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

Strummer22

Sarah1Mitty2 said:

Strummer22 said:

Sarah1Mitty2 said:

Can easily see 7% now, Japan, China, Russia all present the potential for massive volatility in credit markets, for different reasons.

Sure 7% is possible, but do you think that's the likely in the next year, or more at the upper end of the likely range?

I wouldn`t put it at the upper end of the likely range now, more like very easily reached if the effects from the countries I mentioned materialise, China is in the spotlight today on financial news for example.

https://www.theguardian.com/business/2023/aug/11/china-economic-problems-show-things-are-seriously-amiss 

Sounds like China is lots of things, but a global inflation driver doesn't seem to be one of those things at the moment.

Sarah1Mitty2

Strummer22 said:

Sarah1Mitty2 said:

Strummer22 said:

Sarah1Mitty2 said:

Can easily see 7% now, Japan, China, Russia all present the potential for massive volatility in credit markets, for different reasons.

Sure 7% is possible, but do you think that's the likely in the next year, or more at the upper end of the likely range?

I wouldn`t put it at the upper end of the likely range now, more like very easily reached if the effects from the countries I mentioned materialise, China is in the spotlight today on financial news for example.

https://www.theguardian.com/business/2023/aug/11/china-economic-problems-show-things-are-seriously-amiss 

Sounds like China is lots of things, but a global inflation driver doesn't seem to be one of those things at the moment.

I would say when were they ever a global inflation driver? China produced cheap goods for the West at wages no one in the West would work for so people in the West could buy loads of cheap things for their house and to wear etc. combine this with super cheap debt in the West and no one was complaining about the lack of wage rises? 

But you have to consider other perspectives....

https://www.cnbc.com/2022/05/02/how-china-is-contributing-to-higher-inflation-worldwide-in-three-areas.html

I read this as China has the ability to affect global inflation and is now doing so to an extent but for a long time contributed to global price stability and availability of cheap but durable items people like to buy for everyday use, this combined with cheap and plentiful debt kept wage demands low or off the table (wage demands are one reason the BOE will still be raising rates at the next meeting)

The main thing China is exporting now is volatility, defaults in China have knock on effects in global credit markets and as we know this can cause spikes to borrowing rates due to perceived risk and not just inflationary pressures?

Andreg

Just 18 months ago a base rate over 5% was completely unimaginable to many people.  With today's news of 7.6% wage increases, I can see the base rate being over 8% by the end of 2024, with inflation still higher than 5% pa at that time.

Sarah1Mitty2

Andreg said:

Just 18 months ago a base rate over 5% was completely unimaginable to many people.  With today's news of 7.6% wage increases, I can see the base rate being over 8% by the end of 2024, with inflation still higher than 5% pa at that time.

Yes, for a long time now I have thought that 8% or 9% base rate is easily reachable, the politicians will just lecture about the dangers of inflation to the wider economy and keep raising if they have to, they really need a proper recession now to shut down people`s belief that they can demand wage rises and still keep their job, as the more informed/more experienced posters always preached - the less debt you have in these sorts of economic times the better off you will be. If it was up to me I would leave base rate at around 5% for a few years and let this totally insane and damaging to society property bubble deflate away, but that isn`t how economic events usually play out is it, they usually turn very quickly and very brutally, catching out people who didn`t think or plan ahead.

Strummer22

Sarah1Mitty2 said:

Andreg said:

Just 18 months ago a base rate over 5% was completely unimaginable to many people.  With today's news of 7.6% wage increases, I can see the base rate being over 8% by the end of 2024, with inflation still higher than 5% pa at that time.

Yes, for a long time now I have thought that 8% or 9% base rate is easily reachable, the politicians will just lecture about the dangers of inflation to the wider economy and keep raising if they have to, they really need a proper recession now to shut down people`s belief that they can demand wage rises and still keep their job, as the more informed/more experienced posters always preached - the less debt you have in these sorts of economic times the better off you will be. If it was up to me I would leave base rate at around 5% for a few years and let this totally insane and damaging to society property bubble deflate away, but that isn`t how economic events usually play out is it, they usually turn very quickly and very brutally, catching out people who didn`t think or plan ahead.

Real wages are likely to be above tomorrow's inflation update, the first time this has happened since 2021. 

Given that:
1. the last 12 months has seen the biggest negative gap between wage rises and inflation this century, i.e. the biggest decrease in real wages;
2. income tax bands have been frozen, so a decent chunk of the extra money people have been earning has gone on tax; 
3. food and energy prices remain high; and
4. for those renting or with a mortgage, housing costs have spiked.

is there actually a material risk of a wage-price spiral? All of the above factored combined have significantly reduced spending power. Furthermore, is there evidence of a wage-price spiral? Can you say there is even the beginning of one, if inflation is now falling even as wage increases speed up? 

Regarding China, you seem to be saying either they will drive up global commodity prices (as per the article you linked) or a creaky economy will spook the markets into increasing the cost of borrowing. Well, since that article was published (May last year), commodity prices have cooled significantly, which shows just how quickly the situation can change in either an inflationary or deflationary direction. Regarding the second point I don't necessarily see market borrowing costs affecting the BoE rate, if anything it is expectations regarding the BoE rate that affect market rates... 

FWIW I don't see interest rates getting close to 8 - 9%, I expect a peak of 5.75%. Headline inflation will be below 5% by the end of this year and probably around 3% by the middle of next year. Getting it down to 2% or below will take a while, but I don't think it will take interest rates >6%, or any interest rate hikes next year, or a recession to do so. 

PixelPound

Politicians like to show everything is under control, e.g. inflation to 5% by the end of the year. Inflation is incredibly sticky and will take longer to come down than it says in the media. Wage increases are up, and I suppose if it was admitted that inflation will take longer to get below 5% then you could expect more wage increase demands in future.

What the BoE rates go to surely has to do with how much pressure the Govt put on the BoE to get inflation back under 2%. It can take many months for the BoE rises to have an effect on curbing inflation, but with inflation coming down there may well be a lot less pressure for too many more rises, and so base rate will probably be still under 6% come the end of the year. They may well be static for a while with any further increases if it looks like inflation is sticking and risking being "baked in".

Strummer22

nic_c said:

Politicians like to show everything is under control, e.g. inflation to 5% by the end of the year. Inflation is incredibly sticky and will take longer to come down than it says in the media. Wage increases are up, and I suppose if it was admitted that inflation will take longer to get below 5% then you could expect more wage increase demands in future.

The next three inflation updates will replace Aug - Oct 2022 MoM values of 0.5%, 0.5% and 2.0%, cumulatively a touch over 3.0%.

If the next three MoM values are cumulatively less than 1.2%, which I would suggest appears likely unless fuel prices continue rising and food prices stop falling, then when October's update is released the annual rate of headline inflation will be <5%.  

Or are you referring to core inflation? The annual rate is sitting at 6.9%, and the Aug - Oct 2022 values to be replaced are 0.8%, 0.6% and 0.7% for a cumulative total just over 2.1%. This looks set to fall slightly if the last two MoM increases (0.2% and 0.3%) continue. However, over 4.2% of the annual core inflation rate is due to the values in Feb - May 2023. Without some months of deflation, it's nailed on that core inflation will be above 5% until at least late spring 2024. The upcoming MoM values should be informing monetary policy much more than the annual rate.

jobdone1

Core inflation is stuck, in that view interest rates are only going upwards IMHO 

Strummer22

jobdone1 said:

Core inflation is stuck, in that view interest rates are only going upwards IMHO 

Core inflation was 0.2% last month and 0.3% this month. As an annualised rate, that's 3.04%, well below the figure over the most recent 12 months which is 6.9%. So maybe core inflation isn't stuck, but it'll just look stuck because four months of high values from Feb - May 2023 will be included in the annual figure for several more months? As described in my post above.

To take an extreme example, imagine core inflation was 0.1% month on month (MoM) in 2022, then suddenly went up by 4% MoM in December 2022 for just a single month, before returning to 0.1% MoM thereafter. Annually, the rate would have been about 5% for the entirety of 2023, before suddenly dropping to about 1% in January 2024.

In this scenario, core inflation would appear to be 'stuck' at 5% for all of 2023. But in this scenario, should the interest rate be continually hiked? If yes, should the increase in the rate be credited with the sudden drop in core inflation in January 2024 when the one very high month is no longer included in the figures? Of course not! It's a quirk of the way the statistics are calculated, not necessarily indicative of the actual situation. Granted this is an exaggeration of the situation we find ourselves in, but as I noted the core inflation rate isn't likely to fall significantly until the high MoM increases Feb - May 2023 are no longer included in the annual figures. 

Making interest rate decisions based on data that is weighted towards things that happened a while ago, potentially up to 12 months ago, would risk 'overshooting' on the interest rate, resulting in an unnecessarily deep recession and deflation. This is a risk that has been noted by some economists. 

Sarah1Mitty2

Strummer22 said:

Sarah1Mitty2 said:

Andreg said:

Just 18 months ago a base rate over 5% was completely unimaginable to many people.  With today's news of 7.6% wage increases, I can see the base rate being over 8% by the end of 2024, with inflation still higher than 5% pa at that time.

Yes, for a long time now I have thought that 8% or 9% base rate is easily reachable, the politicians will just lecture about the dangers of inflation to the wider economy and keep raising if they have to, they really need a proper recession now to shut down people`s belief that they can demand wage rises and still keep their job, as the more informed/more experienced posters always preached - the less debt you have in these sorts of economic times the better off you will be. If it was up to me I would leave base rate at around 5% for a few years and let this totally insane and damaging to society property bubble deflate away, but that isn`t how economic events usually play out is it, they usually turn very quickly and very brutally, catching out people who didn`t think or plan ahead.

Real wages are likely to be above tomorrow's inflation update, the first time this has happened since 2021. 

Given that:
1. the last 12 months has seen the biggest negative gap between wage rises and inflation this century, i.e. the biggest decrease in real wages;
2. income tax bands have been frozen, so a decent chunk of the extra money people have been earning has gone on tax; 
3. food and energy prices remain high; and
4. for those renting or with a mortgage, housing costs have spiked.

is there actually a material risk of a wage-price spiral? All of the above factored combined have significantly reduced spending power. Furthermore, is there evidence of a wage-price spiral? Can you say there is even the beginning of one, if inflation is now falling even as wage increases speed up? 

Regarding China, you seem to be saying either they will drive up global commodity prices (as per the article you linked) or a creaky economy will spook the markets into increasing the cost of borrowing. Well, since that article was published (May last year), commodity prices have cooled significantly, which shows just how quickly the situation can change in either an inflationary or deflationary direction. Regarding the second point I don't necessarily see market borrowing costs affecting the BoE rate, if anything it is expectations regarding the BoE rate that affect market rates... 

FWIW I don't see interest rates getting close to 8 - 9%, I expect a peak of 5.75%. Headline inflation will be below 5% by the end of this year and probably around 3% by the middle of next year. Getting it down to 2% or below will take a while, but I don't think it will take interest rates >6%, or any interest rate hikes next year, or a recession to do so. 

If you are talking about the bond markets it would be the opposite, or what do you mean?