where are interest rates really heading?

hgllgh

ok, so CPI hits 2.1% and then oil, food, energy bills etc etc are all going up if you believe the media reports ...

http://www.telegraph.co.uk/news/main.jhtml?xml=/news/2007/11/26/nturkey126.xml

http://news.bbc.co.uk/1/hi/uk/7110592.stm

So, we should see CPI going up ?? Which means interest rates going up?

Can the MPC reduce IR to prop up the housing market? Would they do that?

merlinthehappypig

Common sense says rates will remain the same or go up, however the cynic in me says that they will reduce in December or January in a desperate and foolish attempt to prop up a failing economy and increase the 'feel good' factor.

Running_Horse

I predict interest rates will rise, fall, or stay the same. Same with house prices.

sarkin

If they cut, inflation is going to rocket. Petrol over £1 a litre, food up and energy bills on the rise. I think they are stuck, they want to cut but cant and if they raise people are going to struggle with payments. I read some where there is talk of 3 cuts next year, that will be the end of this economy.

hgllgh

sarkin wrote: »

If they cut, inflation is going to rocket. Petrol over £1 a litre, food up and energy bills on the rise. I think they are stuck, they want to cut but cant and if they raise people are going to struggle with payments. I read some where there is talk of 3 cuts next year, that will be the end of this economy.

This is what I'm trying to understand. Where is this idea of IR cuts coming from? If inflation continues to rise, then even if the economy does take a turn for the worse can the MPC ignore its inflation target of 2%, cut interest rates, and watch CPI inflation go up. i.e. is there an CPI rate at which the MPC HAVE to raise interest rates?

fimonkey

Well they seperated RPI from CPI to make things easier for themselves. Perhaps they'll invent another 'Price Index' with which they alone measure the amount of inflation with. I propose the new PI is called 'The Primark Price Index" and does not take into account fuel, or food. Merely the price of goods in Primark, that way inflation'll stay nice and low and the BoE can keep their heads in the sand a wee bit longer.

merlinthehappypig

The MPC can do what they like, but nothing will convince me that they act independently of the Government. The problem they have is because the economy has been so badly managed we have high inflation and reducing growth. They want to keep growth high, so lean towards reducing interest rates so we spend more, but reduced interest rates will increase inflation. A rock and a hard place, really. Plus most people perceive themselves as better off when the value of their house rises. With prices possibly set to fall, consumers (I hate that word) will lose confidence and spend less. A rate cut or two might make people think things are getting better, for the short term anyway.

Personally I think that reducing rates now would be a cheap party trick to bolster consumer confidence, but will lead to a much bigger problem down the line.

hgllgh

chriseast wrote: »

The MPC can do what they like, but nothing will convince me that they act independently of the Government. The problem they have is because the economy has been so badly managed we have high inflation and reducing growth. They want to keep growth high, so lean towards reducing interest rates so we spend more, but reduced interest rates will increase inflation. A rock and a hard place, really. Plus most people perceive themselves as better off when the value of their house rises. With prices possibly set to fall, consumers (I hate that word) will lose confidence and spend less. A rate cut or two might make people think things are getting better, for the short term anyway.

Personally I think that reducing rates now would be a cheap party trick to bolster consumer confidence, but will lead to a much bigger problem down the line.

so it would be acceptable for the MPC to write to Gordon every month if inflation hits 3% and above?

Looks like they are going to hold for now ...

http://investing.reuters.co.uk/news/articleinvesting.aspx?type=economicIndicatorsNews&storyID=2007-11-26T121648Z_01_L26084943_RTRIDST_0_BRITAIN-BANK-BEAN-UPDATE-2.XML&pageNumber=0&imageid=&cap=&sz=13&WTModLoc=InvArt-C1-ArticlePage3

Generali

Just a few points, mostly random:

There is a lag between increasing interest rates and them having an imapct on the economy. This is usually thought to be 6 months for the first impact and then a declining effect over the next year from then. My feeling is that greater numbers of people borrowing at fixed rates mean that the effect of a change is elongated more than in the past.

If this is true (and it's certainly the consensus view among economists) then we are still feeling the effects of previous rises. There is certainly an arguement that the BoE should cut to mitigate the effect of the credit crunch on business.

It is incorrect to imagine that price stability is the sole or even the main aim of monetary policy as set by the MPC. Check the website, it's pretty clear. 2% CPI is a target not a fetish! Their main aim is 'economic stability' whatever that may mean. Sounds vague enough that most outcomes can be claimed to be successful!

Also, CPI is an inflation proxy. The BoE don't pretend that it's a genuine measure of inflation. It's only politicians and fools that claim otherwise.

FWIW, the Generali prediction is for cuts of 75bps in 2008 and for GDP growth to be near or at 0% by this time next year with house prices falling quickly in Northern Eng, W Midlands and the Celtic nations. Please save the flaming for when I've been proved wrong (again).

Toodle pip!

Generali

hgllgh wrote: »

so it would be acceptable for the MPC to write to Gordon every month if inflation hits 3% and above?

Yes if it's as a result of a one-off change in the price level rather than genuine inflation (for examle caused by a one off sharp increase in the value of the Chinese Renimbi)

merlinthehappypig

Generali wrote: »

FWIW, the Generali prediction is for cuts of 75bps in 2008 and for GDP growth to be near or at 0% by this time next year with house prices falling quickly in Northern Eng, W Midlands and the Celtic nations. Please save the flaming for when I've been proved wrong (again)

I'll share the risk of flaming with you by pretty much agreeing with all of the above, though if Santa is reading this, can I also have some big house price falls in the South West, please?

Is Scotland a Celtic nation? Not sure about falls generally up there outside of the main cities. Prices are still very low compared with England. Can't find a house & land similar to the one we sold in March for double the price in Somerset.