Rate predictions 2022, 2023

Nebulous2

ABFG said:

Most of the talk about BoE policy doesn't make much sense to my engineering mind! In 'normal' times increasing interest rates will make it harder/more costly to borrow, which means there's less liquidity in the system and so inflation is tamed. But this will have the biggest impacts on discretionary spend.

Notwithstanding the temporary effect of the SDLT holiday and Covid pent up demand, this time the inflation is driven by the cost of energy, fuel and food - energy and fuel costs rippling up through the supply chain as they affect just about everything else. Rising interest rates surely can have only a marginal effect on this sort of inflation - I see no mechanism by which higher interest rates reduce the cost of electricity, in fact potentially the opposite.

This inflation is not driven by those with money driving up prices of desirable things, it's necessities being paid for by everyone of all levels of means.

The shame of it is, all the liquidity created post 2008/9 and in the pandemic could have been passed into society via more useful projects like the just approved Sizewell C, rather than via the banks. We could have had more of these in the works by now, as anyone engineering minded has been able to predict would be needed. Instead we let the bean counters insist that gas would always be cheap and we didn't need any storage or backup plans.

Tbh I find the arrogance of some bankers/economists spectacular - you can't solve energy problems via financial tinkering and fuel prices don't come down as interest rates rise! At some point 'something real' actually has to be done.

So my opinion:
2% end of 2022
2.5% end of 2023

Keep an eye on what can be tamed by interest rates, a modest rise needed, but if government borrowing gets too expensive then the investment needed to cure the problem properly can't happen.

Great post - got me thinking, I hope you don't mind me presenting a contrary viewpoint! 

Certainly some bankers / economists / commentators do not believe higher interest rates will work, or they believe that the harm caused will outweigh any benefits. More of them (or more of the influential ones) seem to believe a sharp shock has more chance of getting inflation out of the system, before it becomes embedded. 

In simple terms inflation occurs when demand outstrips supply. If you dampen down demand then the two will come into balance. Inflation causes 'demand destruction' if you can't afford energy then you reduce heating, drive less, shower less, cook less to try to get to a level you can afford. That demand destruction should mean that inflation kills itself. 

Like most things there is good and bad in that. If the reduction in energy usage is because firms become more efficient in their manufacturing processes, that's a positive. If people add solar panels and produce some of their own electricity, that is positive as well.  If it is because poor people can't afford to heat food, or heat their houses, and suffer from malnourishment and cold-related illnesses, that is a big negative. 

As I'm writing this the reality has just hit me that I'm going away to undertake a 600 mile return trip to ride a bicycle for a day. Even that is an example of demand destruction however. If fuel hadn't gone up so much we would both have gone, taken the caravan and spent a few nights on campsites. As it is I'm driving down, sleeping in my vehicle before and after my ride, and driving back again.  

I'd have loved it if the money spent during the pandemic had been invested in infrastructure, but the trouble with that is the length of time these projects take. There is very little that is 'shovel ready.' Combine that with the shortage of skills / labour to build infrastructure and putting money into that just couldn't happen at the speed needed. 

RG2015

Thumbs_Up said:

Type_45 said:

Thumbs_Up said:

Type_45 said:

Thumbs_Up said:

Type_45 said:

We will soon be seeing rate cuts.

Why don’t you back yourself and go for a 5 year fixed rate 3.45%. I would if I had your confidence.

I pay 0.75% above the BoE base rate. And that's for life (another 15 years remaining on that deal).

So why would I fix at 3.45% for 5 years?

I was referring to savings rates.

Why would committing my savings to a 3.45% 5 year deal be "backing myself"?

Bold as brass you said “We will soon be seeing rate cuts”  I clarified  my point about savings rates.

Now you come back with “Why would committing my savings to a 3.45% 5 year deal be backing myself"

So what don’t you get? Does everyone on here want to argue with me?

It does appear that way.

You do have a rather forthright style which some may find rather adversarial. 

Lastonestanding

Nebulous2 said:

In simple terms inflation occurs when demand outstrips supply. 

That is very simplistic indeed. You don't mention the money supply or Sterling.
If you had £100 billion in the economy and inflation was at 10%, then you would need £110 billion. If the government then put another £10 billion that would stoke inflation.
Then we have the value of the £, Euro and the Dollar, if one country increases their interest rates, that boosts their currency.

Nebulous2

Lastonestanding said:

Nebulous2 said:

In simple terms inflation occurs when demand outstrips supply. 

That is very simplistic indeed. You don't mention the money supply or Sterling.
If you had £100 billion in the economy and inflation was at 10%, then you would need £110 billion. If the government then put another £10 billion that would stoke inflation.
Then we have the value of the £, Euro and the Dollar, if one country increases their interest rates, that boosts their currency.

That's what I said - it was simplified.

So where do you stand on whether increasing interest rates will work to reduce inflation? 

ABFG

Nebulous2 said:

ABFG said:

Most of the talk about BoE policy doesn't make much sense to my engineering mind! In 'normal' times increasing interest rates will make it harder/more costly to borrow, which means there's less liquidity in the system and so inflation is tamed. But this will have the biggest impacts on discretionary spend.

Notwithstanding the temporary effect of the SDLT holiday and Covid pent up demand, this time the inflation is driven by the cost of energy, fuel and food - energy and fuel costs rippling up through the supply chain as they affect just about everything else. Rising interest rates surely can have only a marginal effect on this sort of inflation - I see no mechanism by which higher interest rates reduce the cost of electricity, in fact potentially the opposite.

This inflation is not driven by those with money driving up prices of desirable things, it's necessities being paid for by everyone of all levels of means.

The shame of it is, all the liquidity created post 2008/9 and in the pandemic could have been passed into society via more useful projects like the just approved Sizewell C, rather than via the banks. We could have had more of these in the works by now, as anyone engineering minded has been able to predict would be needed. Instead we let the bean counters insist that gas would always be cheap and we didn't need any storage or backup plans.

Tbh I find the arrogance of some bankers/economists spectacular - you can't solve energy problems via financial tinkering and fuel prices don't come down as interest rates rise! At some point 'something real' actually has to be done.

So my opinion:
2% end of 2022
2.5% end of 2023

Keep an eye on what can be tamed by interest rates, a modest rise needed, but if government borrowing gets too expensive then the investment needed to cure the problem properly can't happen.

Great post - got me thinking, I hope you don't mind me presenting a contrary viewpoint! 

Certainly some bankers / economists / commentators do not believe higher interest rates will work, or they believe that the harm caused will outweigh any benefits. More of them (or more of the influential ones) seem to believe a sharp shock has more chance of getting inflation out of the system, before it becomes embedded. 

In simple terms inflation occurs when demand outstrips supply. If you dampen down demand then the two will come into balance. Inflation causes 'demand destruction' if you can't afford energy then you reduce heating, drive less, shower less, cook less to try to get to a level you can afford. That demand destruction should mean that inflation kills itself. 

Like most things there is good and bad in that. If the reduction in energy usage is because firms become more efficient in their manufacturing processes, that's a positive. If people add solar panels and produce some of their own electricity, that is positive as well.  If it is because poor people can't afford to heat food, or heat their houses, and suffer from malnourishment and cold-related illnesses, that is a big negative. 

As I'm writing this the reality has just hit me that I'm going away to undertake a 600 mile return trip to ride a bicycle for a day. Even that is an example of demand destruction however. If fuel hadn't gone up so much we would both have gone, taken the caravan and spent a few nights on campsites. As it is I'm driving down, sleeping in my vehicle before and after my ride, and driving back again.  

I'd have loved it if the money spent during the pandemic had been invested in infrastructure, but the trouble with that is the length of time these projects take. There is very little that is 'shovel ready.' Combine that with the shortage of skills / labour to build infrastructure and putting money into that just couldn't happen at the speed needed. 

An interesting reply - thank you. Maybe I was harsh on the bankers and economists, but maybe not!

The effects of inflation in non-discretionary spending is hard to predict, and the trends are being bucked regularly by world events. Most are trying to cope but there are limits and when the limits hit a very unstable equilibrium will be reached. Ultimately I think only bold investment (power infrastructure for example) will provide longer term stability, short term events seem to be dictating as we didn’t go bold 15 years ago.

Lastonestanding

Nebulous2 said:

So where do you stand on whether increasing interest rates will work to reduce inflation? 

I am no expert, but I think if Liz Truss makes tax cuts and fails to pay back the governments debts, that will stoke inflation.
The looming recession and lower living standards will bring down inflation, gradually increased interest rates are needed but will only have a minor effect on inflation.

Type_45

Nebulous2 said:

Lastonestanding said:

Nebulous2 said:

In simple terms inflation occurs when demand outstrips supply. 

That is very simplistic indeed. You don't mention the money supply or Sterling.
If you had £100 billion in the economy and inflation was at 10%, then you would need £110 billion. If the government then put another £10 billion that would stoke inflation.
Then we have the value of the £, Euro and the Dollar, if one country increases their interest rates, that boosts their currency.

So where do you stand on whether increasing interest rates will work to reduce inflation? 

Inflation is mostly being caused by supply-side issues, not by the loosening of monetary policy by the central banks.

The central banks raising interest rates will therefore not reduce inflation.  The central banks are making a mistake by tightening.  And not only that, but they are further making a mistake by tightening into an economic contraction (usually the tightening induces the contraction, but in this instance the contraction was already taking place when the tightening was implemented).

This is a policy error by the central banks.  They will pivot and loosen money at some point this year when they realise the mistake they've made.

Lastonestanding

Type_45 said:

Inflation is mostly being caused by supply-side issues, not by the loosening of monetary policy by the central banks.

Without even mentioning QE, the government are £2.4 trillion in debt, I am sure that is extra money in our economy?

Nebulous2

ABFG said:

Nebulous2 said:

ABFG said:

Most of the talk about BoE policy doesn't make much sense to my engineering mind! In 'normal' times increasing interest rates will make it harder/more costly to borrow, which means there's less liquidity in the system and so inflation is tamed. But this will have the biggest impacts on discretionary spend.

Notwithstanding the temporary effect of the SDLT holiday and Covid pent up demand, this time the inflation is driven by the cost of energy, fuel and food - energy and fuel costs rippling up through the supply chain as they affect just about everything else. Rising interest rates surely can have only a marginal effect on this sort of inflation - I see no mechanism by which higher interest rates reduce the cost of electricity, in fact potentially the opposite.

This inflation is not driven by those with money driving up prices of desirable things, it's necessities being paid for by everyone of all levels of means.

The shame of it is, all the liquidity created post 2008/9 and in the pandemic could have been passed into society via more useful projects like the just approved Sizewell C, rather than via the banks. We could have had more of these in the works by now, as anyone engineering minded has been able to predict would be needed. Instead we let the bean counters insist that gas would always be cheap and we didn't need any storage or backup plans.

Tbh I find the arrogance of some bankers/economists spectacular - you can't solve energy problems via financial tinkering and fuel prices don't come down as interest rates rise! At some point 'something real' actually has to be done.

So my opinion:
2% end of 2022
2.5% end of 2023

Keep an eye on what can be tamed by interest rates, a modest rise needed, but if government borrowing gets too expensive then the investment needed to cure the problem properly can't happen.

Great post - got me thinking, I hope you don't mind me presenting a contrary viewpoint! 

Certainly some bankers / economists / commentators do not believe higher interest rates will work, or they believe that the harm caused will outweigh any benefits. More of them (or more of the influential ones) seem to believe a sharp shock has more chance of getting inflation out of the system, before it becomes embedded. 

In simple terms inflation occurs when demand outstrips supply. If you dampen down demand then the two will come into balance. Inflation causes 'demand destruction' if you can't afford energy then you reduce heating, drive less, shower less, cook less to try to get to a level you can afford. That demand destruction should mean that inflation kills itself. 

Like most things there is good and bad in that. If the reduction in energy usage is because firms become more efficient in their manufacturing processes, that's a positive. If people add solar panels and produce some of their own electricity, that is positive as well.  If it is because poor people can't afford to heat food, or heat their houses, and suffer from malnourishment and cold-related illnesses, that is a big negative. 

As I'm writing this the reality has just hit me that I'm going away to undertake a 600 mile return trip to ride a bicycle for a day. Even that is an example of demand destruction however. If fuel hadn't gone up so much we would both have gone, taken the caravan and spent a few nights on campsites. As it is I'm driving down, sleeping in my vehicle before and after my ride, and driving back again.  

I'd have loved it if the money spent during the pandemic had been invested in infrastructure, but the trouble with that is the length of time these projects take. There is very little that is 'shovel ready.' Combine that with the shortage of skills / labour to build infrastructure and putting money into that just couldn't happen at the speed needed. 

An interesting reply - thank you. Maybe I was harsh on the bankers and economists, but maybe not!

The effects of inflation in non-discretionary spending is hard to predict, and the trends are being bucked regularly by world events. Most are trying to cope but there are limits and when the limits hit a very unstable equilibrium will be reached. Ultimately I think only bold investment (power infrastructure for example) will provide longer term stability, short term events seem to be dictating as we didn’t go bold 15 years ago.

I hope this isn't paywalled - I'm not a subscriber and can read it. 

Here's an article I read recently in the FT about a lack of investment in developed countries. Only Canada has maintained a level of investment, with us being particularly bad. The reason seems to be a desire to offer electoral sweeteners, despite interest rates being very low. 

The investment drought of the past two decades is catching up with us | Financial Times

Nebulous2

ABFG said:

Nebulous2 said:

ABFG said:

Most of the talk about BoE policy doesn't make much sense to my engineering mind! In 'normal' times increasing interest rates will make it harder/more costly to borrow, which means there's less liquidity in the system and so inflation is tamed. But this will have the biggest impacts on discretionary spend.

Notwithstanding the temporary effect of the SDLT holiday and Covid pent up demand, this time the inflation is driven by the cost of energy, fuel and food - energy and fuel costs rippling up through the supply chain as they affect just about everything else. Rising interest rates surely can have only a marginal effect on this sort of inflation - I see no mechanism by which higher interest rates reduce the cost of electricity, in fact potentially the opposite.

This inflation is not driven by those with money driving up prices of desirable things, it's necessities being paid for by everyone of all levels of means.

The shame of it is, all the liquidity created post 2008/9 and in the pandemic could have been passed into society via more useful projects like the just approved Sizewell C, rather than via the banks. We could have had more of these in the works by now, as anyone engineering minded has been able to predict would be needed. Instead we let the bean counters insist that gas would always be cheap and we didn't need any storage or backup plans.

Tbh I find the arrogance of some bankers/economists spectacular - you can't solve energy problems via financial tinkering and fuel prices don't come down as interest rates rise! At some point 'something real' actually has to be done.

So my opinion:
2% end of 2022
2.5% end of 2023

Keep an eye on what can be tamed by interest rates, a modest rise needed, but if government borrowing gets too expensive then the investment needed to cure the problem properly can't happen.

Great post - got me thinking, I hope you don't mind me presenting a contrary viewpoint! 

Certainly some bankers / economists / commentators do not believe higher interest rates will work, or they believe that the harm caused will outweigh any benefits. More of them (or more of the influential ones) seem to believe a sharp shock has more chance of getting inflation out of the system, before it becomes embedded. 

In simple terms inflation occurs when demand outstrips supply. If you dampen down demand then the two will come into balance. Inflation causes 'demand destruction' if you can't afford energy then you reduce heating, drive less, shower less, cook less to try to get to a level you can afford. That demand destruction should mean that inflation kills itself. 

Like most things there is good and bad in that. If the reduction in energy usage is because firms become more efficient in their manufacturing processes, that's a positive. If people add solar panels and produce some of their own electricity, that is positive as well.  If it is because poor people can't afford to heat food, or heat their houses, and suffer from malnourishment and cold-related illnesses, that is a big negative. 

As I'm writing this the reality has just hit me that I'm going away to undertake a 600 mile return trip to ride a bicycle for a day. Even that is an example of demand destruction however. If fuel hadn't gone up so much we would both have gone, taken the caravan and spent a few nights on campsites. As it is I'm driving down, sleeping in my vehicle before and after my ride, and driving back again.  

I'd have loved it if the money spent during the pandemic had been invested in infrastructure, but the trouble with that is the length of time these projects take. There is very little that is 'shovel ready.' Combine that with the shortage of skills / labour to build infrastructure and putting money into that just couldn't happen at the speed needed. 

An interesting reply - thank you. Maybe I was harsh on the bankers and economists, but maybe not!

The effects of inflation in non-discretionary spending is hard to predict, and the trends are being bucked regularly by world events. Most are trying to cope but there are limits and when the limits hit a very unstable equilibrium will be reached. Ultimately I think only bold investment (power infrastructure for example) will provide longer term stability, short term events seem to be dictating as we didn’t go bold 15 years ago.

Here's an example from today's news of the 'demand destruction' I was referring to...... 

Cost of living: Fuel and clothing at top of family spending cuts - BBC News