BOE and a recession.

TonyTeacake

EnterUserName said:

tony3619 said:

Is the market rate prediction still around 5.5% peak?

I'm afraid I have no idea. I'm not sure anyone does, it seems to change daily!

Don't be surprised if they go higher.

movilogo

Macro economics is a complex subject. The typical gutter press news are actually opinions from people who have no clue either.

If interest rate going up, you will get more on your savings. Stop worrying about things which are beyond your control. Think how you can make things happen in your favour whether interest rate is going up or down.

london21

In the short term interest rates will continue to increase as inflation is still high.

Once inflation comes back, rates willl start to come down but 1% era is gone. 

kingstreet

Recession is the inevitable conclusion to BOE policy. It is using rates to remove purchasing power from the economy to stifle demand and hence inflation. At the same time, we are paying more for or mortgages and then for fuel, food etc so the resulting recession will probably be deeper and for longer as the latter is also inflationary.

Cheesy77

In a normal situation the typical response to a recession is to lower interest rates as much as possible/realistic to stimulate the economy. See 2008 recession and rates falling to near zero.

However as others have said its more complicated this time as inflation is still high. So they need to raise rates to a certain level to tackle that. Although the chair of BOE has said in interviews he knows there's a careful balance to strike with making a recession worse and longer. Very difficult situation. 

My view is that they cannot keep rates at 5-6% for longer than necessary to lower inflation otherwise we'd be stuck in a nasty recession for a real long time. They may well peak and be cautiously lowered, but unlikely to 1%...

TonyTeacake

Higher interest rates look like they are going to be here for a very long time, I can't really see them coming down for quite few years at least. 

We all should be prepared for some very nasty shocks in the economy over the next couple of years. I wouldn't be surprised if we have a Black Swan event.

wheldcj

It is a mess for sure.  Personally there feels like a likely showdown in 2023 between USA and UK/EU.

Some of this mess is directly a result of Ukraine.  The US are not impacted economically to the same degree as Western Europe by the robust
support of Ukraine and the Biden administration seem very insular with their rate rises & how this effects their allies.

Russia are squeezing Europe with energy wars and the US with an inadvertent economic war.

If we have to keep up with US rate rises our economy will tank.  Either Truss will further dig a lower tax furrow, which will destroy our currency or a devastating recession will be around the corner.

Cheesy77

TonyTeacake said:

Higher interest rates look like they are going to be here for a very long time, I can't really see them coming down for quite few years at least. 

We all should be prepared for some very nasty shocks in the economy over the next couple of years. I wouldn't be surprised if we have a Black Swan event.

Depends what you mean by higher rates. I think we can expect rates to probably be higher than they have been the last decade, but not sustained at 5% plus.

The Fed and BOE are both nervous of overcooking the rate rises. Inflation is forecast to start reducing and so pushing the rates too high is not something they will want to do, despite some of the scaremongering. A few more short term rises but no reason at all to expect them to then stay at that peak level. 

mi-key

Cheesy I agree. At the moment it is all a knee jerk reaction to everything going on, and to be honest, they have overdone it trying to fix everything overnight.  Keeping very high interest rates isn't going to help anyone as most people now don't have enough in savings to offset the increases

Cheesy77

mi-key said:

Cheesy I agree. At the moment it is all a knee jerk reaction to everything going on, and to be honest, they have overdone it trying to fix everything overnight.  Keeping very high interest rates isn't going to help anyone as most people now don't have enough in savings to offset the increases

Yes the whole world has changed since the days of average rates being a lot higher in the 90s and early 00s.

I was reading some interesting articles around the 'neutral interest rate'. If anyone is interested then Google it. Its hard to be sure but is currently believed to be around 1.75-2% in the UK and around 2.5% in the US. This interest rate level is where in theory it should keep everything stable, inflation under control and economy ticking along nicely, employment levels good etc.

Clearly we have a problem with inflation, as the whole world seems to. Hence why we are creeping up above that level, which is called tightening - trying to rein in inflation is the main driver. 

Once inflation falls, and it will fall, there are three options:

1. Keep rates elevated above neutral, I don't see any economic reason why they would do this. Obviously there are curveballs that can't be predicted but why would they stay high if inflation is back toward target level?

2. Reduce to neutral zone gradually. Probably the most plausible in the medium term.

3. Reduce beneath the neutral zone gradually. Possible if there is a nasty recession and they need to stimulate the economy/loosen the policy to get out of the recession and get things growing. However, maybe this risks inflation going up again.

It's really hard to predict obviously, but all the talk of a one way only interest rate policy and really elevated levels for years to come I'm not sure I agree with. Just offering a different perspective, and it's going to he interesting to see how it all unfolds.