Wednesday, July 4, 2007

Prepare for a global credit crunch

Interest rates will rise tomorrow – but what next?

It seems almost certain that interest rates will rise to 5.75% tomorrow and they're unlikely to stop there, says John Stepek. As yet another subprime hedge fund bites the dust, the global credit crunch looks to be upon us....

Posted by mary @ 10:42 AM (506 views)
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14 thoughts on “Prepare for a global credit crunch

  • Interesting,

    So the markets are no longer surprised then?

    Strange pattern developing here:

    1. inflation above target in April / May 2007.

    2. So we raise Interest Rates once knowing they will probably have to rise once more (to cool the immediate problem) …

    3. We then manipulate the RPI for one month (risky but possible in view of the fact that no one really believes it anyway)….

    4. Then the BOE great and the good liquidate their assets….

    5. Housing on the market / sales go up for a month or two ….

    6. This is claimed to be as a result of the HIP’s fiasco….

    7. Then Interest rates climb steadily upward thereafter….

    8. 5.75% Thursday (at a very long odds 6.00%).

    9. A run for the polls October/November 2007 (before the real cracks in the economy occur)…

    10. Interest Rates at 7.5% by May 2008.

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  • talking rot says:

    Orwell has, probably, pointed out what should happen. However, Orwell’s points do not consider the “Dove” factor. The Doves in the MPC are numerous. I wonder what would happen if Mervin King is out voted a second time? What would happen to the GBP if rates were not raised.

    I reckon it will be close but tomorrow will bring a NO CHANGE. Something along the lines of “The MPC is following a wait-and-see approach because of conflicting indicies” or some such rubbish. 5.75% by the end of the year followed by cuts early in 2008.

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  • C'mon Correction says:

    I’m also unsure about a rate rise tomorrow, the BOE is one of the most dovish central banks- look how long they have strayed over the target rate of 2% and still they dither over rate rises. This economy is on a knife edge and the BOE know this only too well. However, if they don’t rise, Sterling will take a kicking.

    I don’t think we’ll see rates go above 6% this year, but we won’t have any cuts for a long time – only a HPC would cause this. Money supply is far too rapid, and Sterling would drop massively from it’s present level and we would start importing inflation on a big scale.

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  • Disillusioned says:

    “We then manipulate the RPI for one month”

    Orwell. Don’t you mean CPI?

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  • george monsoon says:

    I agree with most of the above comments. The current methods employed by the BoE for managing interest rates do not cater for global changes. The financial world is a very fragile structure and I forsee Britain acting too slowly.

    Talking rot. Can you backup your argument for cuts in 2008? At the moment I cannot see interest rates coming down any time soon. Cheap money will have to be curbed in order to stop the pound sinking through the floor, so I would say that interest rates will continue to climb over the next two years or so.

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  • Planning4acrash says:

    I must say, TR, you are to be commended for having stead fast opinions, but, I honestly can’t see how we will possibly see cuts early 2008. Oil just got to $72, with inflation implications that will feed in over the next 6-12months, for example, and food costs and many others are experience structural changes that will be hard to iron out. I simply can’t see the rationale behind your assertions. The BOE themselves stated a required 5.75% to keep inflation at 2% over the next 2yrs, so interest rates are highly unlikely to go this low again until the next cycle. With the economy operating at the upper end of fan predictions, they will need to go further. This is an implication that is not expressed explicitly in the MPC’s inflation reports, but is easy to see when you read between the lines. Keeping at 5.75 until Christmas will cause a crisis by that time, which will be stamped out by escalating interest rates, in the same way that we saw 3.1% just after last Christmas, when retailers can put prices up during the present buying season.

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  • As I’ve mentioned in the past the key to interest rates are currencies, the US economy is going belly up so their desperate to drop rates, dropping them is not an option as the dollar may go in to free fall even leaving them on hold is causing the dollar to slide, so the US is between a rock and a hard place if the dollar falls much more they will be forced to raise rates anyway. Sterling will be faced with the same problem stop raising interest rates and Sterling will start falling leading to higher inflation.

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  • The Capitalist says:

    Agreed George…IR cuts are not going to happen for ages, I suspect the pound will fall due to our trade deficit…it’s a pretty bad outlook: higher taxes, higher IRs and asset deflation yet inflation in food, fuel etc.

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  • There are now actually three classes of MPC member sentiment – Doves, Hawks – and Wimps..

    The wimps base their decision on what the pundits and the markets are expecting them to do – last time the markets were not expecting a change – so there wasn’t one.

    This time the markets ARE expecting a raise – so there will be one (but only 0.25%).

    The BOE minutes have always recorded the market expectations of the meeting, but of late they seem to be carrying much more weight..

    The odds of a year end rate of 6.25% are now slightly better than 6% BTW…

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  • I did understand that the markets were pricing in 6.25% and actually read it somewhere, but have now lost the aritcle.

    I predict that it will depend on whether this discredited lot in power make a break for the polls this side of the year or next…

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  • I agree with UT, for the first time ever.

    Good point about the Wimps too.

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  • Blanchflower will vote for a cut 🙂 but .25 set in stone tomorrow and I’ll go for yet another 2 * .25s before year end.
    The start of 08 will see the Brown stuff being sprayed here there and everywhere, something akin to a Tarentino film, sorry I meant filem. Things could get very hairy very quickly when rates start to return to the 30 years average of 7%+.

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  • I didn’t know that the 30 year average was 7%

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  • Sparksgalore says:

    Re the pathetic attempt to take the heat out of the housing market by paltry 1/4 % hikes every other month or so. I am reminded of the old Chinese proverb, If you stick your head far enough up your own backside you will very quickly be engulfed in total darkness.

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