[Closed] Interest rates must go up now, surely...

Only if they all agree that our current inflation is a structural one and not a commodities/currency anomaly.

If the latter, buggering around with interest rates wont achieve a great deal.

Unless, the 'independent' BoE are under political pressure not to increase them.

The BoE is also concerned with growth, not just the inflation rate. Like Stoner said, increasing interest rates will take money out of peoples pockets, but won't do much to stop raw materials, cereal crop, fuel prices etc rising which is the biggest cause of inflation at the moment.

Just be happy we are all getting pay rises to reflect this! (insert added sarcasm)

they will not do it, or only by a quarter/half percent. they are trying to manage the bursting house price bubble with slow deflation rather than an election losing sudden pop and the resulting public outrage at repo's and their fixed immovable asset depreciating too fast.

i sometimes think nu-labour are quite glad they lost the election and don't have to deal with the mess they helped to create.

i sometimes think nu-labour are quite glad they lost the election and don't have to deal with the mess they helped to create.

almost definitely.

GDP is declining, that is yer problem. I cannot see interest rates going up with GDP going down.

[url= http://www.statistics.gov.uk/cci/nugget.asp?id=192 ]http://www.statistics.gov.uk/cci/nugget.asp?id=192[/url]

GDP is declining, that is yer problem

it's fallen for one quater, hardly a trend. I think that's probably as a result of all the bad weather we had at the end of last year, which particularly affect the construction industry. So I reckon we'll see some grown in the next quater, and interest rates start to rise.

construction index jumped well into growth territory a few weeks ago.

I concur with Jon - last Qu's GDP was an anomally I reckon.

agree with stoner incresing interest will only make us all poorer it wont stop prices rising.
Will they do it nif they do not by much is my guess and propbaly if /wehn it hits 4.5%

agree with stoner

careful now. You'll get a nosebleed.

arguably, increasing interest rates *will* stop prices increasing, even if the inflation is imported.

If our rates are at 0.5%, investing cash in the UK isn't a great idea. Hense, our exchange rates are a bit crap at the moment.

If our rates go up to 5%, investing cash in the UK is a good idea, you now get more return than in most other markets. People start to buy stirling, and our exchange rate improves. If the exchange rate went back to early-mid 2000s levels (which was arguably 'too high' anyway), the cost of everything we import would drop (pre tax) by ~20%.

however, yes, it would take a lot of money from a lot of people in the UK. Whilst the economy is contracting, this is a bad idea. Due to where we are now with interest rates, and the number of people on variable rates, the boe rate will have to rise slowly, and with lots of notice, so not too many people get caught out and unable to pay their mortgauge (yes, a lack of ability to pay may be their own fault, but people losing their homes does no good for the economy). This is happening at the moment, with the media claiming that everyone should be piling into fixes. That said, I don't think that it's likely that we'll see >1% rates this year

The BOE policymakers are all very smart economists, which is how they get the job. You might not agree with what their decisions are, but they're probably more qualified to make the call than you are.

Don't forget that there are many more savers in the country than there are borrowers (mortgage holders) so a raise in interest rates would put money into the pockets of loads of people. £200k in the bank 2 years ago got you around £10k pa interest, now it's about £4k pa. That's a big difference to peoples income (mostly the older generation though).

Having said that, as a mortgage holder, i'm more than happy with the current situation although i feel rates will tweek upwards over the year, maybe to the 1% level.

You'll get a nosebleed.

5lab - with euro at 1% arguably we'd need a pretty hefty differential over that to get the money pouring in.... 0.25-0.75% wont cut it IMO

Don't forget that there are many more savers in the country than there are borrowers

That's a big difference to peoples income (mostly the older generation though).

raise in interest rates would put money into the pockets of loads of people

But the effect on asset values would probably be a fall. Psycologically perhaps that would also effect peoples spending plans...

See my earlier response:
http://www.singletrackworld.com/forum/topic/lucky-is-confused-and-needs-your-help

It still comes down to GDP and the output gap, which is predicted to be negative for the rest of this year, average GDP growth for the whole year is predicted to be 2% see [url= http://www.hm-treasury.gov.uk/d/201101forecomp.pdf ]treasury average forecasts[/url] which take data from all the big boys and give us a general impression.

BTW read titusriders response, the problem in a nutshell.

So...... is my morgage going up or not?

its not going to go down anytime soon....

I'm being offered 2.65% fixed over 2 years so I presume the bank feels that rates will stay low for a while yet.

the effect on asset values would probably be a fall

There are some good arguments for getting house prices down now, rather than having the bubble hang over the economy for a long period. Would be painful for some, though.

Who have paid off their house,and still have 200k in the bank...not excatly on th epoverty line though is it.

No, but plenty of old people are suffering from negative returns on any savings and they are also amongst those who suffer most from high inflation. Even a few £ makes a difference to a lot of people.

i sometimes think nu-labour are quite glad they lost the election and don't have to deal with the mess they helped to create.

given that this is a worldwide phenomenon, could any government here have protected us from it ? Would not foreign investors trying to buy up huge swathes of British housing have prevented keeping prices sensible ? New Labour is responsible for many awful decisions but I don't think they can be held culpable for this mess as the Tories might well have done worse in the same situation (now for instance ?)

swap rates normally hover slightly above the BOE rate for a given period of time.

http://www.swap-rates.com/UKSwap_extended.html

That shows what the market expects. Its worth nothing a few things

Interest rate expectations have increased fairly significantly over the last 3 months
The '3 year rate' will be slighly higher than what the market expects the *average* BOE rate to be over 3 years. ergo if it's 2.5% and we have 0.5% rate now, a fairly straight increase would put us around 4.5% in 2014
Mortgage rates are typically higher than the swap rates, to cover the banks risk

on the 'more people save' notion - this is true - however the vast majority of people don't save enough for interest rates to make a difference. if you had 30k in the bank (which is I bet more than most people on here have), a doubling of the bank rate (assuming your bank interest rate followed) would give you an extra £12.50 per month.

easy now simon everyone knows that Brown himself caused the worlwide recession that started in the Amercian sub prime market. Due to his personal failure the tories have no choice but to do what they are doing now...they fell bad about it they really do , but they have no choice. They have no political agenda at all here it i sjust Labours fault

I thought it was that bloke off the BBC wot done it ?

I'm being offered 2.65% fixed over 2 years so I presume the bank feels that rates will stay low for a while yet.

What's the arrangement fee on that, out of interest?

would give you an extra £12.50 per month.

at that rate I'd rather spend it now on wild dissipation and become a tramp in my old age (ie tomorrow)

What's the arrangement fee on that, out of interest?

arrangment fees arent paid out of interest, they are separate fees.
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b'dum tish! Financial humour: the very best humour 🙂

plenty of old people are suffering from negative returns on any savings

They are not negative but very low/nil.

He means negative in real terms JY.

They are not negative but very low/nil.

Negative taking into account inflation. I'm not sure any savings accounts are currently paying positive returns.

NS&I were doing index linked bonds until not very long ago - they were tax free as well.

I think someone else is currently doing an index linked account - probably have to lock in for 5 years. Overall, saving isn't a very good idea at the moment.

Having a massive mortgauge, on the other hand, is. If your rate is under 4% essentially the bank are paying you to borrow vast sums of money. Sweet!

I know the big savers are in the minority. I'm just saying that as always, there are two sides to every story.

The older generation who have benefitted from house price rises and better economic conditions over the years can argue that they are having to 'suffer' record levels of low interest rates on their savings to pay for the excesses of todays generation who they would say got us into this problem by living beyond their means on credit.

I'd happily have my 0.98% mortgage rate stay exactly where it is as my savings are way lower than my mortgage but the older generation who no longer have mortgages would be delighted to see a raise in interest rates (assumng they have no immediate plans to sell their properties).

titusrider - re your

its what Japan had through the 90's and is pretty bad

when did Japan do their QE - is there a parrallel with what has happened here - I thought people were predicting lots of inflation as a result of the QE?

Interest rates must go up now, surely...

er... why? its a just a blip, and anticipated to be a temporary increase over their target rate

salaries and house prices aren't going up at the same rate - its fuel, food, tax and raw material prices that are on the up, a rise now would only do more damage to a weak housing market

all the guessers are guessing it will be the summer/autumn period when 0.5% may get added

Some retired folk are amongst the wealthiest in our society

a rise now would only do more damage to a weak housing market

There's the solution - do what Brown should have done and include house prices in the official inflation figures and everything balances out! I'm an economic genious, Ed Balls has got nothing on me. 🙂

Just be happy we are all getting pay rises to reflect this! (insert added sarcasm)

Only if you are a trader/executive at a bank it seems.

I'm being offered 2.65% fixed over 2 years so I presume the bank feels that rates will stay low for a while yet.

What's the arrangement fee on that, out of interest?

£495

The BoE are going to let inflation do its work, cos its the preferred outcome over..... deflation !!. And if they push the economy too far right now, thats what we could have.
Given the unappealing choice between inflation and deflation, the current thinking is that inflation is the lesser of the two evils.

Ben and Merv have decided that we're going to gently inflate our way out of this mess, hence QE. Prices are going to go up, but my wages will not.
At that point, any sensible person won't be borrowing, but will be living within their means...

Inflation in the early 80s hit around 22% IIRC.

I'm working class, if ever I forgot that, now I'm going to be reminded and stomped right back down into the gutter, where I came from...My wages will not increase significantly, while prices for everything I thought I [i]deserved[/i] will once again float way up out of reach.

Ha, ha, the rich win, again. Perhaps I should re-train to become a bankster.
😈

And for the political [i]contributors[/i] wondering whether it was Brown or Osbourne, etc, then someone else coming along to remind us that it can't be Browns fault cos it was a global thingy.....

Well, Germany hasn't done so badly... Of course, they didn't go completely insane, silly, with cheap money and expensive housing, blah, blah. Someone there must have looked at the global economy and unlike our then Chancellor, decided that things looked just a bit too dodgey for them.
And reward for Germany being "Prudent" ?, its now the bail-out fund for [b]over spending[/b] EU [b]countries[/b]. Sound familiar ?.

Oh, and another thing, recent figures for GDP downturn seemed to implicate that imports had a significant impact.
Too many Brits buying cheap Chinese goods................have we covered that one yet[i]?[/i]...

Only if they all agree that our current inflation is a structural one and not a commodities/currency anomaly.

If the latter, buggering around with interest rates wont achieve a great deal.

I think this is largely the case, but with one exception: Bankers' pay!

Barclay's profits are up 32% and I know of one Barcap employee who got a substantial raise last year in compensation for reduced bonus payouts. I believe he said the increases were in the region of 50%. I hear today that the average salary for a Barcap employee is £236,000!?

You may think one bank in the city is insignificant, but as there are many of these and they all pay stupidly large wages, they are sure to be having an impact.

There is a trickle down effect with these high salaries and areas where these people live create property inflation hotspots. There is a knock on effect for all - everything costs more, even the comparative prices in your local supermarket. It's tough luck if you don't earn mountains of cash!

Increasing interest rates when the wider economy is suffering would be perpetuating the stagnation, making it extremely protracted. A japanese style slump.

Much of the inflation is caused by burgeoning global demand for raw materials and fuel. The rest of the world is not suffering a big downturn, it's well and truly booming in many places! (China, Brazil etc).

The other cause of our pain are the results of quantative easing. If you devalue your own currency by printing money, expect to pay more for imports! What galls me is that the last government handed all this printed money to the banks, but without any conditions. Of course the banks have screwed us and have continued to do so with great vigour. The surplus money was supposed to be lent to small business, but the banks kept it to rebuild their margins, increase fees, charges and reduced savings rates. They've never had it so good!

It's easy to say we should clobber the banks, but as they drive the economy, we are helpless and will continue to get screwed

Our economy needs the 20 or so foreign banks that are based here. The chancellor also need the tax receipts. Banking and finance makes up a substantial percentage of GDP, (It was over 30% at one stage).

We are deadlocked thanks to the wastefulness of politicians over the past 30-40 years, who used our money and things such as the proceeds of North sea oil to bribe the electorate. We could have built nuclear power stations and held on to our utility companies. We could have done all sorts of things to put us in a strong position, but successive governments have sold off the family silver and sold you and me down the river. UK democracy doesn't work!

The pound has depreciated about 25% since 2007/8, given the UK is a net importer there's a big chunk of the inflation we're seeing. As 5lab infers, a stronger pound would make our imported goods cheaper which in turn would help bring inflation down. What's left of our manufacturing base is most likely dependent on imported raw materials so our exports could be cheaper too (although less competitive with a stronger pound).

I don't want to get into a whose fault is it argument, but the coalition haven't been in power for a year yet so they can't be to blame for it all surely? Anyway, red, blue, yellow, they're all puppets to the likes of Rothschild!

Houses (as homes not investments) are way overpriced and take up a major chunk of most peoples disposable income (mortgage/rent) unless you're lucky enough to be on a base rate tracker (at historically low bank base rate). If house prices were to drop considerably most people could spend less on keeping a roof over their heads and put more into the economy through either buying goods or investing in wealth generating companies. There would also be less demand for wage rises (unlikely anyway) which means the cost of employing people could be kept down.

The only people that win if house prices stay high are the banks who tie you into a lifetime of debt.

Jesus spongebob what a vitriolic spouting of hate.

I suggest if you think bankers are paid too well for what they do that you join the industry to compete their wages down and do a better job than they do.

I will however leave the short supply of people who actually know what their doing to continue earning me returns on my pension

in terms of blaming one set of firms for inflation you can stick that theory back into the abyss of ill informed puss from whence it came 🙂

Good post Spongebob.

[i]We are deadlocked thanks to the wastefulness of politicians over the past 30-40 years, who used our money and things such as the proceeds of North sea oil to bribe the electorate. We could have built nuclear power stations and held on to our utility companies. We could have done all sorts of things to put us in a strong position, but successive governments have sold off the family silver and sold you and me down the river[/i]

Interesting observation. Consider, 100 years ago, Westminster was frequented by a lot of industrialists, and the UK was a major manufacturer and exporter.

Now Westminster is full of solicitors, and all we have now is the banking sector to rely on for an unhealthy chunk of the GDP/revenue, as you point out.

Is there a corallation ?...

[i]Anyway, red, blue, yellow, they're all puppets to the likes of Rothschild!

[/i]

One of the best one-liners I've ever read on here. I was just thinking about the Rothschild story, yesterday.

You'd never get away with it now, of course...

Totally agree with the last post, especially

The only people that win if house prices stay high are the banks who tie you into a lifetime of debt.

There should have been a big correction in the housing market when the crisis struck 3 years ago. It didn't happen then because the governments around the world lead by Gordon Brown (so he claims) pumped money into them by quantative easing. There still hasn't really been a correction yet. We have seen falls in some areas, but prices are still too high.

Banks created the bubble by lending money they didn't have and governments made it easier for them to lend recklessly.

It's been a disaster allowing houses to become so expensive because you can't afford to move if you own a home and you can't afford to buy one if you haven't got one. The cost of ownership is far higher than the property's true worth.

The irony is that the 4% inflation figure announced today doesn't even include the cost of housing! It was the Conservatives that removed this many years ago. This makes the headline inflation figure almost completely meaningless. Inflation figures today are just a tool for deceiving people.

Young people have no chance these days, unless their parents earn a mountain of cash, or they are one of the fortunate few who get very well paid jobs. The rest will suffer a lifetime of debt and misery. My guess is that they will all rebal on day. It will be ugly!!

Totally agree with all you're saying spongebob, with the exception of the Tories taking housing costs out of the inflation measures. Happy to be corrected but I think it was Brown as Chancellor that switched from RPI to CPI in 2003 or thereabouts.

Ironically there are noises now about adding housing costs back into the measure. IMO this would be ridiculous as the housing market correction that must surely be coming would then help to keep the inflation figure lower. Ignore it on the way up and use it on the way down, a very convenient way to deceive Joe Public into believing that things aren't as bad as they really are.

The irony is that the 4% inflation figure announced today doesn't even include the cost of housing

I'm not sure irony is the right word - as I said in a somewhat tongue-in-cheek way above if you include HPI in the inflation figures it would currently reduce it, not increase it. There must be a strong temptation for the government and BoE to use this as a political tool, as demonstrated by the way Merv started to talk about including HPI in the inflation target in 2007 when it would have got him out of writing a few letters. The time to include HPI in the inflation target is after prices have corrected, not now.

Edit : Beaten to it!

[i]The irony is that the 4% inflation figure announced today doesn't even include the cost of housing! It was the Conservatives that removed this many years ago[/i]

[b]WHOA ![/b]

Thats utter twoddle. Gordon decided that he would move to using the CPI rather than the RPI. That happened on his watch. FACT !.

[i]In his Pre-Budget Report statement on [b]10th December 2003 Gordon Brown the Chancellor of the Exchequer [u]changed[/u] the Governments inflation target to a new base the Harmonised Index of Consumer Prices HICP which has been renamed the CPI[/b]. The level of the new CPI inflation target for the Bank of Englands Monetary Policy Committee MPC was set at a symmetrical 2 with immediate effect.

[/i]

That was Gordon Brown, its out there as fact, don't be pinning that one on anyone else other than Gordon.
🙂

Along with his time machine moment when he told everyone that we weren't where we thought we were the in the economic cycle, but that we were actually...somewhere else...

Ole GB was very tricksy, he was.
😉

house prices haven't dropped by much, in real terms, but in inflation-adjusted terms, they have. Below are some charts a guy called freetrader produces. They show that whilst prices have been broadly flat (a lot of wobbling, but not much either way) in the last 5 years or so, in real terms, in inflation adjusted terms they've dropped 25%. I think this is how things will continue - a 'freeze' in house prices for a decade or so will allow FTBs to no longer be priced out, whilst avoiding negative equity and the problems that go with it

[img] [/img]

[img] [/img]

Why do we seem to be the only economy in the world that is based on house prices

If there had been tighter rules on mortgage lending we would all have been a lot better off, houses can only sell for what people can afford to pay
When we bought our first house we had to put down a 10% deposit and then could only borrow a strict amount based on our joint income.
How can people be buying on terms like an interest only mortgage or more than the value of the property

Madness and if the interest rate does go up its going to cause a lot of pain. Only goes to show that many people couldn't actually afford to borrow what they have and perhaps its the levelling exercise that needs to happen

interest only mortgauges can actually make sense. If you assume properties are going to increase in price by x amount (lets say 7% per year, on average). A interest only loan can buy you a bigger house, than you can without. After 25 years, the figures actually work out that you could sell the bigger house, that you've lived in the whole time, buy the smaller house you'd have been able to afford otherwise, and pay off the entire mortgauge with the money left over.

You are, obviously, gambling on prices rising. But it gives you a nearly 30% better house to live in for 25 years. Some would say thats a sensible investment

Prefer not to gamble with the roof over my head thanks, leave that to the Lloyds names and punters at the bookies.

All sounds good until you end up owing a fortune, bit like the poor sods who were sold endowment mortgages. The words we expect and should don't promise bugger all, like to know once the mortgage has finished the house is mine

Many of the 'poor sods' who took out endowment mortgages did very well out of them indeed. As always with investment, it's all a question of timing. Some won, some lost.

Exactly Mr Tall hence my not wishing to gamble, know which group I would have been in.
My old man always said never gamble unless you can afford to lose, afraid I can't

Interest rates will rise (possibly fairly substantially) at some point this year. The only question is will it be a Euro Crisis that preceeds the Sterling crisis, or Vice Versa. At the point the money markets decide that the risk of the UK defaulting on it's debts, or infact allowing them to inflate away, outweighs the potential return on investing in Sterling Merv will have no choice but to increase base rates.

This will, as predicted cause a further large correction of house prices, and a further dip in the economy as a whole.

Once this has all played out, we will be back where we were the last time the tories had to clear up the mess left by labour. The structural changes made by the next tory government (this one will collapse shortly after the sterling crisis, followed by a disasterous short term labour government, followed by a strong tory government that will have a proper mandate to really turn the screws(hopefully one with less toffs at the helm)) will allow us to rebuild, however the massive cuts to public services will become a drag and the population will forget why a massive public sector doesn't work and we will begin the whole cycle again.

And if my predictions are right, I'd like to emigrate please.

Ta ta then.
Ian

followed by a strong tory government that will have a proper mandate to really turn the screws

I can't wait. I mean the poor, sick, disabled etc are getting far too easy a time of it at the moment.

Why not leave now?

strong tory government

They couldn't even get a majority to replace a very unpopular labour administration so can't see that happening (thank god)