Bank of England - Earlier and Faster rate rises

Graham_Devon

However, they said rates would need to rise "earlier" and by a "somewhat greater extent" than they thought at their last review in November.

Economists think the next rate rise could come as soon as May.

The value of the pound initially jumped almost 1% against the dollar, but fell back to about 0.5%.

Higher interest rates have an important effect on households and the economy.

Quite a significant release from the BOE. Especially the "greater extent" part.

However, under no illusion that as they have said this, they are unlikely to actually do it!

http://www.bbc.co.uk/news/business-42986729

westernpromise

On a 10-year fix so I couldn't care less. the BoE's been consistently wrong on this too.

The calculus is likely to be different to previous eras of rising rates, though. 30 years ago there was less debt in the economy, so you needed interest rates to go from 8% to 15% in a year to restrain demand in a material way. Now there's a lot more debt, mortgage debt especially, so a much smaller rise would take out the same amount of demand. Then again, so many people are now on interest rate fixes that rate rises will affect only those who are not.

I'd like a materially bigger house but the stamp duty is now so obscene that I refuse to pay it. If prices came off enough to refund me the stamp duty I'd probably pile in and upsize - although on previous form, if house prices go down nobody with anything good to sell sells it; they wait for the rally.

If you want to know who'll own property after a correction, look at who owned it before.

Filo25

Global bond yields and inflationary expectations seem to be on the rise so not exactly a shock

michaels

So should an increase in UK inflation caused by rising global prices be met with an increase in interest rates unless UK wages are also growing above trend?

In other words, should we use interest rates to engineer a domestic recession to counteract the impact of imported price inflation or should we maintain full (NAIRU) employment and accept the resultant price increases?

Filo25

michaels wrote: »

So should an increase in UK inflation caused by rising global prices be met with an increase in interest rates unless UK wages are also growing above trend?

In other words, should we use interest rates to engineer a domestic recession to counteract the impact of imported price inflation or should we maintain full (NAIRU) employment and accept the resultant price increases?

I think it is probably a more balanced debate if we weren't still at what are effectively emergency rates, but in the face of rising global growth, it seems likely that we will see some gentle tightening in one form or another from most of the central banks.

For the BoE probably push to 0.75% in May and see how the economy responds, maybe better to do that than possibly being caught behind the curve and having to raise more sharply later.

It will be worth keeping an eye on Commodity prices and wage inflation over the coming months in any case!

On the flipside though asset prices coming under pressure in the face of expected tightening may make them delay again, certainly equity markets have been looking nervous about rising rates of late.

triathlon

I am with most people in that interest rates are probably going to rise in the near future. But unlike some people I consider Carney to have done a reasonable job along with the governors that preceded him. Yet again I think rises will be small because of the work Carney is putting in now, he has made the markets sit up and I would not put it pass him, though doubtful, to get away with not raising rate at all.

Besides the UK just cannot afford big rises, simple as that. I have a mate in Oxford area who has a huge portfolio, and yes he has huge mortgages to match. There are 100,000's of people like him all over the UK, people who borrowed so much it became more a worry for the banks than the mortgage holders. Raise rates to much and you will just push people into walking away from debt, is it worth it.

AG47

Higher and faster than most thought?

Well most didn't think these near zero rates would last almost ten years...

How long will it take for interest rates to get back to normal?

triathlon

I am not sure what level of rates Carney has in his head, my only hope is that he does not drag this out. If he intends to increase rates by 1% or even 2% in the medium term I just hope he gets there asap and even does it in the short term. My only worry is that he will put buyers off until they know rates will probably stop rising, uncertainty will make them just sit and wait.

Filo25

AG47 wrote: »

Higher and faster than most thought?

Well most didn't think these near zero rates would last almost ten years...

How long will it take for interest rates to get back to normal?

Define "normal"!

My gut is that it will be faster than expected (but then again we were only expecting about 1.25% by 2020)! , I have got more hawkish on my rate expectations over the last couple of months as well, but equally the economy has gotten so addicted to low rates in many areas, that I suspect we still aren't looking at true normalisation anytime quickly.

Relatively small rate rises may have significant enough affects in the current environment that we may not need huge tightening. to cool down the global economy a little.

GreatApe

The next 10-15 years is going to be a time of large productivity improvements which will drive the cost of goods and services down. That means low inflation for another 20 years.

The worlds central banks should not be putting rates up, we will need negative real rates for at least another 20 years.

economic

GreatApe wrote: »

The next 10-15 years is going to be a time of large productivity improvements which will drive the cost of goods and services down. That means low inflation for another 20 years.

The worlds central banks should not be putting rates up, we will need negative real rates for at least another 20 years.

I totally agree. I see no evidence what so ever of wage inflation / general inflation rising in a sustainable way. the markets IMO are over reacting.

This is all entirely driven by unemployment falling to record levels such that now there will be wage pressure to the upside and therefore spilling over to general inflation. This is a very simplistic and tbh idiotic way to look at it.

If you look at unemployment numbers, they are very misleading when looked at at a high level. They do not tell you the kind of jobs that are being taken up, what wages are offered, potential for wage rises etc etc. Is there really a skills shortage here and the US? I do not think there is.