Sunday, Aug 13, 2006

Interest Rates. What the Experts think

Telegraph: Have Britain's interest rates peaked?

The first increase in a year surprised the City. Are there more in the pipeline? Robert Watts asks the experts

Mervyn King, the Governor of the Bank of England, paved the way for further interest rate rises last week. The Bank's latest Inflation Report, published on Wednesday, strongly suggested that this month's rate rise - from 4.5 per cent to 4.75 per cent - was the first of a series, rather than a "one-off tweak".

King suggested that there was a "50:50" chance of inflation rising above 3 per cent, one percentage point above the Bank's 2 per cent target rate. If that happens he will be obliged to write a formal letter to Gordon Brown, the Chancellor, explaining the situation - something that has not been necessary since the Bank took control of monetary policy more than nine years ago.

Posted by jason @ 01:29 AM (705 views)
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1. jason said...

Either this is a typo, or they are some very stupid experts:

"Also, what happens to wage inflation will be crucial. So far, there has been no evidence that rising energy prices are having second-round effects. . . such as on earnings growth. If wages do tick up, the Bank will have to make more cuts."

Wages up? Rates down? Durr

Sunday, August 13, 2006 01:33AM Report Comment

2. Warwickshire Lad said...

In the coming months, the "experts" will probably keep telling us reasons that Interest Rates will be held or cut, just as the Bank of England keeps raising them.

Sunday, August 13, 2006 11:40AM Report Comment

3. Ticktock said...

Perhaps they meant cuts to the number of MPC members available to vote?

Or maybe cuts to their wrists?

Or maybe the Goldman Sachs sponsored 'external members' of the MPC, have now mannaged to convince everyone to persue their own bullshit monetary policy?Black is White, night is day etc. Leveraged Hedge funds (like Goldman) don't like rate rises do they?

Sunday, August 13, 2006 02:17PM Report Comment

4. Surfgatinho said...

Kevin Daly - "We suspect inflation will peak at around 2.6 per cent or 2.7 per cent by the end of the year", "The scare stories of the effect to the housing market have been overdone"
Expert, my arse! I think Mr Daly will be eating his hat when inflation nudges 3%. Also as an economist he should realise that a slowdown in consumer spending or growth will effect the housing market. So no rise and a faultering economy or more rises - either way not good news for house prices

Sunday, August 13, 2006 02:29PM Report Comment

5. bidin'matime said...

Jason, that's impressive for 1.33am on a Sunday morning - I struggled to maintain my concentration as I sat here contemplating a siesta... I even read that bit too and didn't notice the 'deliberate mistake'. Now, I wonder who wasn't paying attention at their end - David Hillier, the chief UK economist at Barclays Capital or Robert Watts, the reporter...

They seem to be broadly in agreement that another rise is on the way, but I still get the impression that these employed economists simply shut the possibility of HPC out of their minds. Like we think that, if we say often enough that it will happen, it will happen, they seem to think that if they say often enough it wont happen then it wont. But the fact is that, if enough people say it will, then it will...

And the experts never address the question as to how the ratio of house prices to earnings can be restored without a very long period of zero house price increases and what impact such a prospect is likely to have on the desire people currently have, to overstretch themselves to pay the silly prices being asked. If prices struggle along on the flat then two important factors come into play – first the 'buy now or miss the boat' element disappears, which must undermine demand and start to push prices down. Then the 'wait and see how far prices fall' effect steps in and you have a crash in the making. It's only a matter of time.

Not one of them thinks it

Sunday, August 13, 2006 03:07PM Report Comment

6. uncle tom said...

Having just spent a week in the US, I am convinced that the time-lag between interest rate rises and significant economic consequences remains a long one - rather longer than the time it takes for interest rate cuts to show through. The Americans are still spending, but it's spending funded by equity withdrawal..

As a result, I suspect that policymakers will underestimate the long term consequences of rate hikes, and continue to target inflation using ever higher rates as their sole tool - a strategy that (as I have said before) I think will eventually be abandoned - but not before real damage has been done.

The inflation report explains the sudden panic to raise rates, but I do wonder what the MPC are doing between meetings - looking over the shoulders of those compiling the inflation reports would not seem an unreasonable activity...

The problem that our Merv and his happy band have to face is that tweaking rates by a quarter percent may prove to have minimal effect, and indeed none that they can reliably detect within a few months.

It would be very surprising if we do not see further UK rate increases in the not too distant future. These will sting homeowners, and dampen the enthusiasm of buyers looking for somewhere to live in themselves.

But it should bring to a close the aquisition spree of the BTL brigade, without whose activity the market will sober up, and come to terms with the fact that if you price out half the population, you will sooner or later find yourself critically short of buyers...

Sunday, August 13, 2006 09:22PM Report Comment

7. bidin'matime said...

Too true Tom - I've often said that a craftsman with only one tool in his box will struggle to do a good job.

PS - glad to see something has set the blog alight at last this evening - I think everyone must be on hols...

Sunday, August 13, 2006 10:23PM Report Comment

8. Ticktock said...

I think at least two tools - IR movements and (much more significantly) Forex manipulation. Stirling seems to RISE with inflation these days (thus making imports cheaper and containing the effects of rising prices)
Funny that isn't it.

Monday, August 14, 2006 06:53AM Report Comment

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