Tuesday, May 1, 2007

Live for today society still alive and kicking

Booming spending stokes fear of 6% rates

A surprise surge in retail sales combined with strong factory prices are both piling the pressure on the Bank of England to raise rates even higher than the 5.5 per cent mark expected to be hit next week. [Poster Comment] Looks like the younger generation have given up on planning for the future. With house prices so out of reach perhaps they believe there is no future, so what the hell.

Posted by uncle chris @ 09:09 PM (651 views)
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23 thoughts on “Live for today society still alive and kicking

  • Ilejustwait says:

    they should have raised rates last month, know they have no choice but to raise rates at an even higher base, they only have them selves to blame, perhaps they thought the problem would go away, but then perhaps they are playing with time, which is a very dangrous game to play, but then perhaps to them they really have nothing to loose, they can hit at any time with an intrest rate hike of up to 8% or more, and thats what really P–S me off about all this, they are there to control inflation, DONT SEEM TO ME THAT THEY REALLY KNOW THERE JOB TO WELL , exept waiting till the last moment, if there paid a wage to do a job then do it, the longer you draw this out the more people will be effected with this game you play,

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  • I’ve gotta chip in here.

    There is a moral dilemma for the Bank of England. Another quarter point rise will be a weak response to soaring inflation, spending and asset prices.

    A 0.5% increase will kill the housing market dead.

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  • Sounds like the media warm-up for a 0.25% rate rise then nobody gets upset ‘cos’ it could have been 0.5%’.

    Then business as usual and the B of E looks like its doing a good job to the reality TV generation.

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  • Are the words “moral” and “BoE” permissible in the same sentence? I’m sure this breaks a grammatical rule, if not an ethical one. The dilemma they face is surely one of credibility.

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  • Paul, I choose a dead housing market. They cannot hide from necessary interest rates for much longer, and these will hit people hard. As a potential first time buyer, time is on my side. The banks are the kind of people that give you an umbrella when the sun is shining and then take it back from you when it rains. It has started to rain this year and it will rain hard.

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  • enuii – yes looks like a ‘warm-up’ job – can see it now – on tv saying “not our fault we had to put up IRs to 5.75% – people just kept spending!”

    Hey – you never know! They don’t [if ever] put up IRs by 0.5% – but then they hadn’t written ‘that’ letter until last month.

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  • Well hang on, a 0.35% rise is already a certainty.

    The only uncertainty is whether its 0.5% or 0.25%.

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  • 0.25% certainty I mean

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  • David20040_0 says:

    There is no way in hell they will put up rates by 0.5% and 0.25% will have no effect.

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  • Why couldn’t it be 0.35%, or any other amount not divisible by 0.25%?

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  • uncle chris said: “Looks like the younger generation have given up on planning for the future. With house prices so out of reach…”

    I am not sure I see the point. We have no data who is spending on the high street, it may as well be older generations that are happily “withdrawing equity” from their homes (remember houses have become today’s low-interest credit cards).

    IMHO… if the property asset bubble is the main root-cause of inflation (and it may well be since a.houses are the source of broad money at low rates for individual borrowers and b.rising property prices – and not salary raises – are driving up the consumer confidence) then BoE will have to raise rates aiming at reducing/stopping house inflation if they want to put a lid on goods inflation.

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  • “then BoE will have to raise rates aiming at reducing/stopping house inflation if they want to put a lid on goods inflation”

    Alternatively, secondary wage inflation due to increased costs of borrowing from higher mortgages is therefore driving up wage demands.

    I’ve considered that if your spending is based on debt, then raising rates could create an inflationary spiral.

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  • Paul Said

    A 0.5% rise will not kill the market dead, the last two 0.25% rises have been ignored, it will need 6.5% to cool the market, 10 – 15% would kill it !

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  • dohousescrashinthewoods says:

    Interesting point, Paul, I wonder if you’re right?
    In the past, interest rates have been used to control an economy where people actually had the money they are spending.
    Does it work backwards when people are spending money they don’t in fact have?

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  • In 2000 – 2002, interest rates were dropped below norms to compensate for the deflationary effect of globalisation on Western economies.

    And a new era of stability was discovered in that these low IRs meant people could borrow more without causing a rise in default rates.

    So asset prices rise.
    So MEW takes off.
    So no recession (equivalent 6.5% of take home pay in the UK is MEW).

    At the same time, labour pricing power is reduced by competition from globalisation. And the prices of goods go into freefall for the same reason.

    These processes are reversing, and will continue to do so :
    1. Cost reductions from globalisation are slowing (China gets more expensive and capacity restrictions like raw materials are biting)
    2. Asset prices have risen so high that defaults on loans are increasing, restricting debt supply.

    Any rational person would argue that this is lining up for at best a reduction in Western growth rates.

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  • Did anyone else notice the report in the media that Blair will be announcing his timetable to stepping down on the 9th or 10th of May, the same time as the MPC meets this month. That should keep the interest rate rise out of the headlines. I suppose if one wanted to get 0.5% past the public without causing too many headlines, this month would be the time to do it. Nice way of sending a signal to the banks without causing too much unrest.

    I predicted this timing to a couple of friends last month…and when I heard the report on the radio I had about 5 seconds of smug delight followed by the usual rebound into feelings of helplessness and depression. Of course there are many other reasons why the timetable would be announced on a Wednesday or Thursday, but why next week and not this week or the week after next?

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  • I think Paul and d’oh are right.

    I think interest rates will rocket because each rise will fuel inflation and necessitate another rise. I also think this is planned (by the banks) in order to bring the housing market down so that everyone is in debt servitude forever and the bank still gets to repossess the house.

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  • Kiesty, don’t be silly. The Bank of England can’t do decimal – whole fractions only.

    Their sliderules won’t allow it.

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  • confused76 says:

    Rimmer… what are you saying?!!
    The market is six-foot under at 6.5%, just calculate affordability of the marginal investors (the million or so gullible folks that have bought in the past 2 years). With earning multiples of 6x and growing lending spreads, a base rate of just 6% is going to crash the market by bringing levels of afforability right where they were in the early 90’s.

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  • A tough call but as we all know the powers that be do not want to stop the party. They rightly fear this would lead the public to know the trumpeted economic miracle is in fact failure.

    The CPI inflation measure is manipulated to this end. I believe their play will be that inflation is set to drop as energy prices (gas and electricity) are going down and this effect will be far greater on the CPI that when these prices were rising. Should crude prices start to drop below their current level their inflation calculator could compute deflation.

    We all know the longer the party rages the greater the hangover when it ends.

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  • confused76 said

    Sorry mate but thats utter rubbish, i am in the south east and every other car on the road is a new 700 series BMW ( or so it seems ), 6% might cause a bit of belt tightening and even a few who sadly are stretched to the limit to loose their homes, i have to say that anyone who has taken out a mortgage in the last 2 years and cant “Comfortably ” ride out 6% really cant afford a house .

    I personally dont think 6% will cause any kind of crash, i do however see the UK rates making 7.5 to 8% in the next 5 years

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  • Confused >> here are the base rates for the early 1990s >>>

    1992
    1 Dec 92 – 9.29
    13 Nov 92 7.00
    1 Nov 92 – 9.99
    16 Oct 92 8.00
    22 Sep 92 9.00
    18 Sep 92 10.00
    16 Sep 92 12.00
    1 Jun 92 – 10.65
    5 May 92 10.00
    1 Mar 92 – 10.95

    1991
    1 Oct 91 – 11.50
    4 Sep 91 10.50
    1 Aug 91 – 11.95
    12 Jul 91 11.00
    1 Jul 91 – 12.45
    24 May 91 11.50
    1 May 91 – 12.95
    12 Apr 91 12.00
    1 Apr 91 – 13.75
    22 Mar 91 12.50
    27 Feb 91 13.00
    13 Feb 91 13.50

    1990
    1 Nov 90 – 14.50
    8 Oct 90 14.00
    1 Mar 90 – 15.40

    1989
    1 Nov 89 – 14.50
    5 Oct 89 15.00

    As you can see they were ABOVE 10% for 2 -3 years and 8% was the NORM, i stand my ground 6% wont cause a crash.

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  • C'mon Correction says:

    I would be surprised if the BOE increased rates by 0.5%, Sterling is still fairly strong overall and increasing by only 0.25% will still keep the money markets expecting another 0.25% thus proping up Sterling a little longer. I beleive once rates hit 5.75% then Sterling will be near a short-term peak and will then actually fall, as a result we’ll import more inflation and the threat of rates going over 6% will be with us again end of year going into 2008.

    Once rates hit about 6% in the next 18 months,we’ll see big effects on consumption, house prices falling, Sterling falling; but we’ll still be importing inflation so rates won’t be cut and we could have Stagflation in 2008. After that it depends entirely on the world economy, not what the BOE and government tinker with.

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