BOE hints at interest rate cut

heathcote123

Worrying that they are considerin this - it will send house prices through the roof - not so much for the .25 cut, but for the message it sends that ir's will be low for a long time to come - many holding off purchasing will give up.

Bad news because I want to upgrade to a bigger house.

The_White_Horse

i don't see the point of the interest rate cuts - who does it help? the few on trackers? big deal.

the govt should force the banks to cut actual mortgage rates for everyone - this way more people benefit, more people have more money to spend and the banks take the hit.

ILW

The_White_Horse wrote: »

i don't see the point of the interest rate cuts - who does it help? the few on trackers? big deal.

the govt should force the banks to cut actual mortgage rates for everyone - this way more people benefit, more people have more money to spend and the banks take the hit.

Mortgages are dirt cheap at the moment anyway.

joe_blotts

purch wrote: »

If it was true (the the BOE prints money and gives it to HM Gov to spend) then we wouldn't have a deficit or the need for "austerity".

On the other hand, if that is what happened the currency would be close to worthless and a loaf of bread would cost £ 45........err no £ 46........oops £ 48 :eek:

Mr. Gordon Agahouse explained what happens rather succinctly earlier in the thread BTW.

Thankyou Mr Purch, yes I read that but all that broad/base money was a bit over my head. I understand that the BoE 'prints' to buy 'assets' from the banks, I thought that maybe they bought gilts directly from the gov too but seems I'm wrong. If the banks buy gilts, as they do, are they then not funding the gov deficit via the BoE as the BoE buys worthles assets from the banks and the banks use that money to buy gilts and the gov uses that money to fund the programmes? A bit like a shell game. I think I'm right on that but please tear my 'logic to shreds' if you can find a hole. many thanks for explanation.

grizzly1911

chucknorris wrote: »

I'm 29k per year better off due to the low base rate, only a tiny fraction of that is 'eaten up by inflation'.

Aren't you a multiple BTL investor?

Not your average punter with a mortgage being "helped" out. My reply was inresponse to a SVR Post taken to be for a normal mortgage proposition.

grizzly1911

ILW wrote: »

Mortgages are dirt cheap at the moment anyway.

If you can get one, apparently.

grizzly1911

Anyone see Bank on Dave C4?

Simplistic but interesting.

5% 1Yr deposits. Lends to punters the mainstream banks won't at "normal" rates. Only 2% default rate after 6 months on lending.

Profit generated after 6 months distributed to charity.

gagahouse

joe_blotts wrote: »

Thankyou Mr Purch, yes I read that but all that broad/base money was a bit over my head. I understand that the BoE 'prints' to buy 'assets' from the banks, I thought that maybe they bought gilts directly from the gov too but seems I'm wrong. If the banks buy gilts, as they do, are they then not funding the gov deficit via the BoE as the BoE buys worthles assets from the banks and the banks use that money to buy gilts and the gov uses that money to fund the programmes? A bit like a shell game. I think I'm right on that but please tear my 'logic to shreds' if you can find a hole. many thanks for explanation.

The BOE is prohibited from purchasing Gilts in the 'when issued' primary market i.e directly from the govt. It can only purchase them in the 'already issued' secondary market by those who hold them. When it does this it effectively swaps central bank reserves for Gilts, this drains the private sector's holding of Gilts and increases their deposits. There is no change in the balance sheet of the govt.

However, if at the same time the govt is issuing debt and thus increasing its balance sheet, and the propensity to save hasn't changed, the private sector will absorb the new issuance via its increased deposits. So QE facilitates the govt's ability to issue debt by forcing holders out into cash with which they can purchase the new debt, it does not finance new debt directly.

To finance new debt directly, the BOE would buy directly from the govt - it gains an asset, the gilt, and creates a corresponding liability of new central bank reserves with which it credits the govt's account at the BOE. The govt can then spend this money via the commercial banks. This is true 'money printing' as the central bank has transformed a newly created debt instrument into currency, one of its primary functions. By spending this money, the govt increases deposits (broad money) at the commercial banks. In effect, the money is 'spent into existence' the same way as households and corporations 'borrow money' into existence when taking a loan. We live in monetary system governed by double entry bookkeeping - an asset cannot exist without a corresponding liability.

The key difference between QE and 'money printing' is that in money printing the govt doesn't swap it's debt with the already existing cash of the private sector , it is swapping it for newly created cash which is why it tends to be inflationary. Although the central bank and the govt are 2 separate institutions in terms of balance sheets, foreign investors look at them as one on a consolidated basis. So if they see that the central bank is directly funding the govt deficit in the 'true money printing' mechanism described, they demand a higher rate to compensate for the additional inflation. If they see there is any permanence to this policy, they eventually lose faith in the currency and repudiate its debt instruments.

joe_blotts

Thanks for your explanation GG. I just came across this article

http://www.marketoracle.co.uk/Article35687.html

Which was posted over a HPC forum and I made a thread about it here;

https://forums.moneysavingexpert.com/discussion/4083475


What do you make of it GG as it seems to go against what you said before? At least it appears too but then maybe I'm wrong...again

gagahouse

joe_blotts wrote: »

Thanks for your explanation GG. I just came across this article

http://www.marketoracle.co.uk/Article35687.html

Which was posted over a HPC forum and I made a thread about it here;

https://forums.moneysavingexpert.com/discussion/4083475


What do you make of it GG as it seems to go against what you said before? At least it appears too but then maybe I'm wrong...again

The next stage is QQE, which will involve the UK government (same applies to the likes of the US) via a number of mechanisms to directly spend money printed electronically by the Bank of England without it going through the !!!!! banking system i.e. direct transfer from the Bank of England to Government. The exact mechanisms used and what they will eventually be called will only become fully clear in hindsight but the basic outcome will be as I indicate here in that the Government will spend money printed (electronically) without it adding to government debt!

He says the same thing as I did, direct monetizing of govt debt will be inflationary hence 'QQE'. But he then conflates QQE with current QE when he describes how QE via the banks allows the govt to 'save' the interest payment as it's refunded to them by the BOE.

This interest payment originally came from the govt and was handed back to them by the BOE therefore it's not 'new money'. Whether it proves inflationary depends on what the govt chooses to do with that money, it can either use it to reduce its deficit or spend it into the economy. You're talking about at most an average coupon payment of 4-5% on 33% of 1 trillion, about 16.5 billion or 1% of GDP, hardly inflationary is it?

Then he goes on to say this complete rubbish.

Yes this mechanism is QQE because it allows the government to spend money without increasing its NET debt burden, not only that but the government is actually REDUCING its debt burden as the debt is actually being cancelled out. So QQE is the quantum of QE as the net debt interest burden falls towards ZERO.

I am sure this is one secret that the Bank of England wants to keep hidden away for as long as possible for it implies that the ramping up of the Inflation Mega-trend is already underway with approx 1/3rd of Government debt having been effectively cancelled to date! As effectively 1/3rd of the interest the government pays on it's debts is going back to itself! And meamtime about 12% of the value of the debt has been wiped out by inflation (£132 billion) over the past 3.5 years)

Cancelling the interest coupon on the debt is not the same as cancelling the entire debt nor does he explain how this is cancelled. The bond held by the BOE will have to mature one day and the govt will have to make the payment to the BOE. He implies the BOE will simply write this payment off wiping out its own capital just like that. And that the BOE and the govt would simply ignore the obvious reaction of the markets to Zimbabwe style economics. He also fails to mention that the govt is continually having to issue new debt.

The only bit he got right was the last bit about the real value of the debt being eroded by inflation but he fails to describe how current QE and the interest recycling mechanism is contributing to the current rate of inflation which has been falling recently.

He often gets some of the big picture themes right Mr Walayat but gets very muddled with the details of some things causing him to make some grand extrapolations of the future which are unfounded.