BoE: Gloomy Outlook

chucknorris

chucky wrote: »

inflation is secondary at the moment, trying to fix the economy is the primary reason rates are low. no other reason

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I agree it's a question of priorities

Blacklight

Won't they reverse QE before they raise interest rates?

BLT_2

nembot wrote: »

I don't think they will stay the the levels they are now for an extended period of time, when needs must - it'll happen and will undoubtably bring an end to fantasy house prices, bout bloody time too!

It won't necessarily mean an end to fantasy house prices, however it will result in many more repossessions.

Heyman_2

They will rise eventually, it's inevitable because they have been cut to about as low as they can go. But the BofE won't raise them on a whim, or anything they perceive to be short-term pressures (like the VAT rise).

I'm loving my 1.29% Mortgage at the moment so they can stay low for years as far as I'm concerned :beer:

Graham_Devon

Personally think they will let inflation run and keep interest rates where they are.

Don't think even 5% inflation would have them moving the rates at the moment. Everything is hanging on those rates staying where they are ,including many homeowners.

Heyman_2

Graham_Devon wrote: »

Everything is hanging on those rates staying where they are ,including many homeowners.

Yeah that's what I mean about the bigger picture - and as you say it's about more than the oft-produced rant that I see here about 'rates being kept low for homeowners'.

That's why rates are still 1% in the Eurozone and 0.5% in the US, 0.5% in Canada, 0.25% in Sweden, 0.1% in Japan, 0.5% in Hong Kong, 1.25% in Denmark, 1.5% in Norway and so on and so on - there's much more to it than politicians keeping rates low for the over-leveraged homeowner.

Percy1983

It does annoy me as a FTB (still saving) that mortgage rates on new deals show no relation to the interest rate.

With that I have been doing many calculations and with my current plan I could stand an interest rate of around 12%, by all measn I would hate for that and it would mean a lot of cutbacks but I do believe it would be foolish of me to buy looking at todays figures.

Degenerate

Generali wrote: »

A one-off rise in prices like that doesn't cause inflation by itself as inflation is a persistant tendancy for prices to rise, not just an increase in prices.

That's a fair description of the inflation we should be targeting, but not the inflation that is measured by CPI, RPI, etc, which counts all the one-off price shocks as there is no mechanism to adjust for them. The implication of what your saying is that the recent figures on the high side aren't "real" inflation, so should not concern us.

RenovationMan

From the article it looks as though the BoE is going to ignore inflation over the short term with the expectation that the austerity measures will kick in and reduce inflation over the long term. As others have said, there are more tools in the toolkit than just using interest rates to control inflation. Using fiscal policy is one they are already employing, it just takes longer.

Everything is looking rosy for my interest rate gamble. We need 3.5 years of low rates and then I'll be set for life. 3 years until the end of my mortgage deal and overpayment cycle and then .5 years to allow me to get a decent 10 year fixed rate.

Generali

I've never felt that 'inflating our way out of trouble' will work, given the levels of debt around at the moment. If household budgets are stretched then inflation will finish some off. The reason? Pay rises come but once a year but inflation spreads itself across the year.

E.g. You're spending £300/week and earning £300/week (that's the way many live). If inflation is at 10% and you're getting cost of living pay increases, by the end of the year either you will have had to find another £30/week to maintain your standard of living or you will have had to reduce your spending to the equivalent of £272 at the start of the year. Ok, at that point you catch up as you get your annual pay rise but it's not a great way to live and if a big chunk of your income is tied up on debt repayment and so roughly fixed the amount taken off you living standards is so much greater. In the end it works out better for the indebted but it's painful getting there.

Degenerate wrote: »

That's a fair description of the inflation we should be targeting, but not the inflation that is measured by CPI, RPI, etc, which counts all the one-off price shocks as there is no mechanism to adjust for them. The implication of what your saying is that the recent figures on the high side aren't "real" inflation, so should not concern us.

That's exactly what I'm saying. One off changes in the price level caused by oil prices rising, electricity costs halving or whatever aren't inflation or deflation, it's the persistent tendency that matters.

We got used to CPI/RPI being a valid proxy for inflation when we had proper inflation in the period 1960s-1990s. Since about 2000, inflation hasn't been a problem in itself* the very low readings for the CPI & RPI have mostly, IMO, been noise from relative price changes rather than a persistent tendency for prices to rise.

In 2000 I was on £30,000 with Mrs Generali on about £18,000. I reckon a young couple starting out in London now on £48,000 between them would have about the same living standard we did back then. They'd probably make different choices based on relative prices but in absolute terms they'd be in much the same position we were.