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Will Interest Rates stay extremely low for 5 Years?

HAMISH_MCTAVISH
HAMISH_MCTAVISH Posts: 28,592 Forumite
Part of the Furniture 10,000 Posts Name Dropper Photogenic
edited 13 March 2010 at 12:16PM in Debate House Prices & the Economy
From The Times

March 11, 2010


Given that tax increases and cuts in public spending are inevitable in the next Parliament, whoever wins, a strong recovery will only be possible on one condition. Interest rates will have to remain low — if not quite at their present rock-bottom level of 0.5 per cent, then certainly no higher than 1 to 2 per cent range — not just for the rest of this year, but until 2014 or 2015.



Without a commitment from the Bank of England to keep interest rates near zero for the next four or five years, it is almost impossible to imagine how the British economy can return to a growth rate of around 3 per cent in the next Parliament — and without such a return to normal growth rate it will be impossible for the next government to keep a promise to halve public deficits, regardless of whether Labour or the Tories are in charge

Kaletsky seems to think so....
“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.

Belief in myths allows the comfort of opinion without the discomfort of thought.”

-- President John F. Kennedy”
«1345

Comments

  • chucky
    chucky Posts: 15,170 Forumite
    10,000 Posts Combo Breaker
    can't see near zero but can see around 2%-3% quite easily
  • Generali
    Generali Posts: 36,411 Forumite
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    It depends on what you mean by interest rates.

    Right now for example, if you take the BoE base rate, then clearly interest rates are near zero. If you have savings they're pretty near zero. If you are borrowing for a mortgage with a 20%+ deposit then you're already up to 2.5-3% (variable).

    Even the UK Government, if borrowing over 10 years, is looking at paying nearly 5% pa.

    It's interesting that a home owner can borrow at a variable rate for 25 years at an interest rate lower than the Government (that will always be able to repay as they can print money) can borrow fixed for 10 years.

    That shows me that the Gilt market is expecting inflation. I have my doubts but it is worth saying that markets are amazingly good predictors of outcomes.
  • michaels
    michaels Posts: 29,223 Forumite
    Part of the Furniture 10,000 Posts Photogenic Name Dropper
    Inflation or currency depreciation?

    Plus stagnant wages and domestic prices with only tradeable goods prices increasing - why not tweak the boe target to exclude such tradebles to justify keeping the base rate low?
    Generali wrote: »
    It depends on what you mean by interest rates.

    Right now for example, if you take the BoE base rate, then clearly interest rates are near zero. If you have savings they're pretty near zero. If you are borrowing for a mortgage with a 20%+ deposit then you're already up to 2.5-3% (variable).

    Even the UK Government, if borrowing over 10 years, is looking at paying nearly 5% pa.

    It's interesting that a home owner can borrow at a variable rate for 25 years at an interest rate lower than the Government (that will always be able to repay as they can print money) can borrow fixed for 10 years.

    That shows me that the Gilt market is expecting inflation. I have my doubts but it is worth saying that markets are amazingly good predictors of outcomes.
    I think....
  • Generali
    Generali Posts: 36,411 Forumite
    10,000 Posts Combo Breaker
    michaels wrote: »
    Inflation or currency depreciation?

    Plus stagnant wages and domestic prices with only tradeable goods prices increasing - why not tweak the boe target to exclude such tradebles to justify keeping the base rate low?

    That was the mistake made by the Fed in the late 70s - they stripped out the volatile stuff from the preferred inflation measure ('core inflation') which was basically the stuff rising in price leaving behind everything else.

    There is a clear analogy there to the BoE targeting inflation without measuring purchased housing costs during the biggest house price boom the UK has ever recorded AFAIK.
  • Cannon_Fodder
    Cannon_Fodder Posts: 3,980 Forumite
    Not according to the Bank of England;

    http://www.bankofengland.co.uk/monetarypolicy/qe/askqa.htm

    3. Quantitative easing isn't fair to savers who did nothing wrong in the lead up to the crisis and now get very little on their savings. Doesn't it simply reward the imprudent who borrowed too much?

    "Monetary policy is a rather blunt instrument and unfortunately there will always be gainers and losers from any particular MPC decision. For instance, raising Bank Rate usually benefits savers and hurts borrowers. At the present juncture, many savers are suffering from particularly low interest rates on their savings, even though the financial crisis is not of their making. But by cutting Bank Rate sharply and undertaking quantitative easing now, the MPC is aiming to get the economy back on track sooner rather than later. And when that happens, interest rates for both savers and borrowers can return to more normal levels. If the MPC had not undertaken quantitative easing, interest rates would need to stay low for even longer to keep inflation on track to hit the target."
  • HAMISH_MCTAVISH
    HAMISH_MCTAVISH Posts: 28,592 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    Not according to the Bank of England;."

    That may change......
    Without a commitment from the Bank of England to keep interest rates near zero for the next four or five years, it is almost impossible to imagine how the British economy can return to a growth rate of around 3 per cent in the next Parliament

    and without such a return to normal growth rate it will be impossible for the next government to keep a promise to halve public deficits, regardless of whether Labour or the Tories are in charge
    “The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.

    Belief in myths allows the comfort of opinion without the discomfort of thought.”

    -- President John F. Kennedy”
  • chucky wrote: »
    can't see near zero but can see around 2%-3% quite easily

    I can see this also. However most people on here are interested in what mortgage rates will be over the next 5 years, if the above figure were to be true I'd expect mortgage rates to also increase by at least the corresponding amount.

    With liar loans, 100% loans, lax lending etc.... a thing of the past, in my opinion there will be little competition in the market except maybe for those who have larger deposits or equity, and therefore rates will increase.

    I don't see house prices going anywhere over the next few years (except maybe down) and that is despite record low approvals, proof again the the money no longer exists to prop up prices and transactions.
  • dopester
    dopester Posts: 4,890 Forumite
    I can see this also. However most people on here are interested in what mortgage rates will be over the next 5 years, if the above figure were to be true I'd expect mortgage rates to also increase by at least the corresponding amount.

    With liar loans, 100% loans, lax lending etc.... a thing of the past, in my opinion there will be little competition in the market except maybe for those who have larger deposits or equity, and therefore rates will increase.

    I don't see house prices going anywhere over the next few years (except maybe down) and that is despite record low approvals, proof again the the money no longer exists to prop up prices and transactions.

    If it's not hurting it's not working.
  • Radiantsoul
    Radiantsoul Posts: 2,096 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    There aren't really many inflationary forces that would justify higher interest rates. The economy will scarcely grow this year and so there will be enough spare capacity for inflation to be a minor issue for several years. The output gap must be 10% which is going to take a few years of strong growth to be closed.
  • sabretoothtigger
    sabretoothtigger Posts: 10,036 Forumite
    Part of the Furniture 10,000 Posts Photogenic Combo Breaker
    If they put rates upto 5% now then maybe we could stay there stably for the next five years.

    They wont take pre-emptive action so it will have to spike upwards like it has in the past I guess.

    ukbaserate.jpg




    Estimates circa Dec 08

    boerate.jpg


    Right now USA libor rate is lower then Japans
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