Inflation, Interest Rates, yield curves, instant vs fixed rate savings & gilts

hallmark

Sharp fall in inflation today to 3.4% & IIUC expected to fall further over the next couple of months as the energy cap reduction takes effect.  Despite the slightly hawkish rhetoric from the MPC I think it's unfathomable that they'll keep rates high for much longer.  I think they'll cut soon and in at least 0.5% chunks.  My guess fwiw is base rates will be 3.x at the very most by the end of 2024.

Instant access accounts are 5%+ at the moment, with 2-3 year fixes around 4.7-4.4%.  Surely these will sharply de-invert very soon. 

Likewise the heady days of 5%+ on MMFs must be nearly over.  If I read this correctly it's still possible to lock in about 4.23% for three years on something like T27A
https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Anybody risk-averse & wanting to put money in something yielding decently well for awhile could do worse IMO.  I think 4.23% might look like a very good yield fairly soon.

Regardless of how the above plays out, it's definitely a good time to keep a close eye on all the above as the opportunities to shift funds about will probably change fast.

All, of course, just IMO and a bit of a ramble but interested what other's think.

JohnWinder

1. Even the experts have struggled to guess interest rate movements correctly: https://www.marketwatch.com/story/yes-100-of-economists-were-dead-wrong-about-yields-2014-10-21.  Every economist asked was wrong, not how much interest rates would change, but in the direction of change.

boingy

There is no way they are going to cut by anything more than 0.25% at a time and I'm expecting them not to change anything at all on Thursday. The last thing they want to do is cut rates then have to raise them again because they were premature so they will be very cautious to say the least. My best guess would be probably a few more months before they start cutting but it is just that - a guess.

That's not to say that banks won't start cutting EA interest rates before that. We've already seen Virgin and Metro announce cuts, and probably some others I haven't noticed. 

Linton

hallmark said:

Sharp fall in inflation today to 3.4% & IIUC expected to fall further over the next couple of months as the energy cap reduction takes effect.  Despite the slightly hawkish rhetoric from the MPC I think it's unfathomable that they'll keep rates high for much longer.  I think they'll cut soon and in at least 0.5% chunks.  My guess fwiw is base rates will be 3.x at the very most by the end of 2024.

Instant access accounts are 5%+ at the moment, with 2-3 year fixes around 4.7-4.4%.  Surely these will sharply de-invert very soon. 

Likewise the heady days of 5%+ on MMFs must be nearly over.  If I read this correctly it's still possible to lock in about 4.23% for three years on something like T27A
https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Anybody risk-averse & wanting to put money in something yielding decently well for awhile could do worse IMO.  I think 4.23% might look like a very good yield fairly soon.

Regardless of how the above plays out, it's definitely a good time to keep a close eye on all the above as the opportunities to shift funds about will probably change fast.

All, of course, just IMO and a bit of a ramble but interested what other's think.

There has not been a sharp fall in inflation today.  The change in the 1-year value is more a result of the large rise in the Jan23-Feb23 monthly value which has now dropped off the calculation than anything that has happened in the past month.

hallmark

This is why I think it's important we think about these things.  If 100% of economists get it wrong the absolute worst we can do is "as badly as we would have if we followed the guidance of economists".

If we go back to 2017 Inflation was rising to 3%+ and the MPC deemed the most appropriate base rate to be 0.5%.

With inflation 3.4% and falling, why on earth would they deem the most appropriate rate to be ten times higher?

hallmark

Linton said:

hallmark said:

Sharp fall in inflation today to 3.4% & IIUC expected to fall further over the next couple of months as the energy cap reduction takes effect.  Despite the slightly hawkish rhetoric from the MPC I think it's unfathomable that they'll keep rates high for much longer.  I think they'll cut soon and in at least 0.5% chunks.  My guess fwiw is base rates will be 3.x at the very most by the end of 2024.

Instant access accounts are 5%+ at the moment, with 2-3 year fixes around 4.7-4.4%.  Surely these will sharply de-invert very soon. 

Likewise the heady days of 5%+ on MMFs must be nearly over.  If I read this correctly it's still possible to lock in about 4.23% for three years on something like T27A
https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Anybody risk-averse & wanting to put money in something yielding decently well for awhile could do worse IMO.  I think 4.23% might look like a very good yield fairly soon.

Regardless of how the above plays out, it's definitely a good time to keep a close eye on all the above as the opportunities to shift funds about will probably change fast.

All, of course, just IMO and a bit of a ramble but interested what other's think.

There has not been a sharp fall in inflation today.  The change in the 1-year value is more a result of the large rise in the Jan23-Feb23 monthly value which has now dropped off the calculation than anything that has happened in the past month.

With respect, how is that different to a sharp fall in inflation?  The annual rate has fallen from 4% to 3.4%.  By definition that has to be due to the fact that inflation during the same period a year ago was less than it is currently.

Unless you're specifically referring to the word "today" in which case yes I agree but "today" seemed a reasonable way of describing "the figures released today".

Linton

hallmark said:

Linton said:

hallmark said:

Sharp fall in inflation today to 3.4% & IIUC expected to fall further over the next couple of months as the energy cap reduction takes effect.  Despite the slightly hawkish rhetoric from the MPC I think it's unfathomable that they'll keep rates high for much longer.  I think they'll cut soon and in at least 0.5% chunks.  My guess fwiw is base rates will be 3.x at the very most by the end of 2024.

Instant access accounts are 5%+ at the moment, with 2-3 year fixes around 4.7-4.4%.  Surely these will sharply de-invert very soon. 

Likewise the heady days of 5%+ on MMFs must be nearly over.  If I read this correctly it's still possible to lock in about 4.23% for three years on something like T27A
https://www.dividenddata.co.uk/uk-gilts-prices-yields.py

Anybody risk-averse & wanting to put money in something yielding decently well for awhile could do worse IMO.  I think 4.23% might look like a very good yield fairly soon.

Regardless of how the above plays out, it's definitely a good time to keep a close eye on all the above as the opportunities to shift funds about will probably change fast.

All, of course, just IMO and a bit of a ramble but interested what other's think.

There has not been a sharp fall in inflation today.  The change in the 1-year value is more a result of the large rise in the Jan23-Feb23 monthly value which has now dropped off the calculation than anything that has happened in the past month.

With respect, how is that different to a sharp fall in inflation?  The annual rate has fallen from 4% to 3.4%.  By definition that has to be due to the fact that inflation during the same period a year ago was less than it is currently.

Unless you're specifically referring to the word "today" in which case yes I agree but "today" seemed a reasonable way of describing "the figures released today".

The point I am making is that these figures do not imply that the BoE should be doing something new now.  They review the data each month.  Inflation has been fairly steadily falling over the past year.  The somewhat larger than usual change announced today mainly reflectts something that happened 13 months ago rather than the current situation. 

Is it possible that your expectations of normal interest rates are based on experience since 2008?  Current interest rates are historically rather low.  They did not fall below 5% at any time between 1964 and 2001.

hallmark

Thanks Linton. It's a good point re historical IRs and FWIW my guess is that moving forward a higher range than the post 2008 years is likely for both inflation and IRs.  I'm mid-50s so what I'd class as normal IRs is much more like what we saw pre-2008.

Regarding the next year or two though, I just think it's incredibly unlikely that the MPC, who I believe are Doveish by nature, won't reduce IRs dramatically.  The logic among economists seems to be that the MPC were too slow to raise therefore they'll be too slow to cut.   My view is that they were too slow to raise, because they are doviesh, and that rather than be sluggish on cuts they'll be the opposite.

To put my predictions on the line, I reckon an IR cut by May is more likely than not and an IR cut by June almost 100% certain.  Followed by several more.  And that 0.5% cuts are very possible.

I also hope I'm wrong as I think inflation could easily reignite and should be treated with utmost caution.

Albermarle

hallmark said:

Thanks Linton. It's a good point re historical IRs and FWIW my guess is that moving forward a higher range than the post 2008 years is likely for both inflation and IRs.  I'm mid-50s so what I'd class as normal IRs is much more like what we saw pre-2008.

Regarding the next year or two though, I just think it's incredibly unlikely that the MPC, who I believe are Doveish by nature, won't reduce IRs dramatically.  The logic among economists seems to be that the MPC were too slow to raise therefore they'll be too slow to cut.   My view is that they were too slow to raise, because they are doviesh, and that rather than be sluggish on cuts they'll be the opposite.

To put my predictions on the line, I reckon an IR cut by May is more likely than not and an IR cut by June almost 100% certain.  Followed by several more.  And that 0.5% cuts are very possible.

I also hope I'm wrong as I think inflation could easily reignite and should be treated with utmost caution.

The 'money men' seem not to agree with you . From BBC news.

Currency traders are pricing in slightly higher cuts to UK interest rates this year after lower than expected inflation figures.

Money markets are betting there will be 0.7% of rate cuts this year, up from speculation on 0.67% of cuts

Central banks around the world tend to follow the lead of the Fed, which is widely expected to hold rates at 5.25% to 5.5%.

hallmark

Albermarle said:

hallmark said:

Thanks Linton. It's a good point re historical IRs and FWIW my guess is that moving forward a higher range than the post 2008 years is likely for both inflation and IRs.  I'm mid-50s so what I'd class as normal IRs is much more like what we saw pre-2008.

Regarding the next year or two though, I just think it's incredibly unlikely that the MPC, who I believe are Doveish by nature, won't reduce IRs dramatically.  The logic among economists seems to be that the MPC were too slow to raise therefore they'll be too slow to cut.   My view is that they were too slow to raise, because they are doviesh, and that rather than be sluggish on cuts they'll be the opposite.

To put my predictions on the line, I reckon an IR cut by May is more likely than not and an IR cut by June almost 100% certain.  Followed by several more.  And that 0.5% cuts are very possible.

I also hope I'm wrong as I think inflation could easily reignite and should be treated with utmost caution.

The 'money men' seem not to agree with you . From BBC news.

Currency traders are pricing in slightly higher cuts to UK interest rates this year after lower than expected inflation figures.

Money markets are betting there will be 0.7% of rate cuts this year, up from speculation on 0.67% of cuts

Central banks around the world tend to follow the lead of the Fed, which is widely expected to hold rates at 5.25% to 5.5%.

This is kind of what I'm getting at in a hamfisted way.   At present you can still lock in decent yields on a 2-3 year horizon. I think that's because the markets are underestimating the Doveish nature of the MPC.

I'm probs going to move some funds from MMF into individual gilts as I think a risk-free 4%+ on that horizon isn't a bad proposition for a part of the portfolio.

coastline

hallmark said:

Albermarle said:

hallmark said:

Thanks Linton. It's a good point re historical IRs and FWIW my guess is that moving forward a higher range than the post 2008 years is likely for both inflation and IRs.  I'm mid-50s so what I'd class as normal IRs is much more like what we saw pre-2008.

Regarding the next year or two though, I just think it's incredibly unlikely that the MPC, who I believe are Doveish by nature, won't reduce IRs dramatically.  The logic among economists seems to be that the MPC were too slow to raise therefore they'll be too slow to cut.   My view is that they were too slow to raise, because they are doviesh, and that rather than be sluggish on cuts they'll be the opposite.

To put my predictions on the line, I reckon an IR cut by May is more likely than not and an IR cut by June almost 100% certain.  Followed by several more.  And that 0.5% cuts are very possible.

I also hope I'm wrong as I think inflation could easily reignite and should be treated with utmost caution.

The 'money men' seem not to agree with you . From BBC news.

Currency traders are pricing in slightly higher cuts to UK interest rates this year after lower than expected inflation figures.

Money markets are betting there will be 0.7% of rate cuts this year, up from speculation on 0.67% of cuts

Central banks around the world tend to follow the lead of the Fed, which is widely expected to hold rates at 5.25% to 5.5%.

This is kind of what I'm getting at in a hamfisted way.   At present you can still lock in decent yields on a 2-3 year horizon. I think that's because the markets are underestimating the Doveish nature of the MPC.

I'm probs going to move some funds from MMF into individual gilts as I think a risk-free 4%+ on that horizon isn't a bad proposition for a part of the portfolio.

Normally is the case that they follow the FED . It's a moving target as seen by the bond yield in the last year alone. UK10 year was 3.25% a year ago. Last September 4.75% . This year 3.50% and now 4% .

UK 10 Year Gilt Bond Yield - Quote - Chart - Historical Data - News (tradingeconomics.com)

This can be seen in VGOV the UK gilt ETF. 1800 a year ago, 1575 and this year 1750 and 1700. Can it go to 1800 again ? Looks like it'll need a fair few rate cuts. What will it mean that's the question ? If base rate cuts are heading under 4% then maybe the economy isn't that healthy. ? We can only wait and see.

Vanguard UK Gilt UCITS ETF, UK:VGOV Advanced Chart - (LON) UK:VGOV, Vanguard UK Gilt UCITS ETF Stock Price - BigCharts.com (marketwatch.com)

[img]https://i.postimg.cc/vT9dZ73q/big.gif[/img]

Can they really control inflation or is it a bit of a myth. ? From 1945 to 1955 there were periods of high inflation yet UK rates were held low similar to the US . Inflation fell regardless . From 1960 to 1980 inflation gradually increased to double figures. Rates were also increased in an attempt to cap the move. Didn't work ?

Chart no 5 in the link.

Historical Interest Rates UK - Economics Help

inflation-interest-rates-1945-2011.png (944×650) (economicshelp.org