Are we expecting BOE to remain at 4.75% on 8th February 2025?

lojo1000

@MattMattMattUK

I don't understand why you appear to think debt is an excessive burden on the economy yet also think rates should be adjusted down so investment is more affordable? Are you proposing all investment should be done without any leverage? Interested to know under what circumstances you think debt should be raised.

You also state you think economics is complicated yet at the same time seem to think one can adjust rates to a level which moves the economy toward a better outcome.

BikingBud

MattMattMattUK said:

BikingBud said:

MattMattMattUK said:

The BoE was far too slow to start raising interest rates and did not raise them fast enough when it did start, it should not make the same mistake and be too slow to start lowering them and lower them too little. Note that I am not suggesting that interest rates should fall to sub-1% levels, but somewhere in the 1.75-2.5% range would be good for the economy long term, although that will likely be two years away.

Is that the economy where we are still burdened by ever increasing debt, personal and national, and our children have no prospect of financial independence due to asset prices and costs, especially houses and rent, being escalated beyond their reach?

Yes, it is the same economy. The ever increasing debt is because every government since 1999 has refused to balance the books and has borrowed (Brown followed the Major plans 1997-1999 then went on a spending spree, as well as hiding hundreds of billions of debt off book). Austerity never happened, we had some cutbacks but we did not cut enough or raise taxes enough so the country has continued to run a deficit for more than two decades, that is why there is ever increasing national debt. People want the nice things, but refuse to pay enough tax to fund them, rather than say in Germany or Scandinavian countries where they accept that everyone has to pay higher taxes, rather than just "someone else". Higher interest rates increase the costs of both mortgages and rents, hardly beneficial for those who cannot currently afford them or are struggling. If we as a nation want rents and house prices (and by extension mortgages) to come down then we need to both reduce immigration and build more dwellings, at an absolute minimum house building needs to match immigration and if we want prices to fall it needs to exceed it. 

BikingBud said:

The same economy but with a differing perspective where the fortunate few continue to cream off the nice margins they have built into the system without adding any value?

I am not really sure what that comment is aimed at, but higher interest rates benefit those with assets and make things worse for those without.

Do not consider the interest as the enemy but the total amount of cash repaid. People are now tied into a system for far longer than has previously been normal, so even if repayments seem "affordable" the burden is signifcantly more.

The system has been rigged, for the last 15 or so years, to continually inflate the asset, and the public have been complicit as they are swayed by some bizarre feel good factor. All the while the VIs, playing the long game, are reaping the benefits as everyone is now a slave to debt.

Allow interest rates to apply control on the significant economic drivers for a number of years, not just a passing fad!

MattMattMattUK

lojo1000 said:

@ MattMattMattUK

I don't understand why you appear to think debt is an excessive burden on the economy yet also think rates should be adjusted down so investment is more affordable? Are you proposing all investment should be done without any leverage?

There are three major factors, government debt, which is realistically already above sustainable levels, personal debt, which is too high and the cost of servicing that debt sucks money out of the real economy and business debt, which can be good or bad depending on why it exists.

Interest rates impact all of those, making the cost of the debt higher, the government already spends more on debt interest than on defence, policing and law and order combined, or about the same amount as the entire education budget, so that is hugely negative, even more so when virtually none of that debt was accumulated to invest, be merely to allow governments to keep taxes too low and spend beyond their means. Personal debt is in effect stealing from one's future self, for some things like mortgages then the debt makes sense as very few people can afford to buy a home for cash, but for nearly all other costs it makes little or no sense, as an example more than two thirds of holidays are bought on finance, a third of clothes and half of furniture are bought on BNPL schemes, credit card debt is high, all that interest sucks money out of the real economy in interest payments, people get to live it up in the short term but in the long term the costs are horrific. The burden of those debts and the cost of interest is obviously lower when interest rates are lower, which is better for the economy. Finally there is business borrowing which provided it is used to invest is almost always a net benefit, but again higher interest rates make businesses less likely to invest and increase the costs when they do. 

lojo1000 said:

Interested to know under what circumstances you think debt should be raised.

Government debt only for investment, never for operating costs, the pre-investment budget should always be run at a surplus. For strategic investment then debt can be a reasonable choice, it would make sense to borrow to build a few hundred nuclear reactors, build more wind farms etc. but it does not make sense to borrow just to keep taxes too low, as they have been for the last twenty plus years.

lojo1000 said:

You also state you think economics is complicated yet at the same time seem to think one can adjust rates to a level which moves the economy toward a better outcome.

There are multiple levers that can be pulled to influence the economy, interest rates are one of them. Increasing interest rates sucks money out of the economy and hugely increases the cost of servicing government debt, lowering them reduces those costs. Now if interests are too low that of course has other effects, some of which are not desirable, but in general an interest rate roughly in line with inflation is a good economic position. Of course all that is also impacted by the wider economy, taxation, inward international investment etc. 

lojo1000

MattMattMattUK said:

lojo1000 said:

@ MattMattMattUK

I don't understand why you appear to think debt is an excessive burden on the economy yet also think rates should be adjusted down so investment is more affordable? Are you proposing all investment should be done without any leverage?

There are three major factors, government debt, which is realistically already above sustainable levels, personal debt, which is too high and the cost of servicing that debt sucks money out of the real economy and business debt, which can be good or bad depending on why it exists.

Interest rates impact all of those, making the cost of the debt higher, the government already spends more on debt interest than on defence, policing and law and order combined, or about the same amount as the entire education budget, so that is hugely negative, even more so when virtually none of that debt was accumulated to invest, be merely to allow governments to keep taxes too low and spend beyond their means. Personal debt is in effect stealing from one's future self, for some things like mortgages then the debt makes sense as very few people can afford to buy a home for cash, but for nearly all other costs it makes little or no sense, as an example more than two thirds of holidays are bought on finance, a third of clothes and half of furniture are bought on BNPL schemes, credit card debt is high, all that interest sucks money out of the real economy in interest payments, people get to live it up in the short term but in the long term the costs are horrific. The burden of those debts and the cost of interest is obviously lower when interest rates are lower, which is better for the economy. Finally there is business borrowing which provided it is used to invest is almost always a net benefit, but again higher interest rates make businesses less likely to invest and increase the costs when they do. 

lojo1000 said:

Interested to know under what circumstances you think debt should be raised.

Government debt only for investment, never for operating costs, the pre-investment budget should always be run at a surplus. For strategic investment then debt can be a reasonable choice, it would make sense to borrow to build a few hundred nuclear reactors, build more wind farms etc. but it does not make sense to borrow just to keep taxes too low, as they have been for the last twenty plus years.

lojo1000 said:

You also state you think economics is complicated yet at the same time seem to think one can adjust rates to a level which moves the economy toward a better outcome.

There are multiple levers that can be pulled to influence the economy, interest rates are one of them. Increasing interest rates sucks money out of the economy and hugely increases the cost of servicing government debt, lowering them reduces those costs. Now if interests are too low that of course has other effects, some of which are not desirable, but in general an interest rate roughly in line with inflation is a good economic position. Of course all that is also impacted by the wider economy, taxation, inward international investment etc. 

Hi!

I agree with most of your sentiments but have 1 stinging issue.

Yes, borrow for investment. But govt needs to consider whether that investment represents a positive return AND is the best return available for the country's money supply (we're talking at a macro level for the country, don't mix economic policy with the micro level of an individual making a profit)

My issue re lowering rates and increasing debt is that govts have a policy of encouraging (mortgage) debt to raise GDP.

As an example.....

Buying a house is a capital outlay, hence an investment, but it produces nothing. Is that a good investment FOR THE COUNTRY? No - since it "crowds out" better investment opportunities (productive opportunities) which do have a positive return for the country. No house was built (production undertaken/output produced/value added) in the purchase of a pre-existing house.

I can invest in a small factory building stuff (hopefully using new technology) and get a 10% positive return as an entrepreneur. It's a risky investment for the bank to lend against so I need to finance with 100% equity.

Or I can buy a pre-existing house and rent out. I can leverage from the bank so a gross yield below 10% can be increased to a net yield after interest above 10% if the rate is low enough and the leverage high enough (and thankfully govt/c.bank is on board to let this happen).

At the margin, lower rates encourages the investment in the pre-existing house, raising house prices and yet produces nothing in the economy - except paperwork.

So why does the govt encourage it (get on the "housing ladder") and central bank facilitate it? It adds to GDP as banks lend at ever higher house prices in ever greater numbers as more people undertake it as they see not only an income but a capital appreciation/investment which "cannot" fail. It is a very easy/lazy policy and there are so many winners (whilst it lasts). And we all know how much the print media love it.

Investors and banks love the govt/c.bank policy of supporting house prices as it is the asset/security which backs their investment/pension.

Is it a good policy for the country using available capital to lend to the landlord or would the money be better lent to the entrepreneur?

The bank should be assessing returns on a level playing field but the bank knows that the govt/central bank will step in to save property owners (since ownership is too widespread to ignore/too many votes involved) but will not save the entrepreneur (nor should they).

The entrepreneur may fail. The bank which might lend may lose their investment. But without a govt policy of encouraging investment and startups are you going to get any innovation which leads to productivity? This is why productivity has died - successive govts and central bankers prefer the short term easy option of increasing debt to juice GDP (it wins votes and massages egos).

(the recent IFS report is being discussed but the media fails to grasp the understanding that economic policy is the reason for lost productivity. instead they focus on the near term issue of the election/party politics)



Central banks should not cut rates to encourage investment since it raises debt and asset prices and skews investment toward capital intensive business as it offers more security for the lender (which is not necessarily more innovative (e.g. software)).

Any investment needs to make a return based on the merits of adding economic value not because the central bank has cut rates low enough that even mediocre ideas can generate positive returns.

There is no need for a central bank. They only create uncertainty. Look at the way business owners so often wait to invest based on when the CB will cut rates. Leave rates at 5% at let the market/prices adjust.

Central banks have taught the country like Pavlov's dog to expect they will always be bailed out by cutting rates in an economic downturn - so as long as the bank will lend, people will borrow (no, not everyone but enough).

What should be happening is ppl and business are left to suffer the consequence of poor investment decisions and over time will learn to make better, risk-assessed decisions. Equity and risk-capital will still be there. Indeed there will be more capital put toward projects with large potential upside as less is put into govt-backed second-hand property.

ReadySteadyPop

"Central banks have taught the country like Pavlov's dog to expect they will always be bailed out by cutting rates in an economic downturn - so as long as the bank will lend, people will borrow (no, not everyone but enough)."

Only in the past few years, many people are old enough to know better fortunately. To the posters wishing for the base rate to start with a 2 or a 3, I think if that ever happens we will be in a big recession, and that won`t be good for the economy or people with big mortgage debts.

lojo1000

ReadySteadyPop said:

"Central banks have taught the country like Pavlov's dog to expect they will always be bailed out by cutting rates in an economic downturn - so as long as the bank will lend, people will borrow (no, not everyone but enough)."

Only in the past few years, many people are old enough to know better fortunately. To the posters wishing for the base rate to start with a 2 or a 3, I think if that ever happens we will be in a big recession, and that won`t be good for the economy or people with big mortgage debts.

"Only in the past few years..." 

I would say since 2001 and the Twin Towers (albeit rates were already coming down) and then certainly again in 2007/8 and the GFC.

Hoenir

MattMattMattUK said:

Another straw man. It should fall below 4% because to not do so will damage the economy, government and personal finance, it should not be set at a level that benefits only savers. 

All that QE on the BOE balance sheet that was pumped into the banking system primarily to underpin mortgage lending by the banks. Has yet to be transferred onto savers balance sheets. The market will determine the correct level of rates for both savers and borrowers. There's at least a decade of unwinding to go yet. 

Worth remembering that 30 year mortgage rates in the US are currently above 7%. Borrowers in the UK have so far got off lightly. 

ReadySteadyPop

Hoenir said:

MattMattMattUK said:

Another straw man. It should fall below 4% because to not do so will damage the economy, government and personal finance, it should not be set at a level that benefits only savers. 

All that QE on the BOE balance sheet that was pumped into the banking system primarily to underpin mortgage lending by the banks. Has yet to be transferred onto savers balance sheets. The market will determine the correct level of rates for both savers and borrowers. There's at least a decade of unwinding to go yet. 

Worth remembering that 30 year mortgage rates in the US are currently above 7%. Borrowers in the UK have so far got off lightly. 

And there is a LOT of potential volatility for credit markets.

PixelPound

MattMattMattUK said:

nic_c said:

MattMattMattUK said:

The BoE was far too slow to start raising interest rates and did not raise them fast enough when it did start, it should not make the same mistake and be too slow to start lowering them and lower them too little. Note that I am not suggesting that interest rates should fall to sub-1% levels, but somewhere in the 1.75-2.5% range would be good for the economy long term, although that will likely be two years away.

So are you in the "I have a big mortgage and want the rates as low as possible, but suggesting a level just slightly above what I'd prefer to appear reasonable" camp?

No, I am in the "I have rationally looked at the economics of the situation" camp. I do not have a big mortgage. Straw men do not help your position.

nic_c said:
I can't see it getting anywhere near 2.5% this decade (save for something going wrong in the economy). Since the rates were cut after the 2007 banking crisis most of us have known very low rates, so it's easy to think of them as "normal", which they are not.

As AI says, looking at a historical period and saying that justifies your position when current economics are different does not make your position rational. Higher interest rates have a huge negative, they cost the government a lot more to service the national debt, as well as the off book debt and that debt is huge. The additional interest paid will such huge amounts out of public services. If one looks at economic factors having inflation of 1.5-2% and interest rates of 1.75-2.5%, fluctuating as required would be a good position to be in. Government debt will not be too expensive, business can afford to invest, mortgage interest does not suck too much money out of the real economy and it is at the right level that makes investment a better choice than just saving in a bank account, which is good for the economy overall.

nic_c said:

The interest rate fell below 5% in 2001, before that it was 1964. Between then and the 2007 crash it went briefly down to 3.5%. There will be cuts (or at least a cut) from the current 5.25% more for an appeasement as the "Cost of Living" factor is ever present at the moment, but they won't want to go much lower. The lower it goes the less flexibility the BoE has to change it to impact the economy, and 5% is the historic benchmark (for 200+ years). 

Historic benchmarks are largely irrelevant, even more so when you choose to ignore other factors (the huge national debt and high personal debt). The negative drag on the economy of interest rates higher than optimal will cause compound damage to the economy, society and government finances, which is why it needs to fall over the next few years.

nic_c said:

If it goes below 4% in the next parliament then it would be because of some economic event they've had to react to, otherwise why would it go anywhere near 4% (because you have to re-mortgage at some point isn't a valid answer)

Another straw man. It should fall below 4% because to not do so will damage the economy, government and personal finance, it should not be set at a level that benefits only savers. 

The main point behind quoting historical benchmarks is because of the suggestion that sub 2% is in anyway normal, it's not. Post the 2008 crash we've had unusually low rates and I guess many have got used to it. It is funny that not going below 4% will damage the economy, yet why was that not a concern pre-2008. Being used to historically low rates means now that suddenly 5% benefits only savers. Only because the sustained period of low interest rates meant house price inflation outstripped wage increases etc. Cutting rates will make it harder for the government to borrow, unless accompanied by some global tracking. It's harder to sell government bonds at a lower yield. Existing bonds are set, so wouldn't make the government debt cheaper, just for new borrowing.

Anyway surely the point of this topic was whether the BoE will cut rates or when and by how much. What the long term ideal would be is a different subject. The BoE have shown they can be slow to move, like they didn't start raising early enough and now most likely won't lower until they are sure they don't have to reverse a decision. 

If the markets respond positively to the next government then maybe there will be a cut in August but it won't go anywhere near 4% over the next year.

ReadySteadyPop

I`m doubtful that a Labour government can proceed very far without upsetting the bond markets to be honest, and the attacks on shipping lanes have ramped up recently, plus all the other geo-politics going on, meaning there is plenty more inflation to come.