Wednesday, March 21, 2007

Real interest rates too low to cool down property market

Is Uncle Gordon warming up the gulags?

Last time the retail price index was this high, the UK base rate was 11%. And inflation doesn't look to be going away any time soon - expect further rate hikes.

Posted by mary @ 10:55 AM (531 views)
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7 thoughts on “Real interest rates too low to cool down property market

  • Didn’t one of the BoE want to drop rates?

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  • There is just so much unbacked money flushing about it’s causing inflation everywhere in stocks, property, energy you name prices are rising. You’d all better buy yourself a wheelbarrow now to carry your money around in before they get to expensive.

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  • The acid test will be the strength of Sterling which unfortunately has creeped backup again over the last few days. However, the longer the fantasy goes on the more the unpleasant the reality will be when the music stops. Sterling and the Dollar will maintain their exhalted status while it suits the manufacturers of the world. When it no longer suits them – rush to Heathrow or Gatwick as quickly as you can.

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  • dohousescrashinthewoods says:

    So, if we are headed for inflation, better buy gold/CHF.
    If the credit crunch hits hard and we get deflation, presumably cash is actually the best option.
    The question is, which will hit first and which will be the stronger influence?

    Looking at Germany’s inflationary period, it seemed the trick was to buy assets early in the inflation, but we seem to be well into ours (10% seems an appropriate figure). When the currency stabilised/deflated, the smart money got out of assets. Likewise, if we are about to see deflation, now might actually be a good time to have savings?

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  • inflation is eating my savings says:

    What this analysis is missing is the mechanism of inflation control practiced by the government. Brown is presently relying more on fiscal policy rather than monetary policy as an anti-inflation device. Under the Tories, monetarism was more in vogue. I’ll not discuss the relative merits of the two- although ignoring my VI status at a HPCer, I tend to support the fiscal idea myself.
    We tend to harp on about “historically low interest rates” but this is not really very true. If you look back to the 70s and 80s as history, and the rise of monetary policy, yes interest rates were very high. However, looking at the long term historical trend ie. pre 1970s, then we are currently at a normal level (around 5%).
    I think the BofE webpages have the historical IR data back as far as the Scottish enlightenment. Take a look.

    Regarding the inflation/deflation idea- if the state has any control at all, they would opt for inflation. However, gold is at the end of a bull run- so maybe we should all buy houses.

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  • When the crach occurred in Silicon Valley, there were many stories of cars found at San Francisco airport with keys in the ignition, the previous owners having bought one-way tickets back to India or China (more than 50% of Silicon Valley’s egineers since the late 70s were of Indus Valley origin).

    Will we see the same thing here? BMWs left at Heathrow, keys in the ignition?

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  • sold 2 rent 1 says:

    inflation is eating my savings,

    “However, looking at the long term historical trend ie. pre 1970s, then we are currently at a normal level (around 5%).”

    You have a point but before the 1970’s the government never had the ability and/or the will to fight inflation. I note the times of between 1914 and 1920 and the early years of the Second World War when inflation ripped.

    The industrial revolution in the late 18th and during the 19th century kept prices and consequently interest rates in check.

    See inflation graph

    Unless we are now in an era similar to the industrial revolution, prices and IR will rise – unless we have a deflationary depression first.

    China’s negative impact on prices will slowly wither, once the extra 3 billion workers added to the global labour supply start consuming the world’s resources.

    The timespan for this is over the next decade so don’t expect inflation to take off immediately.

    “However, gold is at the end of a bull run”

    How did you arrive at this conclusion. The commodities super-cycle is only half way through.

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