'U.S. rates due to be raised this year'

Reaper

Interest rates rises were predicted years ago but never happened. I suggest you don't hold your breath on this one either.

Even when inflation does start to rise the bank will drag its heels because:
1) The economy will still be fragile and they don't want to risk damaging it. Higher interest rates reduce consumer spending (more spent on mortgages, more incentive to save instead of spend for example) and also makes exports more expensive as sterling strengthens, hitting some businesses and making our national Balance of Payments worse.
2) The government would actually like more inflation as long as it doesn't get out of control to reduce our huge debts.

Daniel54

Current expectations are the Fed will increase US interest rates in September and the BOE will follow within a maximum of 6 months.It would be foolish not to plan on this happening,in my view.

As Bowlhead says,Carney is not expecting the lending rate to rise to pre crash levels.However noises from the BOE suggest they are concerned about an asset price bubble, for residential property in particular,and also about rising household indebtedness.

My own view is that the BOE will move sooner rather than later once the Fed increases their rates

justme111

Bowlhead , I agree with what you say.My point was not poor saving returns specifically. I was replying to someone who remarked in cursory manner that incomes are increasing in line with inflation. And someone else who said inflation was 0. ..how interesting news headlines are about 0 inflation in the last month and not about almost 40% in the last decade ( for the record income of many selfemployed people I know is the same as 10 years ago.

colsten

bowlhead99 wrote: »

Carney said yesterday that while rates will go up at some point, he doesn't see them getting up to the really high rates we saw in recent decades.

I haven't had a mortgage for over 10 years now but I am sure that current and prospective mortgage payers will breathe a huge sigh of relief on that Carney statement. Similar for current and prospective owners of small and medium businesses that are a major power in our economy.

Would I like to receive better interest rates on my savings? Of course I would but I'd also like to win the Euro millions and stay young and healthy forever. On balance, though, I'd rather live in a society where the 'give' and 'take' is balanced, rather than skewed in favour of one of the participant groups. This is not a political statement, just a reality check on what works in favour of a prosperous society.

bowlhead99

justme111 wrote: »

Bowlhead , I agree with what you say.My point was not poor saving returns specifically. I was replying to someone who remarked in cursory manner that incomes are increasing in line with inflation.

They didn't say that incomes increased exactly in line with inflation. But it was in response to your 'in cursory manner' comment that "So you need to pay fir everything about a third more , ie our salaries give us a third less than 10 years ago"

There are a few obvious flaws in your logic if you think about it. Firstly, simple maths - if everything costs a third more (e.g. a £1 item costs £1.33) then you will get 75 items for your £100 instead of 100 items. So when prices went up by 3% a year compounded for ten years for a total price increase of about a third, your salaries buy you about a quarter less, not about a third less.

Secondly, the obvious one that was pointed out is that average salaries did not stay constant, and so salaries will not simply buy three quarters of what they used to, they'll buy more than that, if they're trying to buy the average basket of goods included in CPI and RPI. As you noted, minimum wage went up by over 20%, and nobody aspires for minimum wage anyway. A majority of people are moving up a career path rather than stuck on the same thing for 10 years, but I admit that's a separate thing.

If the income of your self-employed friends is exactly the same as it used to be a decade back, they are probably in a minority. As prices of goods and services are higher, then on average the costs of running a business will be proportionally higher but also on average their sales prices will be proportionally higher and so their profit margin (= pay) can be higher too. If they are worse off in real terms then harsh as it sounds, perhaps they should try to refocus their business or change careers to keep pace with what businesses are in demand these days. That's the risk of going into business for yourself.

Finally even if someone can now only buy 95 items instead of 100 with their salary; many of those items today are different and better. A family TV does not just cost less than a decade ago but on average it has a larger screen and better resolution and perhaps in-built services such as TV-on demand apps etc. The average person's internet service is faster and their PC or smartphone is also faster and more sophisticated. A new car has a higher safety rating including pedestrian safety, and achieves more miles to the gallon, polluting less.

So, in some cases you are laying out as much or more money as a percentage of your salary, but you are getting more for your money. The average 'standard of living' has improved since the 19th century, even though things cost a lot more money than they did in the Victorian era.

And someone else who said inflation was 0. ..how interesting news headlines are about 0 inflation in the last month and not about almost 40% in the last decade

The headlines coming out in June 2015 should be about the inflation being 0 for the last month and last year - because we already know what the inflation is for the 9 preceding years; they were headlines themselves at the time.

If the media were constantly telling us old facts about how prices have changed in the last decade, rather than focussing on current information which is that much closer to enabling us to consider what the price changes might be in the future, then the media would not be doing their job. Frankly, the figures on how much savings interest or stock market returns or house prices or consumer products prices have been in the last decade, are not going to be a great indicator for seeing what your returns will be for the next.

Still, broad concepts such as investment markets providing better returns than inflation over the long term, and savings returns not having any expectation of beating inflation over the long term, will probably continue to hold true over the long term.

justme111

Very valid points as usual. Debatable re media and what they should talk about. One more thing to add - drop in income is related not only to increased cost of production due to goods prices change but to dramatically increased outlays and lower output to comply with regulations. Taxes (or NI) are creeping up as well. Re friends - they should not do anything different , as they did not complaint , I just stated the fact that income was the same while inflation was going on.

Pincher

One thing I don't understand. If the UK national debt is so huge, doesn't increasing the BOE rate increase the interest the Treasury has to pay? Older debt is fixed, but the ones rolling over must reflect the new rate, surely?

bowlhead99

As you say, the older debt is fixed, and some of it (both regular gilts and index-linked gilts) doesn't need to be paid back until 2060 or later. There are only about five tranches of gilts falling due in the next couple of years, and many many more are due later later than that - i.e. somewhere up to the 2060s. So a quarter or half percent on rates today does not instantly increase the cost of the entire national debt by a quarter or half percent.

When the government borrows money it doesn't do it at base rate. It does it at a rate that reflects its perceived creditworthiness and inflation levels etc. If the BoE ticks the base rate up a notch, it is an indicator that the UK now has the financial strength to handle it which is positive for people's perceptions of how safe we are to lend to - and people generally accept lower rates when lending to stronger countries - so gilt yields (and libors) do not always move neatly in step with base rates like you might think.

Putting rates up does have the effect of quashing inflation, i.e. the inflation at a given interest rate is lower than it would have been if the interest rate had stayed lower (because people are incentivised to save rather than spend and they find it difficult to obtain cheap credit to go out and spend or invest). If inflation is quashed then it will cost us more 'in real terms' to settle the outstanding national debt. So, by that route, higher rates can make it effectively cost relatively more, to clear what we owe.

Interest rates are very much linked to both inflation (money supply) and exchange rates. Fortunately, there are smarter minds than us, working at the BoE. So I'm sure it's fine

justme111

How do you know they are smarter ?

enthusiasticsaver

I think again that this is much a do about nothing. An interest rise has been forecasted for at least the last three years as far as I can recall both in the US and here. While jobs data and wage increases are looking ok at the moment, the global economy is not recovered and there is a huge amount of both government and personal debt around. Only today there are reports that people are spending more on credit cards than before the banking crisis and not repaying it but moving it around instead. A rise of even 0.5% could start to put the brakes on the very slight economic growth we do have. I cannot see the BOE going for that. Also presumably this would effect the bonds market rates and government debt costs etc etc.