Thursday, August 4, 2016

Implications of the rate cut for Nationwide customers

Bank of England base rate announcement

Customers on Tracker mortgages get the full 0.25% decrease, Standard Variable Rate reduces from 3.99% to 3.74% and Base Mortgage Rate customers see a cut from 2.50% to 2.25%. Suckers defrauded by Carney's prior rate rise carnival get Jack diddly squat. For those seeking new mortgages or equity release, the £500 or so savings per year on, say, a £200k mortgage should let you leverage an extra £2500k in borrowing power. To be sucked up into house prices very fast.

Posted by libertas @ 10:34 PM (6789 views)
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22 thoughts on “Implications of the rate cut for Nationwide customers

  • I previously said that market rates imply that the next cut will be to 0.125.

    Well, apparently minutes of the MPC state, with this quoted from the Express::
    More rate cuts are also on the cards, with the minutes of the Monetary Policy Committee revealing that most members expect to cut rates to a “little above zero” by the end of the year.

    So there you have it, and only baby steps due to fear of negative, but of course zero is a comfortable move from there and then a dabble in negative. What is this? A currency war with the Eurozone. Plus, mention of “regime change”, which I put to more than just Brexit, but a move to remove Junker, et. al. and possibly the current Euro structure, probably led not only by Britain but also the States after failure to achieve trade deals and support various foreign policy objectives.

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  • There are also sentiment issues whereby many holding cash will try to convert it into other assets, like property, plus the additional lending made available from the additional QE announced that will cause more risky lending.

    I can see property values doubling before 2025. I have said no crash until 2026 for some time now.

    As with every other cycle in history, the trigger for the next crash will be different than any before, but it will follow a rhythmic cycle nonetheless.

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  • I guess my 1.49%+BOS will fall saving me £20

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  • Khards, yes, and that will save you £200 a year, which could allow you circa an additional £600 in borrowing if you attempt to re-mortgage on a home improvement loan or a mortgage equity withdrawal. But the confidence if installs may encourage you to dig deeper, and you may withdraw money from your bank to back it up.

    This is not a small thing, and when it affects millions of people, that could be an additional £600 x 27,000,000 households could be a shift of £16bn towards housing and consumer spending.

    The fundamental issue with most House Price Crashists is that they are incapable of understanding multiplication.

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  • “The fundamental issue with most House Price Crashists is that they are incapable of understanding multiplication.”
    You’re on dodgy ground there – having shown us some of your iffy maths in the past.

    In any case, if all the 27,000,000 households spend an extra £600/year for the next 10 years – that only adds £6,000 to each household’s ‘worth’. How does that double house prices by 2025? Where does the extra £205,000-odd x 27,000,000 come from for each household to double the present price of a house? Especially as you reckon that there will be general deflation of everything else in the economy. Including wages?

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  • I’ll answer my own question. I suppose you could argue (in an extreme case) that if only one or two houses changes hands per year in 10 years’ time and that is at double the present price – then that will then be the going price of a house and all others must be worth a similar amount. That way, there would only need to be one or two people per year paying silly money to buy a house and there would be no need to find all the money I wondered about in my previous post.

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  • Libby a few days ago you posted an article from the Independent.

    As Khards as pointed out the fall in rates wont give much real money in your pocket, and not for everyone. I find it hard to also understand how on one hand you are arguing for a deflation while at the same time arguing for increased house prices, mewing as people are more confident in price rises. Surely that would argue for increasing inflationary pressures?

    Ok so lets look at that article.(rather than using it to provide us with a myopic view).

    “cuts in the base rate by the Bank crush the private banks’ profit margins when rates are already close to zero.”

    “As for ordinary depositors, in theory they should also be in the firing line for charges on positive cash balances if the base rate turned negative.”

    “However, retail depositors are highly valued by banks …. and it would create an avalanche of bad publicity for the financial sector if they hit ordinary savers in this way.”

    So what to do? Oh and :

    “In 2015 almost 90 per cent of news loans were fixed rate as people sought to lock in low rates for a couple of years. If you’re on one of these deals you will not benefit from a reduction in the base rate.”

    So now you must be talking about all those on a variable rate before 2015, that they wont use the extra to hedge against bad times but instead will be “confident” to do more borrowing but isn’t consumer confidence quite low? Oh yes:

    “The GfK Consumer Climate for the United Kingdom fell sharply to -12 in July 2016 from -1 in the previous month, worse than market consensus of -8. It was the sharpest drop in more than 26 years” Oh yes but that is before a 0.25% fall in rates … silly me it must now move back into massive positive territory!!

    But but but…. when rates go negative then banks will what? Pay people to take out a loan? Ive shown a couple of times that the Swiss experience was the opposite to the perception that rates at the long end would fall.,

    So the next question is what happens. As usual its risk v reward. I can tell you now that during the 80s when rates at the long end were approx. 15% EVERYBODY thought that Bonds would stay there or (the IR would) go higher. At that time my Dad bought a fair amount of ZCBs.Of course the majority are always wrong at the turns.

    Will rates on the long end reverse ? Who knows the timing but rates at the long end are currently what ??? 2.44% in the US and that is from a low of 2.10%. Maybe the UK / German bunds yields will go lower still but surely the risk is that – for whatever reason – yields will rise?

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  • techie man. I am calling for deflation in goods, services and commodities that are becoming more plentiful and cheaper to produce due to technology and labour mobility. Not only visa free access to labour markets, but teams can be networked over continents.

    HOWEVER, as banks view this as a monetary issue, which it isn’t, they pump more money in, which causes more investment, resulting in more over-production, causing more deflation.

    MEANWHILE, planning restricts the number of houses and cash will flow into them as a relative gold standard and store of wealth that money no longer is.

    ——–

    Negative rates do not affect bank margins, because they operate on the arbitrage between lending and borrowing. Negative is just an abstract concept.

    ———

    Yes, I see a reversal. You could see profit being made from negative rates to the point where short coupons have a lower negative rate than longer date bonds, in the topsy turvey world where deflation is the norm. UNTIL banks realise this is not a monetary issue, but that the central banks no longer have a role and should leave rates to market forces.

    You are seeing the death of the central bank by the way.

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  • Sigh… Deflation is a contraction in the Money Supply. Since the banks are responsible for 97% of money created , then when they don’t want to lend (because they fear bad debts) or their customers don’t want to borrow (they are not confident of their ability to repay) you get deflation.

    Your last post is wrong on so many levels but if that is what you think then fine. I’ve pointed out the issues but you fail to address them.

    You could be right about property continuing to increase in price but not for the reasons you think.

    I have had some “discussions” on this subject before. Indeed the increase in the money stock and the decrease in the cost of money is the reaction to this threat.

    As

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  • Whoops ! Mobile had a melt down.. last post should have read:

    Sigh… Deflation is a contraction in the Money Supply. Since the banks are responsible for 97% of money created , then when they don’t want to lend (because they fear bad debts) or their customers don’t want to borrow (they are not confident of their ability to repay) you get deflation. I have had some “discussions” on this subject before. Indeed the increase in the money stock and the decrease in the cost of money is the reaction to this threat. 

    Your last post is wrong on so many levels but if that is what you think then fine. I’ve pointed out the issues but you fail to address them. 

    You could be right about property continuing to increase in price but not for the reasons you think. After all a bubble can -as we all can attest- become more bubbleicious before it finds it’s pin.

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  • @8 para 2 – The money ‘pumped in’ by central banks goes into investment in assets already in place, not into real investment in goods and services. The drift towards deflation is caused by chronic stagnation in productivity and output, especially in Japan and the Eurozone since 2008 and in emerging markets, plus Canada and Australia in the past year. Deflation in real goods and services is caused by the resulting slowing global trade, which has forced countries into the zero-sum game of boosting exports by driving down (export and import) prices. Central bank liquidity injections (which devalue currencies) and ‘labour market re-structuring’ (cutting costs of production by lowering wages and benefits) are the means of boosting exports. Real investment redirected to export production does provide some real growth and income creation but it is sporadic, volatile, and temporary since someone else is racing you to the bottom.

    @10 – but you have to explain how that decrease in money supply fails to prevent the rise in asset prices.

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  • 3rd sentence should have read “……is caused ALSO by….”

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  • Hi Icarus. Yes but it seems to fall on deaf ears. To me there are 2 areas which are admittedly difficult to reconcile.

    One is the kind of analysis that Libby undertakes, I. E. A quasi experience based one (“common sense”) with a bit of conspiracy theory thrown in, and some economics thrown in now and again.

    The other based on economic theory spiked with macro- rather than scaling up micro – experience.

    The “arbitrage” argument of NIRP, which supposedly maintain banks profits is not supported by any serious experience based analysis. E.g. BIS analysis. But if you don’t believe that Bank profits are reduced by lower rates you won’t examine what the banks might do to attenuate that reduction.

    In short it seems a bit pointless to ask someone else to support their position if when you do so the response fails to respond to the points raised. It is Sunday after all and I have some bits and pieces to do.

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  • Well sorry Techieman, but I properly predicted a rate cut and have been spot on about house prices continuing their bull market.

    Banks make money on arbitrage because folk purchase negative bonds because they have to (Banks must hold a certain percentage of assets in government bonds), as such, lending out less negative than you are forced to borrow can be profitable, noting that the stated bonds will have a high coupon value, boosting the bank’s collateral to use in more productive areas.

    You can find plenty of others who will claim that an economy cannot be sustainable where positive interest is charged, so it is all a mute point, frankly.

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  • Mute? I think there are likely some on this site who wish you were 😊.

    ok well no real surprise on IRS as this was already MOOTED by members of the MPC after the prior vote -which I think was when you thought the rate would be reduced.

    As for bank profits when IRS are lower. I’m not going on a gut feeling but after reading the 2015 review by the BIS. Have a search for working paper 514. I don’t know where you get your info from ?

    Also ftse banking index looks a bit crap and correlates to IR falls.

    As for HPS no need to apologise. The bulls have momentum on their side, not to mention the (soon to dissappear? ) central bank. No the interesting point to me is when will a market turn.

    You yourself said Libby’s castle had been valued 80k lower than before. However I agree that the jury is out as we have little evidence that the market has turned. Personally I think it has but there will likely be a back and forth of the indexes for a while at least.

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  • techieman. There are winners and losers of interest rate changes and the vested interests will always rebel the loudest because they have the most to lose and the most resources to propagandise.

    Reality is that BOE is simply following market rates that are reflecting a deflationary environment for products and services that is co-inciding WORLDWIDE alongside a housing boom. We are transitioning towards a four day week right now as our cultures slowly adapt to all this computation and automation.

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  • @16 – “We are transitioning towards a four day week right now as our cultures slowly adapt to all this computation and automation”.

    Robert J Gordon has recently produced a paper on why productivity growth in the US is the slowest ever. According to him this is due in part to the digital revolution having had less of an impact on productivity growth than did previous tech revolutions before 1970. The contribution of the internet was largely played out by 2005 and the wireless tech revolution that followed has had an even lesser impact on productivity than did the internet. He puts up other factors such as education system failures, but the point is there’s a serious analyst here who doesn’t concur with the idea that digital technologies are raising productivity and lowering working hours.

    (I think that the slowing of productivity growth is due more to offshoring of manufacturing and some construction and its replacement by ‘service’ industries, especially the ‘contingent’ sectors, where productivity is lower and more difficult to measure.)

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  • techieman. There are winners and losers of interest rate changes “and the vested interests will always rebel the loudest because they have the most to lose and the most resources to propagandise.”

    So -as usual – platitudes. No reading of 37 pages, no attempt to argue against the BIS study (which can be argued against) no acceptance that the article posted by you might have a point.

    All you have done Libby is continue with your MO as I’ve mentioned

    “One is the kind of analysis that Libby undertakes, I. E. A quasi experience based one (“common sense”) with a bit of conspiracy theory thrown in, and some economics thrown in now and again.”

    Yep we don’t need to analyse the concept or the evidence we can just ignore it and blame propoganda and conspiracy. Duh of course why didn’t I think of that (scratches head and pulls out some splinters).

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  • … or we can change the subject and if someone asks the time tell them that it’s 24 degrees and apples are green , but after a while they might go a different colour ! :).

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  • Got gold? 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊 😊

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  • Gold is actually up from about £700 to £1000 in the past year. Seems that monetary stimulus is finally giving that bear market some bull legs, though it is not breakout time yet and could be a re-test.

    Of course Tiechiman, you are so intelligent and I cannot deal with concepts. How dreadful.

    By the way, Enfield is clocking over 18% growth in the last ONS/Land Registry data, with Boroughs like Waltham Forest clocking about 22% growth. Seems that the suburbs are catching up with the inner city as the population rises.

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  • Libby… I spank you 😁😁

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