Are interest rates strangled?

Graham_Devon

What I mean by this is can the BOE use interest rates in the same way they have in the past ?

Or, are interest rates hostage to the rest of the economy?

Today we have interest rates at 0.5%, mortgage rates around 5%.

Around the 70's, base rates were around 10-12%, mortgages the same.

Based on the economy now, and the economy in the 70's, and everything within the economy, i.e debt etc, would base rates ever be able to go up to the rates we have seen in the passed, or even an average 7%? Or are they strangled by the fact so many people would lose their homes and it would cause massive debt default?

Have we lost control of effective use of interest rates?

purch

Have we lost control of effective use of interest rates?

Altering the Base Rate has always been hugely overrated as an Economic tool.

chucky

no, they're not but they can be less effective than they were in the 70s, 80s or 90s.
it also doesn't always work - so not sure if it was always effective.

you also have the money supply that is currently being expanded and in time will contract.
that can also be seen as an effective tool.

Graham_Devon

purch wrote: »

Altering the Base Rate has always been hugely overrated as an Economic tool.

But has saved shed loads of people from the loss of their homes. 5 million plus have more to spend, and in some cases, hundreds more to spend each month.

So they have been effective for those lucky enough to take advantage, and have been hailed as being effective by the government and many on here.

But I was wondering where that leaves us now. Ok, the lowering of rates helped sort a crisis in the housing sector, and no doubt other sectors. But are they now going to be able to be used for other purposes they are used for? Or have we cut our last rope in terms of what we can use them for.

I hope people can get the jist of what I'm on about, its hard to explain! What I'm saying is are we now in catch 22 with no where to turn if another part of the economy needs rates looking at. Or indeed, if HPI continues to race ahead, how are we going to control it without those already in the chain being hurt by higher rates?

chucky

Graham_Devon wrote: »

But has saved shed loads of people from the loss of their homes. 5 million plus have more to spend, and in some cases, hundreds more to spend each month.

So they have been effective for those lucky enough to take advantage, and have been hailed as being effective by the government and many on here.

But I was wondering where that leaves us now. Ok, the lowering of rates helped sort a crisis in the housing sector, and no doubt other sectors. But are they now going to be able to be used for other purposes they are used for? Or have we cut our last rope in terms of what we can use them for.

I hope people can get the jist of what I'm on about, its hard to explain! What I'm saying is are we now in catch 22 with no where to turn if another part of the economy needs rates looking at.

personally - i think that the low rates has been over rated, especially on this board and HPC.co.uk. it has helped many but not on the scale that is said on here.

things like unemployment not soaring past 3 million in 2009 and inflation being so low have been a bigger positive factor in the economic climate.

ukcarper

How many people have benefited from low mortgage rates my mortgage has hardly dropped while I'm getting next to nothing in interest on my savings?

stueyhants

Isn't it also a problem for all the BoE with respect to QE. A significant proportion of the QE money is sitting in the BoE deposited from the banks who sold their Gilts back to the BoE. If rates go up then the interest on the deposited money increases costing the BoE and hence the country more.
So I'm guessing the BoE would want to remove QE before any significant rate rises.

chucky

ukcarper wrote: »

How many people have benefited from low mortgage rates my mortgage has hardly dropped while I'm getting next to nothing in interest on my savings?

i think it's 50% of mortgages are fixed - but you have people coming off their fixes too so they wouldn't or couldn't remortgage.

stueyhants wrote: »

So I'm guessing the BoE would want to remove QE before any significant rate rises.

that would be my expectation too

Graham_Devon

So I guess they are somewhat strangled.

Was just interested, I don't really have much more to say. Just thought it was another indicator of the difference between now and the last major recession, when rates seemed to be, from where I am standing, less strangled by other factors, especially those who could afford their mortgages, i.e., repo's and debt default can't have been as much of a concern as now?

ukcarper

chucky wrote: »

i think it's 50% of mortgages are fixed - but you have people coming off their fixes too so they wouldn't or couldn't remortgage.


that would be my expectation too

Some SVRs have only dropped a little

chucky

ukcarper wrote: »

Some SVRs have only dropped a little

so even less would have benefited - as i said in the post above the mortgage rate drop for me is overstated, there are bigger favourable factors that have helped people.