some of your money in gold. I don't think interest rates will go very high, maybe 6% but I think they are more likely to go lower if their is trouble ahead. And they dont need to go very high to cause problems, a year at 6% and the fear of life will creep into people who are on an average wage with a 1000 a month mortage repayment at 4%.

Thursday, July 6, 2006 04:00PM Report Comment
 

10. gruppenfuhrer said...

Just look on the Wiki for the press articles from 1989. It was about August that the first noticeable down turn was recorded - 3 per cent. Interesting however that the press message was still mixed until after this point.
I am sure I am hopelessly optimistic but I think, on past evidence, that in five years from now we might be talking about how things changed in summer 2006. Go on UT, tell me I'm right.

Thursday, July 6, 2006 04:12PM Report Comment
 

11. uncle tom said...

Thanks Denzil !

Since March, August has been steadily looming out of the mist, but right now it looks a little less likely than it did a few weeks ago.

Most notably, the rising interest rates in the US and eurozone have not led to a fall in the value of sterling - as one might expect - so there is less 'peer pressure' on the MPC than I expected.

I am looking forward to the minutes and new appointments to the MPC, although whether they will be made before the next meeting is unclear.

Harold,

Agree mostly with your answers, except I would not regard a euro saving account as a good move - the euro has rather more scope for falling over than sterling, and one needs a very good reason to justify cash savings that are in a country that is not your place of residence. Index linked NSI products or short dated index linked gilts are safest.

Given the structure of the market, and the vulnerability of of the lenders, I still think the crash is likely to take the form of an inverted sine curve - an accelerating collapse - that will hit a very low base before rebounding.

To get some fix on eventual prices after the rebound, one needs to take account of construction costs, and the fact that homes are consumer durables that should experiance depreciation over time.

Also that the shortage of homes is really quite marginal - we have more houses per thousand adults than ever before - I anticipate that the initial post crash rebound will be followed by stagnation and a failure to keep pace with inflation.

I also think that the crash will be severe enough to prompt the political imperative to never let house prices take off again.

Thursday, July 6, 2006 04:23PM Report Comment
 

12. denzil said...

Uncle Tom said:
>>Since March, August has been steadily looming out of the mist, but right now it looks a little less likely than it did a few weeks ago.

I'd completely agree with you. Apart from my rash guess at a rise last month Aug looked set in stone but maybe they will hold. I notice the shadow MPC shifted towards a rise this month but still not unanimous.

As for sterling, maybe somebody can throw some light why it is holding it's value?

Thursday, July 6, 2006 04:33PM Report Comment
 

13. harold said...

"...one needs a very good reason to justify cash savings that are in a country that is not your place of residence"

UT, not so:

http://www.nationwideinternational.com/accounts/accounts_euro_details.htm

But you may be right about the fact that "the euro has rather more scope for falling over than sterling", although given that the euro is backed by the German economy and the is backed by, err well, not very much, I'm not sure I agree totally.

Thursday, July 6, 2006 05:42PM Report Comment
 

14. Bubbles. . . . said...

Thanks U T. Im looking forward to that sine curve its all a bubble and people I think are like ostriches and putting their heads in the sand and hoping it wont effect them..Live for today worry about tommorow if it comes attitude...Upset I didnt buy 4 years ago but if I did I would be moving back home again and selling up now before the complete saturation of the market and home buyers packs come in...

Thursday, July 6, 2006 09:02PM Report Comment
 

15. sirgoogle said...

I still hold that the only things that the BoE react to are inflation and Sterling, with the protection of Sterling being to most important.

If they see cash leaking out of the currency in search of stronger interest rates they WILL increase interest rates. The MPC has made it very clear in the recent past that it does not give a stuff about the housing market and any VI who thinks that the MPC will protect them from interest rate rises is living in fairy land - these are cold blooded bankers with a job to do.

Thursday, July 6, 2006 09:41PM Report Comment
 

16. talking rot said...

I'd like to congratulate DA for asking the difficult questions which need to be asked. As I've said repeatedly on this Blog, there is not a House Price Crash happening now and neither will one happen tomorrow. While there are risks to the economy, risk may or may not come into being. Whether the Cassandras on this Blog like it or not, the CPI is used to set Interest Rates. The CPI is currently low so there will not be an Interest Rate hike. If, and it is a big IF, there is to be a House Price Crash, some element of the UK's economy will have to change significantly. Perhaps it will be one thing or a combination of things. But last time I looked, doomster predictions on inflation, interest rates, unemployment, impact of higher repayments upon the wider population as opposed to the minority "massive" debtors, and oil prices have been wrong.

Please some one tell me what constitutes a House Price Crash? 20% over 3 years? Because even a 20% drop over 3 years will still mean UK house prices are very very high.

Finally, WELL DONE to Uncle Tom for another accurate call.

Thursday, July 6, 2006 10:05PM Report Comment
 

17. The Bald Man said...

Could I point out that everything with the Uk economy is not a "miracle" despite the continual spin.
1. There has been a large increase in taxes (many of them not noticeable to the man on the street e.g. pension fund loss of ACT credit)
2. There has been a massive increase in the civil service.
3.There is a pension funds crisis (some of which was generated by 1).
4.`Individual borrowing is at record levels (often secured against property).
5. Real inflation is running high (despite what the politically influenced CPA says)

Basically we have been borrowing from the future to sustain the economy today. Eventually we will stop borrowing and the miracle ends. IMHO that is when the house price slide will gain momentum.

Friday, July 7, 2006 09:02AM Report Comment
 

18. uncle tom said...

Harold,

I didn't mean that foreign currency accounts are difficult to set up - they are hard to justify because they tend to generate risk without reward.

Friday, July 7, 2006 09:20AM Report Comment
 

19. Waitingfor The Crash said...

i do not think the doomsters have been wrong..... just the timing has been wrong.

We have lived in age where manipulation has avoided the inevitable. This policy will continue to the bitter end - and it has to for the people who are in control.

CPI is shown at 2.2% - YES - but in reality it is 5%+ and growing - not slowing. Fuel rises are creeping in, and price rises from China & Eastern Europe are following ( I can vouch for this I buy from both and had 20% increase in prices this year on some comodities I buy)

Add to that the US problem - which on it's own is driving up IR's on a global scales and pulling up the other Asian currencies (and ours in the end). Unemployment has not risen on Govt figures - but jobs are being lost in the UK - and we will see a raft of profit warnings over the coming year.

Part of the bubble is the lenders - who have made huge profits - but withdebt levels at a point of no return - and bad debts rising this will effect them. They are getting tougher on lending now. I spoke to someone today in Chelmsford, his son is trying to sell his house but can't. Even at the price it is now he will still make a loss and be in debt - this is NOW without future cause and effect.

Lastly GOVT debt is record levels. Taxes must rise to pay the debt - and govt receipts will drop - another blow yet to come.

Anyone agree that the Olympics is a white elephant? Another 2 BILLION over forecast already?????? What will east londoners do with these stadiums after the games????

Friday, July 7, 2006 09:33AM Report Comment
 

20. The Bald Man said...

WFTC 100% agree. Another couple of external problems to add to the Uk specific issues. This is one enormous bubble (not just property) that is about to explode when the lending/borrowing stops.

Friday, July 7, 2006 10:21AM Report Comment
 

21. tyrellcorporation said...

I'm sure East London Councils will fill empty stadiums with Eastern Bloc migrants - hey, we could probably get the whole lot to come over! :)

...One big 'respect' party... how great would that be?!?

Friday, July 7, 2006 11:54AM Report Comment
 

22. Retiredbanker said...

WTC

Absolutely right about the Olympics; my heart sank when I heard that London had been chosen for the games.

I had always understood that staging these events was a massive financial loss for the host country, and was
only undertaken for prestige reasons. ( Nice little earner for Seb. Coe though ! ).

Still the sheople ( those who believe anything that they are told ) are delighted.

Friday, July 7, 2006 02:04PM Report Comment
 

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