BOE MPC - Interest Rates remain at 0.5%

padington

Generali wrote: »

I'd be quite careful about basing any long term financial decisions on interest rates not rising for a decade let alone two.

Services are the parts of CPI that are least impacted by the falling oil price and make up just almost 47% of the CPI weights. The cost of those items rose by 2.9% in the year to December 2015 and 0.7% in the month of December alone. It's the fall in the oil price and other commodities pushing down the price of real goods that is keeping inflation so low, especially the fall in food prices. It is hard to see how long meat prices can continue to fall by 5% a year for example.

The big increases that are coming to the minimum wage must surely be inflationary as, so landlords seem to claim, will be the big tax hikes on BTL.

While the MPC was happy to see inflation of ~5% when unemployment was high, I can't see them being quite so sanguine about it now unemployment is 5.2% and falling fast.

This time it's different are the four most expensive words you'll ever hear.

Interesting, the tax on BTL could be seen as an insurance policy agaiant deflation.

Generali

westernpromise wrote: »

Personally I don't think the tax hikes will be inflationary because so few landlords are affected by them and because the marginal landlord's costs don;t determine rent. If they did rents would have fallen when mortgage rates did. Rents correlate inversely with house price trends, so falling prices = rising rents and vice versa.



I'm thinking this time it's going to be the same - as 1700 to 1970, broadly. 1970 to 1995 was the real 300-year aberration.

That implies an base rate of 4-8% with rates occasionally dropping as low as 2.5% for brief periods:

http://www.bankofengland.co.uk/statistics/Documents/rates/baserate.pdf

FWIW, I agree. I think base rates will return to long term norms. I don't see any reason for them to be at the 10%+ rates seen in the 1970s as we've gotten better at monetary policy. I think it is highly likely that rates are going to get back to long term norms though.

padington

westernpromise wrote: »

Personally I don't think the tax hikes will be inflationary because so few landlords are affected by them and because the marginal landlord's costs don;t determine rent. If they did rents would have fallen when mortgage rates did. Rents correlate inversely with house price trends, so falling prices = rising rents and vice versa.

I'm thinking this time it's going to be the same - as 1700 to 1970, broadly. 1970 to 1995 was the real 300-year aberration.

Not many businesses reduce the price of their product when costs go down but many increase the price when costs go up.

Ever known the price of a 99 ice cream to go down ?

Generali

padington wrote: »

Not many businesses reduce the price of their product when costs go down but many increase the price when costs go up.

Ever known the price of a 99 ice cream to go down ?

It depends on the competitiveness of the market. What has happened to petrol prices as oil prices have fallen?

padington

Generali wrote: »

It depends on the competitiveness of the market. What has happened to petrol prices as oil prices have fallen?

.. and as property is a highly competitive market to buy into, price rises will only usually happen with fluctuating costs.

cells

Generali wrote: »

I'd be quite careful about basing any long term financial decisions on interest rates not rising for a decade let alone two.

Services are the parts of CPI that are least impacted by the falling oil price and make up just almost 47% of the CPI weights. The cost of those items rose by 2.9% in the year to December 2015 and 0.7% in the month of December alone. It's the fall in the oil price and other commodities pushing down the price of real goods that is keeping inflation so low, especially the fall in food prices. It is hard to see how long meat prices can continue to fall by 5% a year for example.

The big increases that are coming to the minimum wage must surely be inflationary as, so landlords seem to claim, will be the big tax hikes on BTL.

While the MPC was happy to see inflation of ~5% when unemployment was high, I can't see them being quite so sanguine about it now unemployment is 5.2% and falling fast.

This time it's different are the four most expensive words you'll ever hear.

They could also be the most profitable words you can ever hear.

The near AI tech will crush the price of some services.
Self drive cars will crush my last insurance bill from 2600 pounds to closer to 2600 pennies.
They will also crush all the other costs of transportation (capital depreciation fuel servicing etc)

Banking insurance accountancy and legal services can also all be far more automated.


And we've had this debate before. Real returns can not be higher than 0% in the long run for the safest assets. If government bonds paid just 1% above inflation then in a couple of thousand years a single dollar becomes more than than the GDP of the world. Risk adjusted Real return on investments will have to be zero %.

The period 1950-2010 where rates were sometimes quite high in real terms will be seen as the sillyness before the norm of 0% rates for thousands of years.

[There were good reasons why rates were quite high in the past. Specifically the risk priced in of a cold war or another ww2 type event held rates higher than they would in a lower risk peaceful world]

Generali

cells wrote: »

They could also be the most profitable words you can ever hear.

The near AI tech will crush the price of some services.
Self drive cars will crush my last insurance bill from 2600 pounds to closer to 2600 pennies.
They will also crush all the other costs of transportation (capital depreciation fuel servicing etc)

Banking insurance accountancy and legal services can also all be far more automated.


And we've had this debate before. Real returns can not be higher than 0% in the long run for the safest assets. If government bonds paid just 1% above inflation then in a couple of thousand years a single dollar becomes more than than the GDP of the world. Risk adjusted Real return on investments will have to be zero %.

The period 1950-2010 where rates were sometimes quite high in real terms will be seen as the sillyness before the norm of 0% rates for thousands of years.

[There were good reasons why rates were quite high in the past. Specifically the risk priced in of a cold war or another ww2 type event held rates higher than they would in a lower risk peaceful world]

That isn't true. The total value of assets can increase at the rate that people can pay for them, effectively the same rate as GDP growth.

The reason real rates of return were 0% for thousands of years was that GDP growth was effectively 0% for thousands of years.

Thrugelmir

padington wrote: »

Not many businesses reduce the price of their product when costs go down but many increase the price when costs go up.

Ever known the price of a 99 ice cream to go down ?

Who says the banks costs will go down. BOE doesn't directly provide mortgage funds for mortgage lending.

Mortgage rates in the US have been consistantly maintained at around the 4% level despite the ultra low Fed rate.

mwpt

Thrugelmir wrote: »

Who says the banks costs will go down. BOE doesn't directly provide mortgage funds for mortgage lending.

Mortgage rates in the US have been consistantly maintained at around the 4% level despite the ultra low Fed rate.

Yes, thank you. I've been meaning to explore this for a while.

My current understanding from an outside view is that mortgage rates are set by buyers of the MBS (mortgage backed securities) products. In the same way that government bond prices are set by the buyers of those bonds. Central banks buying the bonds of course suppresses the price. I'm not sure whether the central banks buy MBS?

So of course as yields on government bonds and other investments are suppressed, so the market chases lower yields on MBS and so underlying mortgage rates can come down.

Anyone have more first hand experience with how mortgage rates are set?

padington

Thrugelmir wrote: »

Who says the banks costs will go down. BOE doesn't directly provide mortgage funds for mortgage lending.

Mortgage rates in the US have been consistantly maintained at around the 4% level despite the ultra low Fed rate.

We've seen them go down, so they can sometimes but yes again often businesses don't pass on cost savings when they don't have to which is the point I'm making. The difference being there are hundreds of mortgage providers for those that can afford a mortgage but for those that can't afford a mortgage there are none. In this case landlords don't pass on cost savings to renters and only pass on rises.