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

Sarah1Mitty2

RelievedSheff said:

My money is on 5.5% for the next round of hikes.

I agree, anything else could be a serious mis-step, unless the inflation figures change in a miraculous way. 7% base rate is now being talked about the way 4.5% was a short time ago, not likely but possible. I think 7% is easily possible now.

michaels

Markets are not pricing in rates much higher than 5.5%.  The fall (not just stop rising but fall) in commodity prices gives suppliers scope to reduce prices if demand weakens so we could still see a sharp (temporary) drop in inflation.

Problem is we are turning a supertanker, mortgage rates are slow acting due to fixes, there is still lots of covid unplanned savings money sloshing around, the fiscal position is still deeply expansive and will only get worse this side of an election and the employment market (and employment expectations) remains strong.

And once it has turned the same factors that mean it is slow to do so will perhaps mean we rapidly ride a downward roller-coaster with slow acting monetary policy the only lever to try and pull out of the dive.

It is so sad, there is a simple fix, a temporary fiscal tightening with higher taxes (I prefer income tax as it does not increase inflation the way VAT would) and is a quadruple win:
1) Instantly removes demand from the economy
2) Applies to everyone rather than making a small proportion of mortgage holders take all the pain
3) Helps with the debt crisis making the trajectory more sustainable and reducing long term borrowing costs
4) Can be reversed instantly once it has done what is needed
(3 also means that he longer end of the yield curve will likely fall encouraging longer term investment due to less crowding out)

I hate it that politics prevents doing the sensible thing.  Personally I think the govt should roll the dice and try 'unconventional fiscal policy'.  Trying to be conventional is not going to dig them out of the political hole they are in so why not try being radical?

Aberdeenangarse

Looks like another 0.50% hike next month.

Markets are pricing in that the BoE will raise its bank rate by another half a percentage point at the next meeting on August the third.

https://www.ft.com/content/2b6328a4-1cbf-432a-ae4f-e53284982b97

lojo1000

Looks like the BoE are stepping in to once again artificially suppress rates today with the focus on mortgage rates again due to higher than expected wage data - this time at the key media-centric 2 yr yield

All other tenors up, 2 yr yield down.

lojo1000

Another point that strikes me on when inflation will come down is the number of people I see now choosing to save their excess cash rather than overpay the mortgage as they usually would. This is due to many fixed savings rates being above the mortgage rate for a lot of people.

So as well as people moving to interest only and getting repayment holidays, we now also have another reason people are not paying off the capital sum of their mortgage balance.

All this leads to higher debt levels across the economy hence more money in the economy and inflation staying higher than it would do if the banks weren't in so much trouble and started foreclosing on those in default.

But as usual, we have to drag it out and pretend there isn't an issue with the country buying property at >5x median incomes.

lmitchell

lojo1000 said:

Looks like the BoE are stepping in to once again artificially suppress rates today with the focus on mortgage rates again due to higher than expected wage data - this time at the key media-centric 2 yr yield

All other tenors up, 2 yr yield down.

Dunno which site you use for your datasets, but both the 5Y and 10Y yields are down in this morning's trading session?

lojo1000

We get UK inflation numbers again next week - Weds 19th. The key number is core MoM.

A relatively low figure of 0.4% drops out. The last 3m average is 1.0% per month.







The higher level of inflation (CPIH) is not helped by housing costs (OOH) which appear to be rising, not falling. They make the largest, single part of the overall figure:




So whilst goods inflation is coming down - China is trying to avoid a deflationary spiral and housing crisis - services inflation in the UK also remains high.

At a basic level, I think it takes time for the many millions of people who work for small business up and down the country to ask for and receive pay increases. This means when budgeting for the next year, firms are building in further price increases. Also whilst many Unions have been negotiating for many months, many pay agreements at higher levels are yet to be settled.

The UK is a service economy with wages making up a much larger share of input costs than most other nations - we don't build much but we sure do know how to push buttons on a keyboard.

If oversized pay packets for little added value (notably people those at the BoE and elsewhere in finance) are maintained at the 7% current growth level we saw today, inflation has little chance of hitting 2% any time soon.

Productive people (as in manual labour) who are most often lower paid relative to unproductive people who work in finance should get pay rises to at least maintain their real wage.

However, unless the BoE can engineer higher unemployment and collapse overall wage increases, rates are going to keep rising and not fall below 5% for many years to come.

I suggest the BoE and govt work on getting debt down, not keeping it elevated as they are currently trying to do. 

michaels

lojo1000 said:

Another point that strikes me on when inflation will come down is the number of people I see now choosing to save their excess cash rather than overpay the mortgage as they usually would. This is due to many fixed savings rates being above the mortgage rate for a lot of people.

So as well as people moving to interest only and getting repayment holidays, we now also have another reason people are not paying off the capital sum of their mortgage balance.

All this leads to higher debt levels across the economy hence more money in the economy and inflation staying higher than it would do if the banks weren't in so much trouble and started foreclosing on those in default.

But as usual, we have to drag it out and pretend there isn't an issue with the country buying property at >5x median incomes.

I don' follow why you think there are different economic consequences between using savings to pay down debt as opposed to offsetting debt?

michaels

lojo1000 said:

We get UK inflation numbers again next week - Weds 19th. The key number is core MoM.

A relatively low figure of 0.4% drops out. The last 3m average is 1.0% per month.







The higher level of inflation (CPIH) is not helped by housing costs (OOH) which appear to be rising, not falling. They make the largest, single part of the overall figure:




So whilst goods inflation is coming down - China is trying to avoid a deflationary spiral and housing crisis - services inflation in the UK also remains high.

At a basic level, I think it takes time for the many millions of people who work for small business up and down the country to ask for and receive pay increases. This means when budgeting for the next year, firms are building in further price increases. Also whilst many Unions have been negotiating for many months, many pay agreements at higher levels are yet to be settled.

The UK is a service economy with wages making up a much larger share of input costs than most other nations - we don't build much but we sure do know how to push buttons on a keyboard.

If oversized pay packets for little added value (notably people those at the BoE and elsewhere in finance) are maintained at the 7% current growth level we saw today, inflation has little chance of hitting 2% any time soon.

Productive people (as in manual labour) who are most often lower paid relative to unproductive people who work in finance should get pay rises to at least maintain their real wage.

However, unless the BoE can engineer higher unemployment and collapse overall wage increases, rates are going to keep rising and not fall below 5% for many years to come.

I suggest the BoE and govt work on getting debt down, not keeping it elevated as they are currently trying to do. 

Given commodity prices have not just stopped increasing but have actually fallen, we could get a situation where in the short term falling goods prices go some way to offsetting rising wages.  However that is only likely to be temporary but might give us 5% by the end of the year before inflation rises again.

I suspect in the medium term interest rates will bite, employment will fall and the economy will overshoot sharply on the way down - just as interest rate increases have proved to be very slow acting, any cuts will have the same long and variable lags.  The govt will then be under pressure to use fiscal policy to prevent a recession being too deep and steep but we are not exactly starting from a point where fiscal expansion makes sense....

The is a simple, effective, fast acting, easily reversible, fairer, beneficial for the deficit -  but politically unacceptable solution: use fiscal policy rather than monetary policy to address the current excess demand.

lojo1000

michaels said:

lojo1000 said:

Another point that strikes me on when inflation will come down is the number of people I see now choosing to save their excess cash rather than overpay the mortgage as they usually would. This is due to many fixed savings rates being above the mortgage rate for a lot of people.

So as well as people moving to interest only and getting repayment holidays, we now also have another reason people are not paying off the capital sum of their mortgage balance.

All this leads to higher debt levels across the economy hence more money in the economy and inflation staying higher than it would do if the banks weren't in so much trouble and started foreclosing on those in default.

But as usual, we have to drag it out and pretend there isn't an issue with the country buying property at >5x median incomes.

I don' follow why you think there are different economic consequences between using savings to pay down debt as opposed to offsetting debt?

Paying down debt reduces the money supply whereas increasing savings does not. Savings still circulate the economy as banks have a higher asset base to lend against as opposed to when debt is repaid, reducing money in circulation. 

Of course the inflation effect will be highest where people/businesses continually spend - velocity of money is higher.