Monday, Jan 12, 2015

The only way is DOWN baby, to 0.25% then negative, oh, the only way is down.

Telegraph: Rejoice; inflation is sub 1pc. This is what Mark said to George

It appears that 1980's pop got it wrong in direction as well as style, as UK interest rate expectations begin to collapse.

Posted by libertas @ 08:17 PM (15872 views)
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15 Comments

1. quiet guy said...

Recently, I was browsing Shaun Richard's blog and came across this:
Will it be slow growth and low inflation for the UK economy in 2015?

A quote from the article which seems reasonable to me:
"The higher interest-rates chimera is something that the Bank of England needs to think through. After ignoring inflation of more than double its target it would be extraordinary in my view if it raised interest-rates with the official consumer inflation rate at 1% and falling and signs of a slowing economy."

So yes, a case can be made that rate rises are off the menu for now.

Drifting from the article a bit, what about oil prices? There is a school of thatought that the recent extraordinary drop in oil prices is being engineered by Saudi Arabia for strategic reasons.
Who Is Behind the Oil War and How Low Will the Price of Crude Go in 2015?
Nevermind U.S. shale, Saudi Arabia’s oil power play targets Iran’s economy
Saudi Arabia Feeling Pain Of Oil Price Plunge, But It Has Enough Currency Reserve To Last For Years
Assuming that the Saudis are playing financial warfare, how long will this last? Perhaps a couple of years? Surely not for more than a few years considering the cost. At some point, oil prices will be allowed to rise again and then we will probably see interest rate rises. Enjoy the cheap petrol - if you can keep your job.

Monday, January 12, 2015 11:19PM Report Comment
 

2. khards said...

The only inflation the BOE is really concerned with is asset inflation. Look how they panicked and slashed rates last time assets (houses) fell and now general inflation is sub 1% they really couldn't give a toss. There is no panic, no mention of printing to get inflation back up nada!
It will be interesting to watch the BOE's response as London prices continue to crash, what will they do this time?

Tuesday, January 13, 2015 07:40AM Report Comment
 

3. hpwatcher said...

what will they do this time?

Depends what else is going on. If there are crisis in other parts of the body politic - i.e. NHS - falling house prices will be the least of their problems.

Tuesday, January 13, 2015 08:08AM Report Comment
 

4. taffee said...

Yet the evidence from Japan whose credit bubble burst is prices fell for 20 years even with near zero rates
Which incidentally fuelled the dotcom bubble via the carry trade

Some Tokyo prime fell over 90%

Tuesday, January 13, 2015 08:08AM Report Comment
 

5. hpwatcher said...

Some Tokyo prime fell over 90%

Coming to a country near you. A lot of Japan's woes have come from its protectionism.

In a nutshell, the worlds labour markets have been completely opened up, as a result, wealth will no longer be concentrated in a select number of countries. A higher cost of living will disqualify any country from participating in these global labour markets, property prices, simply MUST fall - there is no other way out. UK cannot afford to be left out.

Tuesday, January 13, 2015 09:41AM Report Comment
 

6. cornishman said...

"property prices, simply MUST fall - there is no other way out. UK cannot afford to be left out."

There is one other way. Property prices could stay the same and Sterling could fall. Which it is at this very moment...

Tuesday, January 13, 2015 09:48AM Report Comment
 

7. khards said...

@cornishman - I also think sterling is in for a large fall, but I don't for one minute believe that it will lead to wage inflation. So we will have a repeat of 2009 where UK housing crashed 50% in USD and foreigners piled in.

Could be mitigated by buying precious metals at these very low prices. Few will wisely choose that route because they fear.

Tuesday, January 13, 2015 10:07AM Report Comment
 

8. hpwatcher said...

There is one other way. Property prices could stay the same and Sterling could fall. Which it is at this very moment...

No, because wages are not keeping pace. That would be true if there was wage inflation - but there isn't.

Tuesday, January 13, 2015 12:01PM Report Comment
 

9. cornishman said...

hpwatcher, I don't see why you need wage inflation to maintain house prices at their Sterling price for UK residents.

If Sterling falls - at a time when world commodity prices are in a downtrend for whatever reason - then CPI in the UK for UK workers could stay positive.

UK wages could go up 2% per year in line with UK CPI being 2%, but still fall in relation to the rest of the world if Sterling fell by, say, 4% per year. Falling UK wages was what you implied (at 9:41) needed to happen to remain competitive on the world stage.

House prices for UK workers could be maintained at their present levels by reducing interest rates further. Halve the rate (eg 1.5% to 0.75%) and you can service twice the borrowing for the same monthly outgoing. Obviously there comes a point where paying back the capital in addition would become too onerous. Are we at that point yet?

Could property prices not stay the same, priced in £ ?

Tuesday, January 13, 2015 12:36PM Report Comment
 

10. reticent said...

It's out now. Inflation was 0.5%.

Funny letter.

@7 Sterling falls. New foreigners want to pile in. Old foreigners want to pile out. Net result ambiguous?

It's really hard to say what the Chinese and Russians who bought UK property over the last 5 years will want to do with them if Sterling is falling, but the Chinese economy is slowing and the Rouble is falling.

As for others buying in, they certainly won't be Russian. There may still be Chinese interest amidst the slowdown. Hard to say.

As for the Southern Europeans, I suspect they will hold even if Sterling falls 15% against the Euro, simply because the Drachma and Lira would fall much more than that.

Of course, if property is falling and Sterling is falling, it will be an exodus.

Tuesday, January 13, 2015 12:41PM Report Comment
 

11. libertas said...

Quiet Guy, oil prices are not down due to conspiracy, neither is copper, commodities and the shipping indexes, it is ALL ABOUT demand plus additional supply from USA. Not only USA's present supply, but the trajectory towards it becoming oil independent and commencing exports.

Tuesday, January 13, 2015 01:56PM Report Comment
 

12. hpwatcher said...

Could property prices not stay the same, priced in £ ?

I'm not so sure. There would need to be substantial support, or house prices will tend to drift downwards. Lower interest rates won't do much....look at the falls during the 2009-2011 time, when interest rates were as low as they are now.

The only realistic choice is massive government intervention like the 42 billions of FLS, which happened April 2013. If you check the charts, the rises of the past 2 years began at that point and have since drifted downwards since. That is the single source of house price inflation for the past two years, brought to you by a government determined to win the 2015 election.

Tuesday, January 13, 2015 03:45PM Report Comment
 

13. hpwatcher said...

Quiet Guy, oil prices are not down due to conspiracy.

It's due to a price war.

Tuesday, January 13, 2015 03:46PM Report Comment
 

14. reticent said...

@12

Agreed FLS was the catalyst that revamped the property market (although HTB2 and the improved GDP figures also played a significant role, I think).

But market mortgage rates began falling again significantly recently, just as the market stagnated.

Hard to imagine what more FLS2 would achieve and I don't think Carney would be able to do that, having made such a hoopla about excluding mortgages from FLS this time last year.

Tuesday, January 13, 2015 08:31PM Report Comment
 

15. quiet guy said...

"Quiet Guy, oil prices are not down due to conspiracy, neither is copper, commodities and the shipping indexes"

It's quite ironic to see you berate me for posting conspiracy theories on the blog :)

I'm fine with the idea that the global economy is not doing well at the minute - reflected in commodity prices - but the Saudi response to the oil price drops looks positively masochistic if judged by normal economic criteria. If the price is falling, why swamp the market with more?

http://blogs.reuters.com/great-debate/2014/12/15/saudi-arabia-is-playing-chicken-with-its-oil/

It's a pity Drewster doesn't contribute here any more. I'd have been interested to hear his take on Saudi policy.

Tuesday, January 13, 2015 08:41PM Report Comment
 

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