MSE News: Interest rates could stay low for years 24 September 2009 at 6:01PM edited 12 October 2009 at 11:45AM in Savings & Investments 29 replies 3.4K views

Former_MSE_Natasha

This is the discussion thread for the following MSE News Story:

"Interest rates will stay at rock bottom in the years to come as the Government tackles the UK's wounded economy, a report predicts ...."

Read the full story:

Interest rates could stay low for years

Thanks to EdInvestor for the original post. This thread was merged to prevent duplication

EdInvestor

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6869403.ece

Interest rates in Britain are to stay low for years to compensate for a severe fiscal squeeze on the economy, a report to be published this week says.
The Centre for Economics and Business Research, in its latest UK Prospects, to be published tomorrow, predicts that Bank rate will remain at 0.5% until 2011 and not reach 2% until 2014.
It also expects further quantitative easing by the Bank of England on top of the £175 billion so far announced, and says that the programme of asset sales will not start to be rolled back until 2014 at the earliest.
The forecast implies a good outlook for the stock market and house prices, but could put further downward pressure on sterling.

cloud_dog

In which case is it should be good (bad) for inflation and commodities. Price inflation will be dependant on some of this waterfall of money actually finding its way to the consimer which hasn't really happend yet.

CLAPTON

seems strange to me as 3 or 4 year saving rates seem to have rise to 4-5% ..which usually means that the financial institutions expect rates to be higher than that

gozomark

cloud_dog wrote: »

In which case is it should be good (bad) for inflation and commodities. Price inflation will be dependant on some of this waterfall of money actually finding its way to the consimer which hasn't really happend yet.

the fiscal tightening should mean inflation won't pickup.....

inflation is influenced by fiscal as well as monetary measures - you can't just look at low interest rates and say therefore there will be inflation.

gozomark

whether this is bad for the £ depends on

1. how much of this is discounted already - to me there is nothing new in this report
2. what other countries will do - I suspect both Euro and US interest rates will also remain low for the same reason - fiscal tightening will happen way before monetary tightening

gozomark

CLAPTON wrote: »

seems strange to me as 3 or 4 year saving rates seem to have rise to 4-5% ..which usually means that the financial institutions expect rates to be higher than that

savings rates are determined not just by expectations of future base rate, but also by risk premiums demanded by savers

ed123_2

..quantitative easing is not working...the banks are using the "free" cash to purchase gilts & then borrowing against these to play the derivitive markets with a limited amount going into commodities, equities etc

CLAPTON

gozomark wrote: »

savings rates are determined not just by expectations of future base rate, but also by risk premiums demanded by savers

if I knew what risk premiums demanded by savers meant I might agree.

but observations over the years show that when financial institutions start to offer fixed saving bond rates above the current level that usually means they expect the rates will rise even higher than their offered rates; just as when they start offering fixed mortgage rates lower than the existing level that's a good indication that they expect rates to fall even further

they do of course get it wrong sometimes.

opinions4u

CLAPTON wrote: »

seems strange to me as 3 or 4 year saving rates seem to have rise to 4-5% ..which usually means that the financial institutions expect rates to be higher than that

An astute observation.

The main driver for these rates is still the wholesale markets and Swap Rates.

Problem (1) is that Swap Rates are high (although dropping back a little in recent weeks). In other words, those banks that can raise money this way still have to pay a price that reflects the risk fears / appetite of the wholesale funders.

Problem (2) is that while Swap Rates are high some banks cannot raise any funds whatsoever beyond a 12 month period. On other words, they have to turn to the retail savings market and that has had the effect of pushing longer term fixed rate accounts over the 4% mark.

if I knew what risk premiums demanded by savers meant I might agree.

Less so the retail saver. Moreso the wholesale funders (including the big American pension funds).

cloud_dog

gozomark wrote: »

the fiscal tightening should mean inflation won't pickup.....

inflation is influenced by fiscal as well as monetary measures - you can't just look at low interest rates and say therefore there will be inflation.

Which is why I was specific in talking in terms of 'price inflation'.

Fiscal tightening will have a bearing but (you missed my point) all this money being printed is basically going to reflate the banks at some point they will start using this money to actually make money (that is what they do), at this point (assuming banks are well capitalised) the only way for the government really to affect / reduce money supply/price inflation within the consumer environment will be via interest rates (or taxes). The big question then comes down to can they afford to do this, will the economies be sufficiently robust to accomodate putting the brages on growth.

I think they will be up against a rock and a hard place and als othere is the benefit to them of inflating their way out of the debt.

Time will tell.