Tuesday, January 18, 2011

When will interest rates rise?

Inflation hits 8 month high - market reaction

The pressure to raise interest rates continues.

Posted by cyril @ 11:12 AM (2742 views)
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11 thoughts on “When will interest rates rise?

  • mark wadsworth says:

    1. The BoE has absolutely no reason to raise interest rates, if it can get away with paying 0.5%, why would they voluntarily pay more?

    2. Banks can’t increase interest rates because of pressure from Home-Owner-Ist Coalition.

    3. Banks can of course increase their interest rate margin by reducing amounts paid to savers – and they have done – the annual net interest maring has gone up from £40 bn per annum pre-crunch to £60 bn per annum as of today.

    4. Japan has had chronically low interest rates for two decades and got away with it (sort of).

    5. We have ‘imported inflation’ due to fall in sterling – unless they can gamble on interest rate rises pushing up sterling significantly, there’s not much point doing it.

    So my current forecast is like Japan, steadily declining economy and house prices, perma-low interest rates, politicians flailing around with one ‘stimulus package’ after another. Look on the bright side, they are going to introduce minimum pricing for alcohol, that will get the economy back on its feet!!

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  • As the article says…”pressure building”.

    and..”The question is whether the peak is 4.1 or is it higher. The trend is your friend in this number and unfortunately that is pretty sharply higher”.

    @MW..”Minimum pricing for alcohol”….oh noes! Should I stock up now?

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  • landofconfusion says:

    2. mark wadsworth said…
    2. Banks can’t increase interest rates because of pressure from Home-Owner-Ist Coalition.

    But don’t banks finance themselves from the bond markets? And aren’t these betting on a rate rise in June?

    Look on the bright side, they are going to introduce minimum pricing for alcohol, that will get the economy back on its feet!!

    Had to chuckle on the one. There’s a guy at work I use as a kind of barometer for the economy. Back when the base rate was at 5.5% the monthly repayment on his leasehold flat was coming in at £100 more than his monthly takehome. During that time he was turning up to work stinking pis*ed and only just avoided getting the sack (management incompetence). When rates dropped he sobered up but has recently started getting bad again. Even drinking straight after work.

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  • mark wadsworth says:

    LOC: “But don’t banks finance themselves from the bond markets?”

    Taking UK banks on the whole, it’s about 50% deposits, 25% bond markets and 25% government bail outs.

    In olden times, depositors might have looked a bit futher afield for better interest rates (like Iceland, tee hee) but right now everybody is scared to death and is happy to live with 0.1% interest provided the money is “safe”. The UK govt has backed up UK banks with taxpayers’ money, so they are as safe as anything else, really.

    Bond market rates could well increase (but why would they, it’s not like there’s anywhere better to put your money) and even if they did, the government holds the trump card as it can just extend and pretend all the bail out money for another few years.

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  • Interest rates are give rise to costs of production; raising them will cause inflation. Flak please.
    N

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  • mark wadsworth says:

    Nick B, interest rates are not really a “cost of production”, they are a “cost of ownership” (although with productive economy, there’s a bit of an overlap).

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  • ontheotherhand says:

    [email protected] great to hold them to their predictions! The fan chart was supposed to show 90% of all possible outcomes so I guess they would argue we had one of those 10% events.

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  • @11 – correction… they would argue that we had “another” of those 10% events.

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  • Yield curve responding, as anticipated.

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  • tenyearstogetmymoneyback says:

    mark_wadsworth @ 2

    I thought the story from Japan was that they have had deflation for years which is why they can get away with the low interest rates.
    Of course there is always the question of how you measure inflation. There is and interesting table of what is going up (essentials)
    and what is coming down (which I would say are discretionary durables) on the bbc website.

    http://www.bbc.co.uk/news/business-12214546

    No reaI surprises. It already costs more to fill your car up than to buy a mid range digital camera.

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