MPC may raise Interest Rates to 6% in August!

Generali

From the data, it looks like the Bank of ENgland is happy to let spreads move out wider. According to the FT to spread on the interbank rate is now 0.75% which shows a lack of liquidity.

Why would the BoE raise rates when the money market is doing it for them? I noticed a little bit more money going on to Betfair (although still very little). It's very tempting to put on a life changing bet, £1-2000 at about 100-1!

IIRC, the BoE likes to do the Lender of Last Resort thing with a little less fanfare than some other central banks.

Edit: According to Big Bank, the BoE hasn't intervened so far to help out the money markets.

phlash

I always thought that rates would get to 6%, but this news of the credit crunch is beginning to swing me to think that the base rates may not raise further.

If the news of the global credit crunch continues it will do the job that the BOE need, and will cool the housing market. It will act as a nice scapegoat for any falls in the housing market instead of blame landing on BOE or the Government, it will be the fault of the "credit crunch of 2007 and those nasty banks that all raised their borrowing costs."

The BOE even if they need to raise rates in the short term may be tempted to hold them so that the blame lays squarely on the credit crunch instead of them. Very interesting times. At the moment though, my bets are still on a raise to 6%, but lets wait and see how the markets do over the next few days and what the CPI figure shows on the 14th August.

phlash.

Generali

The FTSE is down almost 4% so far today.

If this turns into a full blown credit crunch:

Banks will be starting to pull fixed rate deals or bumping up the rates next
Fewer/no 0% introductory rates on credit cards
No more 100% mortgages
No more self cert
Possibly banks will look again at BTL rental coverage on the mortgage

The BoE will not raise rates in a few weeks after this. Rising LIBOR and falling risk appetite among lenders should take care of any CPI problems.

poppy10_2

Central banks are pumping huge amounts of money into the system just to keep the losses down to what they are currently. ECB alone has conjured up £61billion out of thin air.

All this will increase the pressure on inflation down the line. A very short term attitude.

free4440273

...meanwhile inflation still not under the safety net; people still spending beyond their means; savings rate still at an all-time low; employment still 'healthy'. Like King said himself, the Bank is not in the business of bailing out bad lending/borrowing practice. Another .25 raise by november is still on the cards. I'd actually go for a .50 - that way the reduction in rates can be felt even more than otherwise (if you have the BofE thinking cap on)

Generali

poppy10 wrote: »

Central banks are pumping huge amounts of money into the system just to keep the losses down to what they are currently. ECB alone has conjured up £61billion out of thin air.

All this will increase the pressure on inflation down the line. A very short term attitude.

This is an overnight loan to maintain liquidity not a perminent increase in the money supply. That shouldn't do anything to inflation. Anyway the Euro money supply (as measured by M3) is €8,119,000,000,000. The €91,000,000,000 is a drop in the ocean, about 1% of the total.

poppy10_2

Inflation drops to 1.9% in June, undershooting the Bank of England's 2% target. This was a dramatic drop from June's figure of 2.4%, which was itself lower than expected.

Chances of a rise in interest rates this year are now virtually nil.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUfPBNsVUj3o

Generali

Which means that my £6 bet on an interest rate fall that was matched at average odds of 120-1 is looking like a better bet by the day.

Marvellous.

phlash

It is looking like they may well indeed hold off from raising. I suspect that CPI will drop again next month (Last August was a bumper month for CPI, so the annual rise this August will have to off shot up in order to breach the 2% mark).
After the poor sales over the summer (weather related), I suspect shops have lowered their prices. CPI might go above 2% again in a couple of months.
Hopefully they will not cut rates, otherwise it just could well be another August 2005! And we all know that that cut was a mistake. Question is, will they learn from their mistake?

Generali

Falling food prices seem to be more to do with supermarket price wars than bad weather.

e.g. link

Falling furniture prices most likely a function of the strong pound (and weak demand due to bad weather?)

Petrol and gas prices are falling due to strong pound

link