Tuesday, May 3, 2011

A big hint ahead of Thursdays MPC release

Mervyn King warns against raising interest rates

Mervyn King, the governor of the Bank of England, has warned of the “severe” consequences of raising interest rates. Speaking at the European Parliament in Brussels yesterday, King said rate rises would be dangerous given the high debt levels across Europe. King said: “The economic consequences of high-level indebtedness now would become more severe if rates were to rise.” The Monetary Policy Committee meets this Thursday to decide whether to keep the bank rate at its historic low of 0.5%.

Posted by jack c @ 10:15 AM (2958 views)
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23 thoughts on “A big hint ahead of Thursdays MPC release

  • The reporting of this speech has him mostly talking about the severe consequences of a rise in long-term interest rates (as opposed to short-term). He can’t do much to control long-term interest rates but it is a rise in those rates, that he most fears. It’s too late; they are already rising almost everywhere in the world. These people absolutely hate the idea of not being able to exert control over everything but he had better get used to it

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  • “Mervyn King, the governor of the Bank of England, has warned of the “severe” consequences of raising interest rates”

    ~ For once Merv is correct, but only after being wrong so many times in the past.

    We need an uprising of people not rates to cure what is going on with the manipulation of oil prices and rigged wars in the middle east.

    That my friends is 80% of the problem.

    It would be interesting to see what would happen if taxation was reduced in the wake of inflation. Ha, ha! There’s the rub.

    .

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  • The reason behind the rationale of not raising interest rate is simple: All major banks are holding a lot of positions on Interest Rate Derivatives (whether they are Vanilla, or Structured, in excess of 350Trillion USD – 550 Trillion USD, 10 times the size of global GDP), betting interest rates remain low. If Mervyn King raises interest rate, there is high probability that major banks will go bust, needing a new round of bailing out… this will increase tax payers’ burden even more….. he is facing a hard choice!! Please understand him…. unfortunate, he can’t tell the truth.

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  • the original decision to reduce interest rates so low to save a housing market meltdown worked…however ‘fixing’ things this way has consequences.

    debt has been increasing from 1.3 trillion to 1.6 trillion since 2007 as people use their credit cards and loans to pay bills

    after 4 years its now even worse situation

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  • 1. flashman

    Central banks love a bit of inflation, so do government, just so long as it doesn’t kill the host.

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  • Hmmmmm. Interest rates to rise after Mystic Merv retires in 2013?

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  • 3. jack c

    You still haven’t given up on that clown? He was another deflationist back in the day, I sent him a very cutting e-mail at the time. 😉

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  • 4. khards said, Hmmmmm. Interest rates to rise after Mystic Merv retires in 2013?

    ~ Or has a heart attack. lol

    However, a stab in the back must never be ruled out.

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  • Merv – just make sure there’s a good spread between the base rate and Treasury bonds. The Congressional Research Service in the US found that:

    In Q1, 2009 JP Morgan Chase had $29.2 billion in outstanding Fed loans with an interest rate of 0.3% and held $34.6 billion in US government securities with an average yield of 2.1%

    In Q2, 2009 JP Morgan Chase had $7.6 billion in outstanding Fed loans with an interest rate of 0.25% and held $34.6 billion in US government securities with an average yield of 2.3%

    In Q1, 2009 Citigroup had $12.1 billion in outstanding Fed loans with an interest rate of 0.5% and held $14.3 billion in US government securities with an average yield of 3.9%

    In Q4, 2008 Citigroup received a Fed loan of $15.8 billion @ 1.2%, another of $11.6 billion @ 1.1% – and held $24 billion in US government securities with an average yield of 3.1%

    http://www.commondreams.org/headline/2011/04/26-4

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  • icarus: Quite. I can’t see anything other than a convergence of those spreads

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  • @ flashman (1),
    I agree. How long do you think it will be before the ECB puts up rates again? Their inflation rates are up since the last decision.

    I think Merv will keep rates low for as long as he possibly can. That’s a disappointment for many, like me.

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  • I have to say my faith in a house price crash is starting to crumble, it seems that the government will do anything to keep the housing bubble inflated even if it leads to hyper inflation, what other choice does this country have but to inflate our debts away.

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  • mrmickey: I have rather less belief than you appear to have, in the government’s ability to shape everything, for as long as they see fit. In my experience, people who have working experience of ‘the markets’, tend to be quite dismissive of a government’s long term hold on the economic levers. The government might give the impression of control but in the scheme of things, their control is only ever fleeting. They are blowing in the wind like the rest of us and I am quite sure that many people in the BOE and the Treasury do not sleep well. It is actually quite easy to predict the future but unfortunately the degree and timing of events are almost impossible to predict. At some stage interest rates will rise and at some stage they will be very high, no matter what the government does or says. I wish I could tell you when but my experience tells me that these things kinda just happen one day, out of the blue

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  • I wrote a letter to Merv at [email protected] and got a nice reply. Admittedly it was from a member of his office but it was assuring me they only make interest rate decisions on a month by month basis. Apparently, in know way do they decide to keep interest rates low, months in advance!

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  • Been saying it for some time now – no rises until growth locked in. Don’t think growth will happen soon? No rate rises then …

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  • george monsoon says:

    er?

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  • I’ll bet he does.

    The people he works for will lose a lot of money if rates go back to a sensible level. And politicians will lose a lot of votes from dim people who took on mega-mortgages they hadn’t a cat in Hell’s chance of paying off.

    So, for now, savers will have to take the hit. People who did nothing at all to cause this depression.

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  • @8 mrmickey – check out the Nationwide houseprice graph, it’s beginning to look like the lifecycle of a bubble graph. Still it’s going to be years before we get to some sort of bottom. 2018 give or take a couple of years is my call based on time it took to get from the last bottom to the top, maybe even longer with the sort of ongoing support we’re seeing from the gov’t.

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  • flashy – don’t conflate the BoE and the government/Treasury. The BoE is a club of City banks. Nationalisation in 1946 was meaningless (the legislation didn’t even specify what the nationalisation was for) as politicians who tried to restrain it have found out. As a Treasury paper in 1956 noted, nationalisation did not represent any fundamental break with the past – a past in which, according to Keynes (no socialist he) it was a private institution practically independent of any legal control. Top officials are still drawn from City banks.

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  • george monsoon says:

    This will now be buried under yesterdays blog posts, but I cannot believe you three, Peter, Alan and Icarus, all completely ignored my comment. I thought I would enlighten, but it doesn’t matter how bright the light is when all around, cretins plug their thick skulls in the ground and say “la la la la la”. I am so glad I left this site to do some real research and actually found out why all this is happening. bye. (this time I won’t be coming back)

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  • gm @16 – a major theme of the video @12 is that the Fed is private and is run by and for private banks. Not too different from my post @ 15 with regard to the UK. What’s the problem?

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