Why aren't interest rates going up?

kidmugsy

melbury wrote: »

In the past as soon as inflation started rising, so did interest rates.

Savers have had such a bad time for years now, surely they will have to start increasing base rate soon, won't they?

There's an article on this topic in this morning's Tel. The writer is Sentance, who used to be a member of the Monetary Policy Committee. Worth a look?

kidmugsy

dunstonh wrote: »

Inflation in this case is because of a specific event.

In that case why has it increased in the Eurozone and the US too?

Thrugelmir

Pincher wrote: »

Not that they will lend it to me, but if I can borrow £600k at 1.78%, interest only,

Try obtaining an interest only mortgage. Let alone one secured on the purchase of Lloyds Bank Shares.

Pincher

Thrugelmir wrote: »

Try obtaining an interest only mortgage. Let alone one secured on the purchase of Lloyds Bank Shares.

The house I'm living in is over £1miilion, if you believe Zoopla, and no mortgage. So £600k is just 60% LTV, secured on a property. It's the 3.5 times income that is the sticking point.

Despite capital raising being a reason you can tick for mortgage application, it seems to be a big NO NO.

Another peculiar thing is, they query why do you need to borrow money, since you have plenty already. With my car loan last year, they almost refused me £18k, because I seem to have plenty of cash. It's 0% for 12 months, that's why. FREE money. 1.78% is pretty cheap, too, in my book.

Freecall

kidmugsy wrote: »

In that case why has it increased in the Eurozone and the US too?

That question implies that the economics of the two environments are similar, which they are not. Nor is the corresponding response of their respective central banks.

In the case of the US there is some evidence that the economy may be overheating and that is why the FED has started to raise interest rates. Pretty much old-school economics.

In the Eurozone on the other hand the situation is not dissimilar to that in the U.K. The ECB needs to stimulate the economy and has therefore reduced interest rates to an all time low. In fact overnight LIBOR rates for the Euro are currently negative.

So, in the US inflation is creeping up because of a strong (possibly over-strong) economy whereas in the Eurozone inflation is creeping up because of the (deliberately) weak Euro. The result, using the single measure of inflation, is the same but the cause is very different.

The inevitable consequence of this has to be an increasing exchange rate differential between the currencies and that is exactly what we are now seeing with the dollar at a 14 year high. The resultant decoupling of the major trading block currencies is something we have not seen for a couple of decades. Interesting times.

Hopefully your investment portfolio is well diversified.



http://fortune.com/2016/12/16/heres-why-the-dollar-just-hit-a-14-year-high/

Terry98

norm_ wrote: »

If interest rates rose the mountain of debt the economy and housing market is built on would soon start to crumble.

The BoE are just building one giant ponzi scheme, or trying to hold onto anyway.

I agree with you to a certain extent but the 2008 banking crisis was supposed to be the worst since the 1920's. So in many respects the BoE has done a good job up to now but they have still got to do the hardest part.

We all can see inflation is rising at it's fastest for many years and I always thought that raising interest rates was one of the main ways to control it.

ChesterDog

Inflation is currently below the 2% target.

Terry98

ChesterDog wrote: »

Inflation is currently below the 2% target.

True, but it's forecast to be over 4 per cent this year and those forecasts do not take into account sterling's devaluation and the effects of Brexit.

masonic

Terry98 wrote: »

True, but it's forecast to be over 4 per cent this year and those forecasts do not take into account sterling's devaluation and the effects of Brexit.

The independent consensus for CPI inflation in 2017 is a little under 3%, after which it is predicted to fall. I have no doubt currency movements and Brexit have been factored in to those predictions, although what actually happens to inflation in the future is anyone's guess.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/591911/Forecast_for_the_UK_Economy_Feb_2017.pdf

If CPI inflation was set to rise above 4% for a prolonged period, then chances of a base rate rise would be a lot more likely, but it doesn't seem that's what is predicted.

AnotherJoe

Terry98 wrote: »

We all can see inflation is rising at it's fastest for many years and I always thought that raising interest rates was one of the main ways to control it.

Maybe, if its "structural" inflation. But here its been imposed by a one-off external event, the abrupt drop in the £ vs other currencies esp US$ and € (which incidentally once its worked its way through the economy, will drop out of figures in a year or so.)

So, raising interest rates wont help that because it almost certainly wont help the value of the £ (and thus reduce raised prices of imports, which is the current reason for inflation) since you cant fight the markets which "believe" the £ is where it should be. Events 25 years ago proved that trying to adjust the value of the £ by raising interest rates was a losing battle.

Maybe in 5 years time when the Brexit uncertainty is starting to clear .......