Tuesday, November 18, 2014

What will they do once rates are cut?!

Don’t expect an interest rate rise until 2016, says HSBC

What they won't expect is the cut to 0.25% once inflation is below 1% for longer than the bankster's capital bases can tolerate. Also, government like high prices because they can tax the prices of most things, so they try to not allow deflation.

Posted by libertas @ 12:32 AM (7100 views)
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38 thoughts on “What will they do once rates are cut?!

  • What effect would cutting 0.25% have on the economy? It would give mortgage holders an extra £2 per month, so very little stimulus there.
    I can’t see there’s any benefit cutting rates at these low levels unless i’m missing something?

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  • Hmm. I don’t know. I guess anyone who has run up billions and billions of pounds worth of national debt might be in a better situation. Can’t think of anyone in particular who fits that bill though…..

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  • I’d never say ”never” about interest rate rises. A hell-of-a-lot could happen before 2016.

    What they won’t expect is the cut to 0.25% once inflation is below 1% for longer than the bankster’s capital bases can tolerate.

    And exactly what would that achieve? Deck chairs and titanic spring to mind.

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  • The only time BOE will cut interest rates is if asset inflation falls below zero. They don’t care about goods prices or wage rises, the evidence is clear for all to see. After all goods deflation does not hurt banks balance sheets but asset deflation does.
    Once price falls are in full swing and clear for all to see there will be another bout of banks not lending propaganda followed by a new funding for lending scheme. BOE will only cut rates if the US does.

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  • khards @2

    Do you mean £20 a month, not £2 a month? Average mortgage balance £100k (is that right?) so 0.25% cut reduces interest expenditure by £250pa, more like £21 a month.

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  • Khards, BOE DOES NOT RUN THE ECONOMY. They will cut rates because if they do not, nobody will borrow from them, because they have to compete in the market to sell bonds and fund HM Government.

    If they don’t cut rates, private lenders will under-cut the BOE with lower rates and all money will flood into the private sector. That would be a good thing and boost the economy, but government run for their own existence and in competition with the private economy.

    BOE will have no choice but to slash rates if private Sterling rates collapse in response to low inflation and low inflationary expectations driven by GLOBAL forces such as the oil price collapse I was saying may happen a few months back that will possibly cause mortgage rates to go negative.

    Mortgage rates can go negative because banks make money on the arbitrage between deposit and loan rates. Both can go negative.

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  • I see, I didn’t consider BOE’s base rate compared to bonds.

    It wouldn’t surprise me to see 0% mortgages fixed for two years with a £3k application fee shortly before everything blows up again! Like 2007 again, but instead of high loan multiples sill interest rates that will bankrupt the banks when they rise.

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  • Khards, you are fighting the last economic collapse.

    Banks failed last time. This time it is governments that will suffer. Each cycle is similar, but not the same. It is possible that banks, relying on arbitrage, can keep reducing rates, whilst central banks struggle to do so and may struggle to finance themselves having destroyed the real market propping up the banks.

    They will be busy fighting deflation. US already re-evaluating measures of inflation to under-report deflation.

    Deflation will also reduce tax revenue.

    Sovereign debt crisis next. Banks will be just fine. Infact, if anything, governments have over-regulated the banks, fearing another banking collapse that was never going to come, thus creating yet more deflation that will collapse socialism. That is what will be at risk this time around. Anybody reliant on handouts, you could suffer moving forward.

    Problem is, the private sector will not bail out government, they just go off-shore.

    Meanwhile, corporations need to entrench, shutting excess stores. Supermarkets must shut about â…• of all stores to respond to unrespondable competition from online retailers, farmers markets and grass roots resurgence. All part of the shift to local production that deflation will drive. Meanwhile, bespoke manufacturers and service providers will charge increasing premiums and grow.

    This is a new economic cycle. Look in the rear view mirror and you may just miss it.

    Back seat driving is why most pundits are wrong.

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  • IMO supermarkets won’t be closing stores. They will be subletting floor space within to reduce floor space, just like they did in the late 80’s. I can recall going to the hairdressers within the local asda store, there was also a photo shop etc. More empty highstreets will be the way forward.
    I guess the only thing left to do is to print money and hand it to the people like they should have done in the first place.

    “You can always count on Americans to do the right thing – after they’ve tried everything else.
    Winston Churchill”

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  • Khards, BOE DOES NOT RUN THE ECONOMY.

    Yes, but they do manipulate interest rates….and quite successfully so far too.

    Sovereign debt crisis next. Banks will be just fine.

    And so what do you think will happen to interest rates then?

    (Clue – they won’t getting lower at that point.)

    So you have read Nadeem Walayat – from Market Oracle – and are now spewing forth all his ideas. I can tell you, that guy has been completely wrong many, many times in the past 8 years…so just careful who you follow.

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  • The reality is the Fed runs this country.

    They do what is in the interests of the 1%. In the USA, the 0.4% owns 20% of the whole country. that sort of infuence sways things.

    The economics books are not out of date – its a new paradigm for a short spell – untill the next round of the currency wars. The USA is hitting the highs – both stock markets and child poverty.

    We have sold out our children and grandchildren – we just haven’t paid all the bills yet 🙁

    No need to stock up on baked beans, but if you have a large amount of cash, make sure you spread it around – no big deposits chaps….

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  • …oh, and if you have a hoard of gold, FFS don’t show it to the Americans. The Ukrainians did and now it’s gone. All 42 tonnes of it – on an unmarked plane!

    Conspiracy theorists – your views?

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  • The US – and the UK to a degree – has effectively declared war on it’s own citizens.

    No longer working in the interests of the country (the politicians having given up trying to fix anything in any meaningful way) are now fully engaged in a frenzy to grab what they can before the party finishes….so no economic plans are made with any long term view in mind.

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  • HP Watcher, Nadeem is wrong about interest rates. He says they are about to rise. Actually, they are about to fall. This could temporarily be a response to weakness that causes house prices to fall, but I think they will stabilise.

    The more I look at rates and central banks, the more I think that their bailouts screwed the real economy to deflation and that EVERYTHING they have done since 2008 is to avoid deflation and NEGATIVE rates. Many say that rates have been held artificially low. Actually, I think the opposite, central banks have been holding rates artificially high, stopping them falling below zero as the solution to the destruction they caused to the economy, but they will avoid it long as they can, but deflation is coming because QE destroyed the ability to consume by transferring wealth from savers and consumer to lenders who had gambled badly.

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  • Actually Alan, the Bank if International Settlements runs the Fed. It is run by old banking families.

    Alan, USA was the real invader of Ukraine. Soros and the EU pumped billions into destabilisation to let it fall into the EU. Russia swooped into the eastern part to save its assets. Russia and EU are though partly in party with each other, because both want massive trading blocks, aka 1984, because they are all globalists. Putin gave the game away by being against the Nationalists in Ukraine.

    I personally believe that Russia and EU didn’t want a strong independent nation on their doorstep. They negotiated splitting the country with one half falling to the EU and another to Russia.

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  • “I can tell you, that guy has been completely wrong many, many times in the past 8 years”

    Um hahahahahahahahahahahaha

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  • What’s making me laugh is the so called recovery that was predicted by so many self proclaimed experts.

    Not looking so good now is it?

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  • Back on topic:
    S&P today say the only thing stopping more recession in EU is ONE TRILLION in QE by ECB. They urge Draghi to “act now”.

    Got gold? Oops, and stock up on those tinned potatoes too 🙂

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  • Just checked Bloomberg. UK and world economy still growing. Phew, you had me worried.

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  • Just checked Bloomberg. UK and world economy still growing. Phew, you had me worried.

    Ah yes, that’s more money being spent on drugs and prostitution, so GDP has improved.

    Meanwhile the *real* economy gets worse and worse.

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  • Comments about drugs and prostitution make you seem about ten years old. Not being funny but do you have a job? I own a company and things have been great for a few years now. Next years contracts are mostly in the bag and we’re hiring at the moment. I talk to other business owners almost everyday and most of them are equally happy. I don’t think its possible to know anything about the real economy unless you’re actually in the thick of it. You certainly won’t see what’s going on from a fairly entry level job or from reading eccentric blogs. People who run the businesses that constitute the real economy are quite confident in the future. The big procurement and hiring surveys back this up.

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  • @alan – Potatoes won’t go up in price since farmers can only get what people can afford to pay. Potatoes would only go up if real + speculative demand exceeded supply and banks were introduce credit to buy potatoes.

    @flashman, I can only assume that you are in a property related job. Yes the economy is booming just look how well the supermarkets are doing! Considering that’s the first place the 99% like to splash their disposable income on pay day they can be considered a good barometer for the economy.
    Supermarkets were surging ahead when the banks cut interest rates to give consumers more £££’s in their pocket. Unfortunately inflation has since eroded that disposable income and the banks are not in a position to lower interest rates further.

    The same little game has been being played since the early 90’s where banks have cut interest rates to give consumers cash to spend. Instead of giving the consumers an easy ride they should have held up interest rates and forced people to work harder and become competitive rather than encourage zombie households.
    The interest rate falls have merely been offsetting the wage stagnation/deflation, now that’s reached an end game the next thing they will attempt is printing money and giving it directly to consumers. I’m not sure exactly how that will manifest, but keep watching the headlines as it will more than likely be issued through the property market directly to the voters.

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  • Khards,
    I was joking about the tinned potatoes. That’s why I put the little smiley in place 🙂

    I will probably have to stop posting here as I’ve been left a London property in a will. Looks like I should rent it out for a while. I guess future posts will be coloured by this.

    I don’t think terraced houses are in for a big fall. We shall see.

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  • @alan – I wouldn’t worry as I don’t think there are any commenters left here who are renters. Was just making a tung in cheek point the potatoes.

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  • Khards, I build the odd house because I enjoy it but my long standing company has nothing to do with property. I also started up a small business a while back which is why I didnt post here. Its flying now which is really exciting. Even in a boom some sectors do better than others so you can’t just pick out every be bit of bad news you can find to paint a picture. The fact is that unemployment has been falling fast for a few years and the economy has been growing for a few years. The British economy is actually quite diverse. I’m sure there are plenty of pie charts illustrating this if you’re interested.

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  • The big procurement and hiring surveys back this up.

    Hahaha you have been predicting a recovery for the past 8 years, and it still isn’t happening….oh, outside of property, which the government supported to the tune of 42 billions FLS in 1 year. You call that a recovery if you want to.

    If there was a recovery, interest rates would be rising and wages would be increasing significantly….and not some accounting trick, like a drop in the price of oil. The opposite is true, companies are laying people off all the time. Rolls Royce, Lloyds, Waitrose etc the list goes on and on.

    The fact is that unemployment has been falling fast for a few years and the economy has been growing for a few years. The British economy is actually quite diverse.

    The unemployment mainly consists of part-time, low paid self employed, zero hours contracts jobs. And the rosy propaganda simply does not reflect the experience of most of the people who live in this country – if you open your eyes.

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  • It’s like a parallel universe here sometimes. I predicted there’d be a recovery and there was one. Like most normal people I go by the published, easily verifiable stats. There will always be eccentrics who claim that everything’s fixed or that the tooth fairy still exists but fortunately these people are few and they are not taken seriously

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  • I seem to remember no one bemoaning flashy’s interest in forward – looking indicators when he said that if unemployment went above 2.75 million (or thereabouts) that the HP recovery would prove to be a Dead Cat Bounce.

    IIRC, it peaked slightly below that. In any case, it was mostly youth unemployment and the foreigners fleeing the Euro crisis picked up the slack until the onslaught that was FLS and HTB2.

    Ppl only turned on him when he started saying the recovery had canceled any remaining opportunity for the market to clear. Amidst falling unemployment, that wasn’t such an odd call., even if the 2.75 (or whatever) figure was not as meaningful as he thought. It peaked very near to that, after all. Whether or not his reasoning was completely sound, his conclusions have been more accurate than anyone else as far as the recovery goes.

    Recoveries from financial crises are always hodgepodge supposedly. I personally think this one is likely to falter between now and the election, hopefully in terms of falling HPs, but no worse than a stagnant economy. Nevertheless, to my mind, Flashy’s posts are easily some of the most informative on here.

    There are so few posters left, let alone good ones with a unique opinion. Can’t we all just get along?

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  • That 2.75m was sometimes misunderstood. At the time people here were very keen on charting patterns and Elliot wave etc. I somewhat garrulously used to dismiss those things as hocus pocus but some people still thought of my 2.75 number in the same light. It was actually just an imperical observation based on a remarkable positive correlation that held accross many decades and several continents. What it didn’t do was contain and fundamental analysis or commentary at all. Obviously it didn’t prove prescient because it predicted or got lucky with the factors you describe above However it’s reasonale to say that unemployment (or rather its failure to reach 2.75m) was influenced by the factors you describe. In my opinion we should always assume that governments will attempt stimulation in a recession so we should never think ‘ ah yes but that only happened because’. I always prefer to work with hard numbers because jts amazing how many times people and events will run around like loons pulling this way and that only to end up where the numbers suggested they would. Either way the remarkable positive correlation held once again. Incidentally I only found it after failing to find a correlation between intetest rates and house prices. The unemployment correlation was an afterthought and the results surprised me. One day I’ll do some more work on it. An unemployment tipping point for real wages would be interesting but I’ve learned to expect the unexpected when it comes to this type of exercise.

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  • HP Watcher. It is a mixed bag. Some parts of the economy are certainly recovering.

    Back in the 1990’s, yes, recovery would have been matched by higher interest rates and inflation BUT, you are fighting the last economic war. ANY growth and recovery now will see inflation absorbed by labour and capital flows from a depressed Continent. The ONLY way we see inflation in Europe is if we see consistent growth throughout. We have to see the northern countries growing and the Med countries growing, or else there are plenty of folk to take up the slack.

    That is all bullish for housing, for mortgages not only suffer less interest rate pressure but houses also see more demand from the influx.

    Of course, it could all go in reverse, but relative UK strength appears structural to me, down to the flexibility of the BOE and Sterling relative to the straight-jacket of the Eurozone.

    Of course, those with a home, projecting UKIP to win, plan to get your mortgage affordable before they get real immigration reform because if they do, rates will probably rise along with wages as slack reduces. That could leave homeowners on fixed income vulnerable to repossession. Yes, UKIP probably won’t get anywhere before 2020, but if this is a trend, you may wish to up payments and seek to re-pay excess borrowing within the next 10yrs if the UK is on a trend towards immigration reform and if UKIP are a bellwether..

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  • OK, reading the other comments. The drugs and prostitution issue is real. Our EU payments went up because GDP now measures drugs and prostitution and they backdated it, though this is clearly a SCAM since by its very nature, it is a black economy that will be PREDICTED in models rather than real accounting.

    Yes, the economy is growing, but those on wages are not benefiting because labour is not scarce in the EU.

    Homeowners are benefiting disproportionately from the recovery because housing is scarce in Britain and labour scarcity is keeping interest rates low.

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  • Things were more interesting back then. Techieman’s graph analysis sounded like nonsense but he seemed to make a lot of correct calls on gold (I don’t miss people talking about PMs however). I would love to know where he learned it. He had a very bizarre way of talking about market psychology.

    I’ve never understood how your regression analysis on IRs showed no correlation. There must obviously be some correlation between IRs and HPs. It strikes me that low IRs have helped keep high house prices high and growing fast since the late 90s, so there must be some correlation between the rates of change. Or is it to do with expected interest rates or expected rates of house price inflation as determined by expected interest rates? Does a nominal relationship hold or only a real one.

    There’s a lot of ways the correlation might pan out. One also probably lags the other by some way. But is it that HPs sticky or do future IRs shape HPs today?

    Perhaps you just weren’t looking for the right relationship. There must be some correlation since borrowers and lenders alike are looking at monthly payments to check for affordability. They’re not going to be as correlated as IRs and bond prices say, but HPs must surely be a function of wages, interest rates, unemployment, income (in)equality, rates of housebuilding, rates of new household formation, rates of workplace participation and rates of homeownership, with IRs being one of the most important factors.

    An unemployment correlation is less surprising, as recessions affect both HPs and the unemployment rate. How much it holds in boom times is dubious, however, since only people wealthy and skilled enough to own homes are only really vulnerable to cyclical unemployment. If the natural rate of unemployment is high, it won’t affect HPs because the poorest 20% rent socially whether they’re working or not.

    Once I’ve studied econometrics, I plan to check for these sorts of correlations myself. It’s funny, you say you learned nothing useful studying this stuff but you still do regression analysis.

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  • “Our EU payments went up because GDP now measures drugs and prostitution”

    Not true. It’s just a pan European accounts standardising exercise which several other countries also had to do. Several countries got the same accounting boost but they didn’t have to pay extra because once everything else ( it’s not just d&p that was standardised) was on a level playing field only we stood out as clearly stronger than previously admitted to (and in particular our recovery according to Eurostat). It would have been even worse for us if we hadn’t got our way with the bench mark year being 1995. Despite the political nonsense its entirely reasonable that if we are going to have a contributions system then everyone should use the same accounting method to work it out.

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  • The lack of success finding reliable/useful interest rate correlations is actually more understandable than it at first seems. Its because interest rates can rise because of booms and also because of adverse scenarios like the ERM fiasco or when a country’s rating slips. It doesn’t mean that house prices won’t fall if interest rates rise. It just means that they don’t always ( for example when interest rates rise in a boom). You’d have to comb the hell out of the data which would introduce all sorts of curve fitting and bias.

    When I say I didn’t learn anything useful Im not sure what context I was using. Maybe i meant somethinglike the 2.75 m was interesting but I didnt make any moolah or achieve anything concrete out of it? Maybe it was a cynical commentary on some ‘publish any old stuff for attention’ types?

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  • “I would love to know where he learned it. He had a very bizarre way of talking about market psychology”

    techie had enormous experience and he got his start in the pits. The way he thinks and talks about the market is actually quite common in people who came up in the pressure cooker environment of the pits. We actually agreed on far more than we disagreed on. As I told him at the time, i believe that it was his enormous experience and gut that made the calls and his technical analysis was a prop that helped to fight trigger freeze. In the old days people in the pits used pivot points and other indicators. That’s where/why he started using technical analysis.

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  • Yeah, I had considered that. Until recently, IR policy has been used to influence all sorts of positive and negative shocks but the effect on HPs was largely ignored. So, you would expect there to be lots of confounding factors. Also, the proportion of people taking out trackers is influenced by IR expectations and will drastically affect the responsiveness of HPs to IR rises in the 2 years after that. Right now, the number of people fixing is higher than ever. I think I read it was more than 95%, so if IRs do go up, there will not be a significant number of forced sellers. It will only affect the borrowing appetite of people buying after IRs go up, which won’t have the same firesale effect on prices (although the many mortgage prisoners from pre-2007 will still be in a world of trouble).

    I don’t remember what context you said something like that in either, sorry. It’s nice to know there is use to all this stuff in the professional world and that you still have the enthusiasm to make use of it years later. I’m doing macro at the moment and beginning to understand the CBs’ and politicians’ predicament a lot more than I did from reading the Economist, not to mention crackpot blogs masquerading as academic authorities.

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  • Alas, it sounds like the kind of thing they don’t teach in books.

    He was a great poster. He always had something interesting, although often counter-intuitive, to say, that got me thinking.

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