Inflation hits 7 year high - Watch out higher rates coming

deemy2004

Reaper wrote:

Much of the rise is due to oil prices which are outside government control, and raising interest rates would not help.

I'm still a bit mystifyied by the BOE view that there may be one last interest rate rise. It doesn't seem to make economic sense.

They approach rate changes pretty much from a technical view point, taking everything into account + or - etc...

Afterall I could plaster a zillion reasons why interest rates should rise and then again why they should not and maybe some to suggest why they should fall. Similarly the bank takes a holistic view point.

But there are certain conditions that do force a rate rise, such as if the markets want the rates to rise ! Then they must go up ?

How can the markets force the governments hands ?
By selling the currency short............

Now long before theirs a run on the £ the BOE will ensure rates are at a level to prevent the likelyhood of such an event, which actually means signalling a pre-emptive rise in interest rates, hence the talk about another rise in interest rates.

Now the effect this has is to bolster the currency i.e. make it rise and thus reducing the likelyhood of a rate rise, as a rising currency has a deflationary effect on the economy....... :rotfl:

Sorry.... but thats the way the crazy currency markets work

Now taking all of the above into account - the net effect is that rates are likely to rise in or around June 05 - which will actually be followed by a drop in the £....

I.e. the currency is rising in anticipation of a rise in interest rates. After the rates rise the currency will fallllllllllllll..................

Inversly, stocks at the moment are suffering due to the lieklyhood of rate rises here and moreso in the USA, but after the rise they will RISE !

WHY ?

Because then the mood of the markets will shift to the perception that rates have peaked ........... for a while at least, until sentiment shifts again depending on the quaility of trend / sentiment and economic stats..........

Really does make it tough trading currencies when your trying to second guess the second guessers ....

Now my guesstimate is that sometime over the next 2 years interest rates will hit or exceed 6% !!! What I don't know is whether along the way, there will be any rate cuts...

deemy2004

Kennys1 wrote:

So lets start spread betting, you can help if you know.

The problem is that inflation futures would discount a rise in inflation hence you can only really profit by juncture hunting which is a dangerous sport.

The safest long-term bet are index linked government stocks as if rates rise the price of the bonds will rise and so yuo can dump them at a profit... if they don't you hold them to either maturity or paiently await high inflation, whilst collecting index linked income.

deemy2004

I am looking at the facts... the markets are discounting a rate rise.... both here and the USA hence £/$1.92, FTSE correcting 300 points from the peak. 3 Mth Libor tradign between 4.9 and 5%.

The market is speaking that interest rates are likely to rise in the very near future.

Its definetly not a question of panic.... Panic is 100+ drops in a day ! with interest rates movign by the day not by several months.

dougk_2

So if you took the oil rise out of the inflation rate what would the inflation rate then be ? 1.6% or 1.7%?

If you have no control over oil prices why include it in the inlation rate in the first place?

Sorry I don't understanbd this (never have!)

If the government cut its tax on oil/petrol would the inflation rate then drop?

deemy2004

dougk wrote:

So if you took the oil rise out of the inflation rate what would the inflation rate then be ? 1.6% or 1.7%?

If you have no control over oil prices why include it in the inlation rate in the first place?

Sorry I don't understanbd this (never have!)

If the government cut its tax on oil/petrol would the inflation rate then drop?

But inflation DOES include oil prices, otherwise one could exclude everything and have zero inflation.

Its like saying for national house prices, we will exclude the south East because its not doign so well and only include the stronger north.

deemy2004

chucky wrote:

i think that you are missing the point here, i understand what you have said but tend to look at it from a different perspective.

the drop in the Dow, FTSE whatever you look at is already usually factored in by traders / market makers (with the exception of natural disasters, company mis-accounting or government takeovers etc). they have numerous sources of information of information that would take us years to get through - bloomberg, reuters, company reports, government numbers etc... there are Credit Risk teams and Market Risk teams that work for these market makers that provide them with the required information and calculations.

if you are going to tell me that you are forcasting disaster - i think you need to go back to your crystal ball and re-evaluate.

i am not saying that it will not happen but i think just looking at what your hear on the news etc... isn't the way to make that call.

Diaster ??? All said was that the market is discounting a rise in interest rates in May / June 05.

The price moves in response to stats and sentiment in real time, if tommorrow there is a flash report that the CPI is 1.6% then immediatly stocks will rise, bonds will rise, and the currency will fall. The markets move from stats to stats with underlying sentiment driving the trend

deemy2004

Yes the markets have moved but the whole point is that the Base Rate has not !

As they are only set once a month at the meetings.

Which thus leads me back, back... to the point that the markets are discounting a rise in interest rates which MEANS that interest rates will rise either at the next or subsquent meeting, which supports the title of the thread - watch out higher rates are coming.......... phew..........

deemy2004

chucky wrote:

why would the B of E try to increase rates, making the pound more expensive. remember there is a hole in the treasury that needs to be funded - so exports need to increase.

The BOE is not making the £ more expensive, its the speculators and investors who are makign the £ more expensive as they are betting on strong economic growth which supports higher interest rates than elsewhere.

If the sentiment shifted than the £ would fall even with rising interest rates - for as yuo must be aware Britain is running a massive current account trade deficit. That is only being sustained whilst our economic peformance is better than most of the rest of the western world and interest rates are also much higher than most of the rest of the western world. I.e. in the EU interest rates are 2%.

Anway back to where I was.... Inflation Up, Interest on the way Up !
The world is going through an inflationary phase.. the question is, is this that start of stagflation ! The United States sure looks like drifting into such a mode.... i.e. rising prices and interest rates coupled with falling or negative growth

deemy2004

Cheers :beer: