So when do interest rates shoot back up

monkeymaster

mr_jetlag wrote: »

Well, BOE thinking at the moment seems to favor a weak sterling (down to levels not seen this century - think $1.30!) to raise exports. The only bright spot is that the Euro is also weakening against the dollar so any short term currency pain will be shared:

You gotta be kidding! Do we actually manufacture anything to export any more? We're much more reliant on our cheap imports from China to keep our inflation low and what with their rising inflation and sterling's weakness, inflation may not be a benign as the BoE would like to think.

PS. The dollar isn't particularly strong when compared to other currencies.

Jett

Interesting post, something i've been trying to get my head around but I'm totally confused.

All the media hype about credit cruch and the R word, then refering back to previous times, 90's and 20's and high interest rates and then in the next breath state the BoE is lowering the interest rate. Is lowering the rate a last minute effort to avoid a recession, and if that doesn't work then they'll try raising the rate for a bit? not that i'm suggesting our leaders are as much in the dark as i am......... well maybe a little!!

Any explaination or pointers in the direction of some info on what is actually going on would be gratefully received.

monkeymaster

Jett wrote: »

Interesting post, something i've been trying to get my head around but I'm totally confused.

All the media hype about credit cruch and the R word, then refering back to previous times, 90's and 20's and high interest rates and then in the next breath state the BoE is lowering the interest rate. Is lowering the rate a last minute effort to avoid a recession, and if that doesn't work then they'll try raising the rate for a bit? not that i'm suggesting our leaders are as much in the dark as i am......... well maybe a little!!

Any explaination or pointers in the direction of some info on what is actually going on would be gratefully received.

It does seem to be something of a juxtaposition that essentially the problems we're facing today have been caused by too much credit at too low interest rates and the solution is seen to be lower interest rates!

High interest rates are usually a sign of high inflation, they act a means to remove money from the economy (by making people and businesses pay more in interest) which has the effect of dragging prices down to achieve price stability. The current thinking is that inflation (which is the highest in years) is going to falls due to falling oil prices etc which could cause inflation to fall below 0% (deflation) which would be very painful for the economy. The fact that rates are falling is an attempt to prevent an over-contraction of the economy. Also the Bank of England target inflation several months out - not today so they are reacting to what they see in 6 - 12 months.

What low interest rates do is make the currency weaker. Recently the £ has dropped as low as $1.50 when it was above $2.10 not so long ago. What this does is make imports more expensive. For example oil and other commodities which we buy in dollars. It also makes imports from China, which we have relied heavily on and have contributed to the low inflation we've had in recent years, more expensive. Rising prices = rising inflation = higher interest rates. Higher interest rates = cheaper imports = lower prices. One of the reasons inflation has got so high in the past is that when prices have risen people have been able to demand higher wages to compensate which in turn means there is more money in the economy which means manufacturers/retailers can raise their prices, so people demand higher wages etc etc. This hasn't happened recently one reason is because companies can just outsource jobs to India so wages have remained relatively stable.

As you can see it's all a very fine balancing act. Two things could contribute to interest rates being much higher in a couple of years time. Firstly the currency falling to low as investors dump their holdings in sterling because of poor returns and the outlook for our economy, forcing the BoE to increase rates to protect the £. And secondly, all the money that is being pumped in by the Government in the form of bailouts, resulting in more money floating about in the economy, resulting in higher prices - see above!

In essence interest rates have been artificially low in the last few years because of cheap labour in the likes of China and India. This was never going to last forever and I suspect it won't be long before interest rates revert to being 7 or 8% which is more in line with the long term norm.

mr_jetlag

monkeymaster wrote: »

In essence interest rates have been artificially low in the last few years because of cheap labour in the likes of China and India. This was never going to last forever and I suspect it won't be long before interest rates revert to being 7 or 8% which is more in line with the long term norm.

I seriously doubt we will see rates higher than 5% anytime before 2010. Here's why.

1. Although the BoE's remit is supposedly to keep inflation low, it also has to keep an eye on GDP and overall growth, and any rate rises will strangle a recovery in its crib. Even assuming we get out of the recession in a year's time, my guess is that rates will remain low to allow businesses and the City to recover.

2. 5% is the new 15% - yes the rates of the 1990s were in double digits but house prices were a quarter of what they are now (inflation adjusted). Even if house prices were halved (and remember, the current "worst case scenario" is a peak-to-trough fall of 30%), a house would cost roughly double what it used to in the early 90s. Anything significantly above 5% would not only continue to depress the housing market, it would tip a huge percentage of the population into bankruptcy.

3. I think your point on imports vs exports is misleading. Britain exports services as much as it does goods (financial services, intellectual capital via patents). The more relevant point has to do with Britain's current account deficit (its net imports vs exports) and the devaluation of sterling improves this by making British exports more competitive, improving GNP and GDP, hence a way out of the recession. The BoE will not defend the pound unless devaluation goes too far.

Fair enough us debating this, what matters of course is what the BoE see in their crystal ball!

ManAtHome

mr_jetlag wrote: »

I seriously doubt we will see rates higher than 5% anytime before 2010. Here's why.

...general election...

And Sterling dropping 15% in the last year hasn't produced an export boom, maybe another 15% will?

Take our point about the debt-binge though (5% is the new 15%) - but is that ever going to come down?

LandlordLee

monkeymaster wrote: »

In essence interest rates have been artificially low in the last few years because of cheap labour in the likes of China and India. This was never going to last forever and I suspect it won't be long before interest rates revert to being 7 or 8% which is more in line with the long term norm.

Do people not realise that 4.5% interest rates now are as bad in our current situation as the 15% peak in the early 90's? The BOE has been way behind the curve. Interest rates have been left TOO HIGH and action has not been quick enough. The BOE only decided to cut rates when the system ground to a total halt... Everyone could see it coming! They are reactive rather than proactive. Our rates are both higher than the states and europe which indicates this.

I would be my entire portfolio that this is just the start of it all.

I see interest rates falling below 2% by 2010, inflation below 1% and unemployment at over 3 million. They will stay low for around 5 years easily. Deflation is a very very clear possibility and just like in Japan, rates were not cut quick enough and the rest is history.

opinions4u

LandlordLee wrote: »

Do people not realise that 4.5% interest rates now are as bad in our current situation as the 15% peak in the early 90's? The BOE has been way behind the curve. Interest rates have been left TOO HIGH and action has not been quick enough. The BOE only decided to cut rates when the system ground to a total halt... Everyone could see it coming! They are reactive rather than proactive. Our rates are both higher than the states and europe which indicates this.

I would be my entire portfolio that this is just the start of it all.

I see interest rates falling below 2% by 2010, inflation below 1% and unemployment at over 3 million. They will stay low for around 5 years easily. Deflation is a very very clear possibility and just like in Japan, rates were not cut quick enough and the rest is history.

Ooh, you watched the hedge fund manager on telly too!

Does he have vested interest in talking the markets down? Slap me down for being a cynic!

On the subject of interest rates and currency:

1) The Bank of England didn't cut interest rates sooner because they were mandated to manage inflation and leave other economic manoeuvres to HM Government. All through the summer, with inflationary pressures building, they broke their mandate by NOT INCREASING rates. It is the Government that failed to take action, either by removing the inflationary mandate from the Bank of taking alternative action (e.g. significant tax rebates to individuals and businesses).

2) The £ is falling against the $ because the USA slashed their interest rates substantially a year ago. We now look likely to follow which will weaken the £ further against the $ and this is being factored in by the markets.

asandwhen

USD is currently $1.57 to the £ which although appears low due to the rates we have seen over the last couple of years is not that low at all. I remember about 3 years ago when I got married in Vegas we were very pleased because the £ was worth $1.70 and that was the best it had been for years.

sara0405

Interesting thread as I have a tracker rate mortgage.

monkeymaster

mr_jetlag wrote: »

I seriously doubt we will see rates higher than 5% anytime before 2010. Here's why.

1. Although the BoE's remit is supposedly to keep inflation low, it also has to keep an eye on GDP and overall growth, and any rate rises will strangle a recovery in its crib. Even assuming we get out of the recession in a year's time, my guess is that rates will remain low to allow businesses and the City to recover.

2. 5% is the new 15% - yes the rates of the 1990s were in double digits but house prices were a quarter of what they are now (inflation adjusted). Even if house prices were halved (and remember, the current "worst case scenario" is a peak-to-trough fall of 30%), a house would cost roughly double what it used to in the early 90s. Anything significantly above 5% would not only continue to depress the housing market, it would tip a huge percentage of the population into bankruptcy.

3. I think your point on imports vs exports is misleading. Britain exports services as much as it does goods (financial services, intellectual capital via patents). The more relevant point has to do with Britain's current account deficit (its net imports vs exports) and the devaluation of sterling improves this by making British exports more competitive, improving GNP and GDP, hence a way out of the recession. The BoE will not defend the pound unless devaluation goes too far.

Fair enough us debating this, what matters of course is what the BoE see in their crystal ball!

1. But won't higher prices caused by a weaker currency feeding through into higher inflation also negatively affect growth? Of course it will, which is where the balancing act comes in. People have come to see low interest rates as the norm just like house prices going up and so now the answer to everything is lower interest rates - it's not that simple. If it was the case why have Iceland just increased their rates by 6% to 18% rather than slashing them?

2. Why is 5% the new 15%? What's the reason for it? Sure house prices are higher but since when have interest rates been all about house prices? The reason rates have been low is primarily because of cheap labour in India and China and favourable exchange rates, nothing to do with house prices here. These things are all about global markets and global issues not whether a house is 'worth' 10k more in Brighton.

3. You've hit the nail on the head but come to the wrong conclusion - Britains biggest export is now our financial services industy - and what's happening to that at the moment? A big contraction that's what. And will developing economies really want to buy into our expertise in this area after all that's happened. This is another area I've been uncomfortable with for a while, it's not like producing a car where you actually manufacture a physical product that has a value, it's just what someone is willing to pay for 'knowlegde' and that could be a whole lot less. We're definately entering a new era now and it can be difficult to see when you've become used to a certain way of living.

PS. I never said higher rates where going up in the near term, in fact the opposite but longer term...