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

michaels

TerryTeacake said:

michaels said:

Sarah1Mitty2 said:

michaels said:

naf123 said:

RelievedSheff said:

They wont get that far. 5.5% then hold and gradually creep down over the next couple of years to around 4% by 2026.

Just in time for the "great crash" of 2026 if the 18 years cycle is to be believed. If the cycle is accurate what we have now is a minor blip and house prices will rise another circa 20% in the run up to 2026 when they will fall back again.

Not sure I believe it myself but it proved right in 1990 and 2008. 

What would happens to intrest rates in the event of a massive housing crash eg will it go back to above zero or will it go higher than 6%?

In the UK house prices falls tend to be deflationary for two reasons:
The reduce 'wealth effect' spending where people feel wealthy because of the value of their house and therefore spend more (equity withdrawal is an extreme example)
When prices fall transactions volumes do too (various reasons, not wanting to sell at a loss/less than what it is worth/downsizing doesn't bring expected windfall, buyers are afraid to buy a depreciating asset, lenders are cautious on deposits) and this then also reduces other economic activity (estate agents, solicitors, lenders, new kitchen/bathroom, carpets, furniture etc etc)

This reduction in overall demand cools the economy in the same way as interest rate rises which then (in theory ) reduces internal inflationary pressure as unemployment climbs.

Thus a period of falling house prices is very likely to be followed by low/negative growth, falling inflation and thus interest rate cuts.

HTH

Transactions are already massively down but prices have not fallen much yet, that is mostly to do with the price of debt and very little to do with people not wanting to take a loss IMO, PropertyLog is full of price reductions just now so people are still trying to sell but in many cases at quite silly aspirational prices for the market we have now (U.S mortgage applications were down the other day to 1995 levels, that is what the fastest historical re-pricing of debt will do to a debt based asset class) The inflation hitting the UK is from global forces, very little to do (basically nothing to do with) falling U.K house prices, we could easily have a situation where house prices crash but inflation and interest rates keep rising.

The inflation that hit the UK was caused by global commodity price increases.  However these have now largely stabilised or even reversed and yet we are not seeing deflation.  Sure there are lags but the majority of the continuing inflation is about wage increases from a tight labour market being passed on resulting in price increases resulting in wage increases - ie a spiral

Fuelled by the money printers going into overdrive expanding the money supply and the world going into lockdown. This was the root cause of all the inflation we have had.

I would say linked to supply chain disruption from covid and Ukraine although probably the overhang of excess savings from the covid period on its own would have been enough to cause a lot of inflation.

As you say it is obvious, during covid output dropped by perhaps 20% but govt polices meant that income barely decreased.  During the pandemic there was nowhere this extra income could be spent (so it pushed up asset prices) but once spending opportunities returned then people tried to spend.  Increase demand and to some extent there will be a supply response but given the covid and war supply chain disruption mentioned above the increased nominal demand was always mostly going to show up in higher prices.

Where there seems to be disagreement is how much this is a one of shock and how much this is now an embedded wage/price spiral.  Here the UK with its labour market issues seems to be unique in having the most inbedded inflation.

Problem with inflation is when supply and demand are in equilibrium that will keep inflation steady at the current level rather than implying a return to low inflation, the only way to achieve the latter is to have a demand deficit, ie below trend growth.

michaels

So 5,5% is looking nailed on and what with the recent oil/fuel price increases inflation looks like surprising again on the upside.

On the other hand, 2 year gilts remain around 4.7% down from 5.5% 2 months ago and the pound has weakened both suggesting the markets don't think the current tightening cycle has much further to go.

Strummer22

michaels said:

So 5,5% is looking nailed on and what with the recent oil/fuel price increases inflation looks like surprising again on the upside.

On the other hand, 2 year gilts remain around 4.7% down from 5.5% 2 months ago and the pound has weakened both suggesting the markets don't think the current tightening cycle has much further to go.

Inflation being jostled by relatively short-term volatility due to e.g. fuel prices should have little bearing on interest rates. 5.5% will happen on Thursday, unless there's a big surprise in (core) inflation tomorrow. I expect the BoE to signal they expect this to be the last rise, although until recently the news was the 'market' was still expecting a peak of 5.75% to 6%, so who knows?

Strummer22

So, inflation fell again (had been forecast to rise), and core inflation fell quite a lot… so do we need another interest rate rise at all? Will be interesting to see what happens tomorrow.

MattMattMattUK

Strummer22 said:

So, inflation fell again (had been forecast to rise), and core inflation fell quite a lot… so do we need another interest rate rise at all? Will be interesting to see what happens tomorrow.

We probably did not need the last one, 5.00% would have been fine, but I expect 5.5% tomorrow, with signals that it is the last, provided that the current trend continues.

There is still a lot more impact of the rises that have taken place to have their full impact, more than half of mortgage borrowers are still on a rate fixed before the interest rate rises began, others will have taken out a two year fix at 2-3% and will be insulated for a while longer yet etc. Every month that goes on sucks more money out of the economy as more people have to remortgage on significantly increase rates, combined with the savings accrued during Covid slowly being run down and tighter lending in the unsecured space will all have pressures that mean we have yet to get close to the full impact of the measures that will reduce inflation. There is still the reasonable possibility that late 2024-2025 could bring both a recession and deflation, which is not a situation anyone other than venture capitalists wants to be in. 

Strummer22

MattMattMattUK said:

Strummer22 said:

So, inflation fell again (had been forecast to rise), and core inflation fell quite a lot… so do we need another interest rate rise at all? Will be interesting to see what happens tomorrow.

We probably did not need the last one, 5.00% would have been fine, but I expect 5.5% tomorrow, with signals that it is the last, provided that the current trend continues.

There is still a lot more impact of the rises that have taken place to have their full impact, more than half of mortgage borrowers are still on a rate fixed before the interest rate rises began, others will have taken out a two year fix at 2-3% and will be insulated for a while longer yet etc. Every month that goes on sucks more money out of the economy as more people have to remortgage on significantly increase rates, combined with the savings accrued during Covid slowly being run down and tighter lending in the unsecured space will all have pressures that mean we have yet to get close to the full impact of the measures that will reduce inflation. There is still the reasonable possibility that late 2024-2025 could bring both a recession and deflation, which is not a situation anyone other than venture capitalists wants to be in. 

All very persuasive arguments. I think the only reason the BoE would raise rates again is fear. They got it so disastrously wrong from late 2021 onwards, they should have raised rates earlier and higher, and are now scared of making the same mistake as to when to stop raising rates. I think you've correctly identified that the risk actually lies in the other direction.

MattMattMattUK

Strummer22 said:

MattMattMattUK said:

Strummer22 said:

So, inflation fell again (had been forecast to rise), and core inflation fell quite a lot… so do we need another interest rate rise at all? Will be interesting to see what happens tomorrow.

We probably did not need the last one, 5.00% would have been fine, but I expect 5.5% tomorrow, with signals that it is the last, provided that the current trend continues.

There is still a lot more impact of the rises that have taken place to have their full impact, more than half of mortgage borrowers are still on a rate fixed before the interest rate rises began, others will have taken out a two year fix at 2-3% and will be insulated for a while longer yet etc. Every month that goes on sucks more money out of the economy as more people have to remortgage on significantly increase rates, combined with the savings accrued during Covid slowly being run down and tighter lending in the unsecured space will all have pressures that mean we have yet to get close to the full impact of the measures that will reduce inflation. There is still the reasonable possibility that late 2024-2025 could bring both a recession and deflation, which is not a situation anyone other than venture capitalists wants to be in. 

All very persuasive arguments. I think the only reason the BoE would raise rates again is fear. They got it so disastrously wrong from late 2021 onwards, they should have raised rates earlier and higher, and are now scared of making the same mistake as to when to stop raising rates. 

They have been behind the curve since Covid really, the interest rate cut and quantitative easing, on top of printing money for CJRS, SEISS and benefit increases, combined with EBSS/EPC and more handouts was always going to cause fundamental issues with an economy that was already very structurally weak. They were also slow to start raising rates and did not raise them fast enough when they did start, if they had started earlier then rates would have been able to stop rising around 4-4.5% and drop back to 3% within a few years, which is a sensible long term level, as it is we have the current mess because they failed to act. 

Strummer22 said:
I think you've correctly identified that the risk actually lies in the other direction.

Unfortunately it is already pretty much baked in, worse still is that even if we do not have a technical recession we will end up with a decade of anaemic growth and deflation is all but baked in now. The figures for savings being depleted and increases in unsecured borrowing are worrying though, they show that most of the population are attempting to avoid an unaffordable lifestyle rather than balance the books and they will eventually hit a hard stop when they can no longer obtain more credit or savings run out, which means there is no slack in the system, a very worrying situation in economic terms. 

middleagedriver

I think BoE will pause tomorrow or if they do rise 0.25% it will be a lot closer in terms of votes on the MPC which will signal a pause in November provided inflation continues to fall

Maka344

The two-year gilt was yielding more than 5% yesterday, but fell to 4.85% today, while the five-year gilt yield fell from 4.53% to 4.42%.

michaels

Maka344 said:

The two-year gilt was yielding more than 5% yesterday, but fell to 4.85% today, while the five-year gilt yield fell from 4.53% to 4.42%.

Differs from this source?

TMBMKGB-02Y | U.K. 2 Year Gilt Overview | MarketWatch