Interest rates will go up quicker than anyone expects, ex-BoE officials warn

RenovationMan

bendix wrote: »

To control inflation. Which is rising.

Yes, but that's my point. They are already using fiscal policy to control inflation, so dont need to use monetary policy too. The government is still in the process of tightening fiscal policy and so there is a lag between what rates are now and what they will be when the mooted tax rises have been carried out. VAT is one of the largest tax rises, but that doesnt kick in until 2011, so there will be quite a lag before this tax rise hits the public and helps to control inflation. Other fiscal changes will impact sooner.

If they tighten up both monetary and fiscal policies at the same time they risk overreacting to inflation and causing deflation.

Really2

Thrugelmir wrote: »

No. If I work, as I do, 5 hours longer a week on my own projects, and earn an extra £25 per week. Thats not inflationary. As it will result from increased output or sales activity. Real growth.

If one of the organisations that I contract to increases my rate of pay by £25, yet I still work the same hours thats inflationary. As the additional cost will more than likely be passed onto customers as an increased selling price. They will do likewise until the consumer, the man on the street picks up the tab. Thats an inflationary spiral.

Yes, I know and the later in bold is not happening so how far can prices go without them dropping back through lack of wage growth.

You seemed to missed out the point of how will increasing base rate stop inflation caused by tax increases. Tax increases cause price inflation, but will lower demand, so you could raise the base rate to fight it if you wanted to (with little effect) but it would be fairly nailed on it would drop back the following year if you do nothing anyway.

I fail to see what you are portraying, are you saying base rate should go up to combat inflation even though we are not getting wage inflation and most of the inflation will be at the expense of demand?
That would just cause even less demand by taking more "spending" money out of the economy.

chucky

bendix wrote: »

People seem to think there is a mythical 'they' who raise interest rates. There isn't.

Interest rates are set by the market. The BGofE might change base rates, but unless there is a corresponding linkage to what is happening out there in the real world, it's a waste of energy.

The last year or so has seen the widest gap between official rates and real rates in history, suggesting that irrespective of what the BofE says, rates will go where they want to go. And that is where the markets - supply and demand for money - tells them to go.

The government doesn't pay interest based on its on base rates. It pays interest based on whatever it borrowed that money at - rates set by debtor nations, by the World Bank, by the yields set at the time of gilt auctions etc.

so why increase interest rates when you can use the money supply to combat inflation. fiscal policy or monetary policy - which will be used?

inflation does not mean interest rate rises

bendix

chucky wrote: »

so why increase interest rates when you can use the money supply to combat inflation. fiscal policy or monetary policy - which will be used?

inflation does not mean interest rate rises

You could be right. You could be wrong. These are truly interesting times and the text books of historical trends have been thrown out of the window.

Bottom line is, noone knows what will happen. When Bernanke talks of being in a period of unprecedented uncertainty it implies even he doesn't know, so how can we?

If i was a betting man, though, I'd go with higher rates within 12 months and when the door opens, the rates will go up quickly. Not to desperate highs - but to levels that might make people borrowing at times of record lows think about what they have done.

RenovationMan

bendix wrote: »

You could be right. You could be wrong. These are truly interesting times and the text books of historical trends have been thrown out of the window.

It is interesting (sic) to watch these historically low rates and debate when we think they will increase (and increase they will), but I doubt that many experts have much more of an idea as we have.

Really2

bendix wrote: »

Not to desperate highs - but to levels that might make people borrowing at times of record lows think about what they have done.

It will be interesting to see though if those who did borrow at record lows will actually be paying any more on their debt.

By that I mean anyone with less than 25% deposit will have being paying in borrowing terms(%) not far off when base rates were around 5%.

Not many who could take on new debt got record low rates IMHO.

chucky

bendix wrote: »

You could be right. You could be wrong. These are truly interesting times and the text books of historical trends have been thrown out of the window.

Bottom line is, noone knows what will happen. When Bernanke talks of being in a period of unprecedented uncertainty it implies even he doesn't know, so how can we?

If i was a betting man, though, I'd go with higher rates within 12 months and when the door opens, the rates will go up quickly. Not to desperate highs - but to levels that might make people borrowing at times of record lows think about what they have done.

exactly - but at least we won't be lacking the continued frothing by those that demand lower house prices trying to justify lower house prices by increasing rates...

Generali

My feeling is that if/when the BoE start to increase rates, the wheels will come off pretty quickly as heavily indebted consumers have to cut back discretionary spending leading to cuts in rates again.

The only caveat is that if the pound starts to fall quickly, the BoE will have to act to prop it up by increasing rates. I suspect that's one of the things that has prompted the current austerity is a feat that the pound would come under excessive selling pressure.

Thrugelmir

Really2 wrote: »

Yes, I know and the later in bold is not happening so how far can prices go without them dropping back through lack of wage growth.

Therein lies the rub. As many middlemen make enormous margins that can be contracted.

A plastic item that retails in the UK for 99p (excl VAT) manufactured in China. Costs 20p factory gate price, 16p for shipping and UK import duties. Leaving the middleman 63p of margin to distribute the product in the UK. Plenty of room to absorb a lower price to maintain demand yet remain profitable.

Euphoria1z

been meaning to ask for a long time, how does wage growth/wage inflation occur? who controls it? i.e i work in a call centre, and never really see more than 1-2% increase every 2nd yr or so. Is it up to my company to decide whether i get 1% increase? or the government?