Monday, December 1, 2008

Do we really want interest rates bouncing around like this …

MPC Must Cut Interest Rates By A Full One Per Cent On Thursday

“Following the disappointing reaction to the PBR it is critical for the MPC to persevere with aggressive interest rate cuts. To alleviate the worse consequences of the recession, we urge the MPC to cut rates by a full one per cent on Thursday, to two per cent. Additional cuts will be needed in the early months of the New Year, probably to one per cent."

Posted by fahrenheit451 @ 12:38 PM (1286 views)
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16 thoughts on “Do we really want interest rates bouncing around like this …

  • ………….because interest rates cuts saved the US economy didn’t they?

    NOT!

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  • Not a question of must in my mind. more like they will – at least. Reading minutes of the last meeting you will see they were thinking about cutting 1.5% last time, but thought it would shock the market too much (i.e. it wouldn’t be too big a cut, just that it would rock the boat, as it were).

    I’d plump for:
    1.25 at around 40% chance;
    1 with around a 50% chance;
    a slim chance of 0.75;
    a very slim chance of 0.5
    I think even 1.5% has a look in, maybe around the same chance as the 0.5 cut.

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  • Symo – indeed. This tool only attempts to control the short end of the curve, with the idea that it must feed through the curve, however that does not work so well when there is no liquidity in the longer end. But don’t let this fool you into concluding that the tool should be ignored.

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  • Will be interesting to see what they decide to do. One of their justifications last time was about the deterioration in what they expect inflation to be in 2 years time (compare the fan charts in the August and November Inflation Reports). I’m not sure that this has really changed since the last meeting…

    But I’m sceptical that the 2% target has been the main consideration for a while… ‘We’re heading in to recession, get us out of here’, more like.

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  • I wish they’d hurry up and cut to zero so that everyone will stop making such a fuss.

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  • Well, with Christmas in the way, whatever they’re going to do in Jan they may as well factor early into Dec. That’s where it’ll probably have the biggest impact and set the scene for the new year.

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  • titaniccaptain:
    The base rate does not necessarily affect inflation, however the rate one can earn “risk-free” definitely does.
    However, the base rate usually will pull this theoretical risk-free rate (and the real, risky rates) around.
    As the theoretical risk-free rate gets lower there is more incentive to invest rather than save
    Inflation is the rising of prices.
    Broad inflation will increase whenever there is more aggregate demand than supply (of services, goods, etc…)

    Therefore *usually* a decrease in base rates causes a decrease in real rates which causes an appetite for investment, which pushes up demand which puts on inflationary pressure.

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  • TC – lower interest rates causes investors to flee from a currency,(looking for better returns from other countries with higher interest rates), driving it down against other currencies making imports more expensive, although the plus side is that home grown exports are cheaper to foreign buyers and therefore encourages manufacture. Considering the UK imports more than it exports and the talk of a run on sterling has already happened, IMHO, we are being led into a potential hyper-inflationary environment, which would also be the case if we were forced to join the Euro. In short , ‘life’s too short’, yes it is but it could also be, and probably will be, much, much more expensive, and savings will be worth sh*t. On the brighter side the governments huge debt, along with the 1.5trillion pounds worth of individual debt in the UK will be reduced by inflation, so its a win, win, unless you were stupid enough to try saving for a rainy day – it’s raining and HMG are desperately trying to steal the umbrellas of the prudent to cover the profligate.

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  • planning4acrash says:

    There will be a carry trade to places like Russia, borrow 0% from UK, save in Russia for 13%. But money will also be cheaper for UK borrowers not relying on high commercial rates. Overall, money being cheaper, you get more of it, so this is inflationary.

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  • planning4acrash says:

    You have to remember, that the state exists to inflate. To redistribute wealth from savers and workers to it, its friends and big corporations it partners with. Until you get that, you will always look for altruism and be blame inflation on mismanagement.

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  • planning4acrash says:

    Government achieves its aims if it inflates without destroying the cash cow (that’s us), except when a crisis is engineered to centralize power. This is why government lie about inflation figures. Figured it out yet?

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  • You are right TC. Deflation short term, but a build up of inflationary pressure in the medium to long term. The MPC WILL drop interest rates to virtually zero, as will the ECB and the Fed (although it would appear that investors have now decided to attack and destroy sterling so we will suffer the most) but this will just bring about short term solutions to growth and lending (re-igniting the credit bubble on government/taxpayer borrowed money), but the real whammy will come in a year or two when inflation starts to rise.

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  • it_is_going_with_a_bang says:

    Dropping rates to near zero % is a very dangerous path to go down, as it then leaves nothing in the monetary arsenal with which to control or influence.
    It has not exactly worked too well with Japan – the one shining example of how not to do it if ever there was one.
    Deflation has many defintions but we are certainly seeing the first signs of it which is the cutting of prices and large scale job losses to go with it.
    So what will be expected of us all then? To take out huge amounts of lending based on rates of 3% or alot less. What happens when the rate has to be increased.
    Japan happens. You can’t ever raise them again.

    Still waiting for Gordon Brown to admit publicly that his promise to end the cycle of boom and bust was just a load of **** that he made up to impress people.

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  • Of course in my ealier post I meant to say they were thinking about a 2% cut (obv they did cut 1.5) – sorry about that, although no-one noticed yet.

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  • planning4acrash says:

    “Still waiting for Gordon Brown to admit publicly that his promise to end the cycle of boom and bust was just a load of **** that he made up to impress people”.
    – You have to ask, who was he talking too, what was his audience. Certainly, for the established group of financiers, boom and bust has disappeared, via humungus corporate welfare programs.

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  • It’s OK though he was only talking to those ‘people who matter’.

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