Interest rate warning

wymondham

Just wondering if I've missed the daily interest rate warning (about absolutely not hesitating to raise them) today by a member of the BofE?


I usually have my breakfast just after it and I'm getting hungry! - do they skip Sundays and have two tomorrow?

Generali

This one got missed, not sure why. Presumably an oversight from our doom bringers:

http://online.wsj.com/articles/u-k-interest-rates-wont-return-to-precrisis-levels-says-boes-chief-economist-1403354523

LONDON—Britons shouldn't expect borrowing costs to rise to the levels that prevailed before the global financial crisis, and instead should accustom themselves to a "new normal" for the Bank of England's benchmark interest rate of between 2% and 3%, the central bank's new chief economist said in an interview published Saturday.

TBH, it's all a bit 'this time it's different' to me. What's changed to depress base rates more than in the past? I suppose higher levels of debt make consumers more sensitive to interest rate changes which could keep rates lower. Still, as the Chief Economist for the Bank of England, he should know what he's talking about.

HAMISH_MCTAVISH

Generali wrote: »

This one got missed, not sure why. Presumably an oversight from our doom bringers:

Doesn't fit the doom-agenda.

After all, if interest rates for this business cycle do average around half the rate of interest rates for the last cycle, that has some rather large implications for affordability remaining very good even with higher asset prices.

TBH, it's all a bit 'this time it's different' to me.

Every time is different.

But in reality it's not as different as people seem to think.

Many pensioners alive today will already have seen almost three decades of rates at or below 3% in their life time.

Only 6 years of that is from this event so far....

There is no reason to suggest the economic policies required to deal with the aftermath of this great depression will be much different to the last one.

And very low rates for a very long time do seem the likeliest outcome by far.....

Hence the BOE Chief Economist noting that the "new normal" is more likely to be around 2% or 3% than the 5% to 6% it was before the credit crunch.

What's changed to depress base rates more than in the past? I suppose higher levels of debt make consumers more sensitive to interest rate changes which could keep rates lower. .

Well, exactly.

If you double the consumer debt in existence, you only need to raise rates half as much to remove the same amount of money from any potential future overheating economy.

PasturesNew

Interest goes up ..... landlords put rents up .... landlords buy more houses as the rents are increasing ..... Govt underpins another bunch of people who might lose out if house prices were to drop.

Graham_Devon

There was a piece in the telegraph which no one will thank me for mentioning that did some research (alongside the BOE) which suggested that an interest rate at 3% would put mortgage holders in the same position financially as when interest rates were 5.75% in 2007.

This is due to the new mortgages taken on since 2007 and the inability for those on interest only to swap to better deals or fixes. Secondly, if you have wanted a mortgage post 2007, you've had to take a repayment mortgage, meanign any increase in interest rates will hit an already higher monthly payment than people may have had on interest ony mortgages in 2007. They were looking at the amount of income used to service the mortgage.

So while we might think 3% is the new norm and therefore things will be easier, that new norm will have us, on average across all mortgagees, paying the same amount out of incomes on the mortgage as we were in 2007.

Graham_Devon

And this is quite a good piece. Looks at how the traditional wages vs employment link has been broken due to the suply of cheap labour etc. How that impacts base rates etc

http://www.telegraph.co.uk/finance/bank-of-england/10911843/Interest-rates-need-to-be-raised-and-fast.html

michaels

Graham are you feeling alright? Not like you to be agreeing with Hamish.

HAMISH_MCTAVISH

Graham_Devon wrote: »

which suggested that an interest rate at 3% would put mortgage holders in the same position financially as when interest rates were 5.75% in 2007.

Only if bank margins above base rate don't compress from their current near record-high levels.

That seems unlikely IMO.

When base rates were 5.75% in 2007 average margins above base were around 1%.

Today, average margins above base are around 3%.

So while we might think 3% is the new norm and therefore things will be easier, that new norm will have us, on average across all mortgagees, paying the same amount out of incomes on the mortgage as we were in 2007.

Putting aside for a moment the comments above re margins, even if they do return to that level, it's unlikely to cause falls in house prices.

Don't forget Graham, it wasn't UK house prices or UK interest rates that caused the crash to begin with.

Graham_Devon

michaels wrote: »

Graham are you feeling alright? Not like you to be agreeing with Hamish.

I'm not sure I am seeing as he's now "correcting" me

Generali

Graham_Devon wrote: »

And this is quite a good piece. Looks at how the traditional wages vs employment link has been broken due to the suply of cheap labour etc. How that impacts base rates etc

http://www.telegraph.co.uk/finance/bank-of-england/10911843/Interest-rates-need-to-be-raised-and-fast.html

From your link:

t some stage quite soon, real wages will begin rising again, such are the skill shortages developing in many parts of the economy.

It doesn't seem that the link is broken at all and the article even says that wages will rise shortly.

HAMISH_MCTAVISH

michaels wrote: »

Graham are you feeling alright? Not like you to be agreeing with Hamish.

Well to be fair, I have been banging on about the new normal for rates being around 3% for.... oh..... going on 4 years now.

HAMISH_MCTAVISH wrote: »

A number of analysts, and even the BoE itself, have pointed out that 2.5% to 3% is the new neutrality point for base rates, versus 5% in the previous decade.

He's had time for it to sink in.:D