Can UK interest rates remain low?
Discussion
Please help out an economic illiterate.....I'm trying to make sense of the current economic situation.
Simply, can anyone explain to me whether it is going to be possible for the BOE to keep interest rates at their current low levels?
After the election we are going to see tax rises and public sector cuts (job losses & wage cuts). That is a given. To me that points to massive deflation - people are simply going to have less money to spend - therefore BOE has to keep rates down or risk a Japan style deflation spiral. Low rates will also encourage private investment. So at the moment US, EU and UK are all keeping rates low to stimulate the economy.
However, does this line of thinking go completely out of the window if the UK gets downgraded or the pound collapses? I assume then the BOE has to raise rates to encourage takeup of gilts.
So here are my random questions
Realistically, is the UK going to see double digit (or high single digit) rates? Is it inevitable given the state of public finances or are we actually ok given the relatively long maturity of public debt?
Is it going to be possible for the BOE to keep interest rates at their current low levels?
Is it possible to have high inflation with low base rates?
Simply, can anyone explain to me whether it is going to be possible for the BOE to keep interest rates at their current low levels?
After the election we are going to see tax rises and public sector cuts (job losses & wage cuts). That is a given. To me that points to massive deflation - people are simply going to have less money to spend - therefore BOE has to keep rates down or risk a Japan style deflation spiral. Low rates will also encourage private investment. So at the moment US, EU and UK are all keeping rates low to stimulate the economy.
However, does this line of thinking go completely out of the window if the UK gets downgraded or the pound collapses? I assume then the BOE has to raise rates to encourage takeup of gilts.
So here are my random questions
Realistically, is the UK going to see double digit (or high single digit) rates? Is it inevitable given the state of public finances or are we actually ok given the relatively long maturity of public debt?
Is it going to be possible for the BOE to keep interest rates at their current low levels?
Is it possible to have high inflation with low base rates?
Good questions, that not even many experts can answer.
Some say due to the deflationary risks you state that rates can stay low.
The Fed pretty much just reitterated that itself yesterday.
With inflation already knocking about its only a matter of time before bonds start ticking up. Though that assumes economic risks receed. If the economy stays dodgy then look to rates to stay low.
However eventually those who buy bonds will want more risk reward. For banks after tier 1 capital though, bonds are good, so they will keep buying to balance and bolster their books keeping bond prices high and yields low.
So your guess is as good as mine.
However I would say if the Euro zone sorts its s
t out and the govt can axe spending without causing a double dip then rates will rise. Otherwise they will stay low. My 2p from my limited understanding.
Some say due to the deflationary risks you state that rates can stay low.
The Fed pretty much just reitterated that itself yesterday.
With inflation already knocking about its only a matter of time before bonds start ticking up. Though that assumes economic risks receed. If the economy stays dodgy then look to rates to stay low.
However eventually those who buy bonds will want more risk reward. For banks after tier 1 capital though, bonds are good, so they will keep buying to balance and bolster their books keeping bond prices high and yields low.
So your guess is as good as mine.
However I would say if the Euro zone sorts its s
t out and the govt can axe spending without causing a double dip then rates will rise. Otherwise they will stay low. My 2p from my limited understanding.If we are guessing I would say they will have to stay low as half the country are up to their @rses in debt and they will get their homes, cars, TVs, ipods, toasters, paper clips ............... repossessed.
Savers are mere casualties of the current game plan but as they are in the minority, hard luck, there is a price to pay for being sensible.
Savers are mere casualties of the current game plan but as they are in the minority, hard luck, there is a price to pay for being sensible.
Base rates can definitely stay low....I suppose the thing to understand is exactly why they are so low. They are this low (and will be for some time) to help reflate the banking system as they are effectively the rate at which banks borrow. A very low base rate generally creates a steep yield curve (also known as term structure of interest rates) so banks can borrow at low rates (from individual depositors, companies etc) and then lend much higher rates in the form of mortgages, unsecured loans, credit cards etc. This gives the banks a high interest margin on these products which in current times allows them to write down all the non performing loans etc.
As you point out the govt still has to borrow money which will be at rates higher than the base rate as this borrowing is longer term as you point out.
Here is a chart of the term structure of US Govt interest rates
http://www.bloomberg.com/markets/rates/index.html
You can see from that despite short term interest rates being 0 when the US Govt wants to borrow money for 30 years it needs to pay about 4.6% (current yield).
So basically we will keep low base rates because the banks are still in a whole world of pain (Commercial Property being the main problem everyone hopes will go away) and whoever we end up with in Government will happily keep base rates low even though inflation is going up as they want to inflate away the real value of the debt in terms of GDP. So we will see higher inflation than is expected.
It's going to be a mighty painful time to have cash in the bank.
Hope that helps.....
As you point out the govt still has to borrow money which will be at rates higher than the base rate as this borrowing is longer term as you point out.
Here is a chart of the term structure of US Govt interest rates
http://www.bloomberg.com/markets/rates/index.html
You can see from that despite short term interest rates being 0 when the US Govt wants to borrow money for 30 years it needs to pay about 4.6% (current yield).
So basically we will keep low base rates because the banks are still in a whole world of pain (Commercial Property being the main problem everyone hopes will go away) and whoever we end up with in Government will happily keep base rates low even though inflation is going up as they want to inflate away the real value of the debt in terms of GDP. So we will see higher inflation than is expected.
It's going to be a mighty painful time to have cash in the bank.
Hope that helps.....
Thank you for some excellent responses!
Let me get my head around inflation - is this caused entirely by the falling pound? I understand that this will cause imports/oil etc to rise, so the cost of pretty much everything rises. However, as wages aren't going up and public sector workers lose jobs etc there is downward pressure on asset prices. It seems to me that inflation is likely to express itself in terms of rising costs of goods/services and not rising asset prices - which I think is stagflation.
The yield curve chart is interesting - can it remain like that for years? So if the UK keeps borrowing at 5%ish, can they keep base rates low or does there come a point when they have to rise?
The whole area of figuring out what to do now is so confusing - do we save cash, invest in stocks, have high mortgage debt etc. Whenever I think I've figured it out there is always an "ah yes but..."
Let me get my head around inflation - is this caused entirely by the falling pound? I understand that this will cause imports/oil etc to rise, so the cost of pretty much everything rises. However, as wages aren't going up and public sector workers lose jobs etc there is downward pressure on asset prices. It seems to me that inflation is likely to express itself in terms of rising costs of goods/services and not rising asset prices - which I think is stagflation.
The yield curve chart is interesting - can it remain like that for years? So if the UK keeps borrowing at 5%ish, can they keep base rates low or does there come a point when they have to rise?
The whole area of figuring out what to do now is so confusing - do we save cash, invest in stocks, have high mortgage debt etc. Whenever I think I've figured it out there is always an "ah yes but..."
MrCheese said:
The yield curve chart is interesting - can it remain like that for years? So if the UK keeps borrowing at 5%ish, can they keep base rates low or does there come a point when they have to rise?
It could but it all comes down to supply and demand (i.e. how much the Govt wants to borrow and how many people want to lend them money). A few years ago because there was very limited Gilt issuance and an awful lot of demand (primarily form insurance companies hedging annuities) the yield curve was inverted (long term rates lower than short term rates). MrCheese said:
The whole area of figuring out what to do now is so confusing - do we save cash, invest in stocks, have high mortgage debt etc. Whenever I think I've figured it out there is always an "ah yes but..."
Cash most definitely won't be king, shares if you are happy to do the work and understand who has a business that survives in an inflationary economy (crudely companies that have pricing power) and there is nothing wrong with having a big mortgage as long as that is to maximise your exposure to assets that will appreciate and you will definitely be able to cover the interest come hell or high water.....no point in having a big mortgage if part of that money goes to the buying new M3 on the drive to state the obvious.... Interest rates will be whatever politicians want them to be.
Politicians want to keep their jobs.
If everyone suddenly finds their debts much harder to pay and everyone knows someone who has their home pepossesed or someone who goes bankrupt then they'll blame the current government.
So politicians won't repeat the mistake the Tories made in the late 80s and early 90s.
Until everyone has forgotten about that time. Then history will repeat itself.
Politicians want to keep their jobs.
If everyone suddenly finds their debts much harder to pay and everyone knows someone who has their home pepossesed or someone who goes bankrupt then they'll blame the current government.
So politicians won't repeat the mistake the Tories made in the late 80s and early 90s.
Until everyone has forgotten about that time. Then history will repeat itself.
cymtriks said:
Interest rates will be whatever politicians want them to be.
Not entirely true...that might be the case with the base rate (even with an independent BoE) but the banks set the interest rates that companies and individuals borrow at. That's been one of the problems...the conduit for that liquidity injection into the economy is broken. Hence the myriad complaints you can read on here and so many other places about people struggling for finance. Never really understood the deflation argument.
With most of our goods, products and energy imported, money printing, and the pounds value tumbling, everything says inflation to me.
I think Interest rates will have to rise to save the currency, and to allow any further borrowing, which in turn will affect any recovery.
So I'm guessing what we will actually end up with is 'stagflation'
The only thing I can see deflating is the property bubble, which has been artificially kept inflated by Nu Labour to get them to the election.
With most of our goods, products and energy imported, money printing, and the pounds value tumbling, everything says inflation to me.
I think Interest rates will have to rise to save the currency, and to allow any further borrowing, which in turn will affect any recovery.
So I'm guessing what we will actually end up with is 'stagflation'
The only thing I can see deflating is the property bubble, which has been artificially kept inflated by Nu Labour to get them to the election.
Some people have come to the end of their fixed mortgages and can't remortgage because they are in negative equity so they then go on to the mortgage vendors SVR which at the moment is probably not bad for them.
However if interest rates go back up to 5% then the SVR's will move to track the BoE base rate and some people will find themselves in deep doo doo. No government wants to be remembered as "that was when we handed our keys back to the mortgage company"
I'm not sure how many people this would affect, possibly everyone thats bought in the past 3 years and anyone who has done the MEW thing for cars, holidays etc. Not sure what percentage this is of the nation, i read somewhere only 50% of residential property has a mortgage against it.
We could probably take a 1% rise but after that .....
However if interest rates go back up to 5% then the SVR's will move to track the BoE base rate and some people will find themselves in deep doo doo. No government wants to be remembered as "that was when we handed our keys back to the mortgage company"
I'm not sure how many people this would affect, possibly everyone thats bought in the past 3 years and anyone who has done the MEW thing for cars, holidays etc. Not sure what percentage this is of the nation, i read somewhere only 50% of residential property has a mortgage against it.
We could probably take a 1% rise but after that .....
I find economics one of my favoured topics.
Anyway I am as now in a situation where I need to make a real life decision. I have a property let but now 2months notice given which is on the banks svr. I'd guesstimate the value to be up to £250k it's in good nick. So now I need to decide do I readvertise it and find some more tenants but that will mean a 6months to a year a scenario. If I go for a buy to let mortgage fees will be roughly £4-5k and the rates much higher than my current svr.
So should I sell that one now - I have a number of properties the others are on long term buy to let's fixed deals so it is only this one. Due to getting permission to let on what was a residential mortgage it's mortgage interest means I make no profit on it but that's purely due to the fact we took equity out and have used that as the deposit for our current residential property.
Anyway I am as now in a situation where I need to make a real life decision. I have a property let but now 2months notice given which is on the banks svr. I'd guesstimate the value to be up to £250k it's in good nick. So now I need to decide do I readvertise it and find some more tenants but that will mean a 6months to a year a scenario. If I go for a buy to let mortgage fees will be roughly £4-5k and the rates much higher than my current svr.
So should I sell that one now - I have a number of properties the others are on long term buy to let's fixed deals so it is only this one. Due to getting permission to let on what was a residential mortgage it's mortgage interest means I make no profit on it but that's purely due to the fact we took equity out and have used that as the deposit for our current residential property.
Welshbeef said:
So should I sell that one now - I have a number of properties the others are on long term buy to let's fixed deals so it is only this one. Due to getting permission to let on what was a residential mortgage it's mortgage interest means I make no profit on it but that's purely due to the fact we took equity out and have used that as the deposit for our current residential property.
Don't take this as financial advice, as I am no expert, its just my gut feeling.But if it were me, I'd be looking very closely at my debt levels right now, and consider where you might stand if interest rates went back to the long term average of around 7%, and if you had a few void months in any of those properties with no rent coming in.
If you have a number of properties, and have been withdrawing equity from each as a deposit for the next, its sounds to me like you may be well over extended, if one or two factors went against you.
Personally I'm batoning down hatches for what I believe is going to be a financial storm in the the next year or two. There is going to be massive cuts whatever government we get, rising interest rates, and rising unemployment.
I'm debt free, and have plenty of savings, as I don't feel very secure in my industry at the moment, and will also be steering well clear of investing in property until this bubble has deflated.
Scooby72 said:
Personally I'm batoning down hatches for what I believe is going to be a financial storm in the the next year or two. There is going to be massive cuts whatever government we get, rising interest rates, and rising unemployment.
Same thoughts here.I suspect the people with well established (less debt) "portfolios" will get away with it but some of the late arrivals who waded in without considering any potential interest rate rises might get their fingers burnt.
They are not making any moves and hoping that deflation reverses the inevitable, before the st really hits the fan. It's a case of hoping, rather than planning.
The social democrats which make up all of our government have different ideas about the economy than say, the IMF.
They want their cake and eat it, everyone doesn't want the truth.
I can't help thinking that people who hold value will be the winners, those who have silly debt will be the next in line and everyone who is repaying debt will be hammered.
I think that you either want everything paid for, or to have borrowed beyond your means.
As soon as the IMF get involved, things will get very exciting indeed, as the applecart will get upset and the soc-dem planned economy will be upturned.
t really hits the fan. It's a case of hoping, rather than planning. The social democrats which make up all of our government have different ideas about the economy than say, the IMF.
They want their cake and eat it, everyone doesn't want the truth.
I can't help thinking that people who hold value will be the winners, those who have silly debt will be the next in line and everyone who is repaying debt will be hammered.
I think that you either want everything paid for, or to have borrowed beyond your means.
As soon as the IMF get involved, things will get very exciting indeed, as the applecart will get upset and the soc-dem planned economy will be upturned.
Yep the King and Bernanke experiement of Keynesian economics might have run its course soon. The coffers are empty there is no more bailout money left, then what!? The fools who should have been let fail and go insolvent will go insolvent and fail anyway, only they have taken the governments with them.
Of course thats just idle speculation. But the Euro zone may well be playing the above senario out now. There are plenty who have foretold the euro's problems for years.. Fun times indeed.
Of course thats just idle speculation. But the Euro zone may well be playing the above senario out now. There are plenty who have foretold the euro's problems for years.. Fun times indeed.
Note im my Buy to lets I have at the highest a LTV of just shy of 60%. This one is different as its still a residential mortgage with permission to let from the mortgage provider the others were the same but I switched them when the time was right to buy to lets (time being right as in the Banks SVR was not great and the fees + buy to let rate was low.) My other buy to lets have fixed rates for the next 5-6years so I know my outgoings.
An interesting question I have is with the Euro Zone -
Greece .. assuming other Euro currency members sign off on the Bail out what happens if Greece doesnt vote for it? Unlikely but what if?
Next Portugal has to put in xBillion Euros which itself doesnt have so would have to borrow at high market rates...Surely not great for them but part & parcel of being in the Eurozone. What happens if say Portugal in 6 months needs a bail out then say Italy etc etc clearly there would only be France & Germany able to bail them out but where is the point where they say Nein? And also that raises the question if its ok to bail out Greece then why is it not for anohter country - clearly affordability will be a key issue.
Next is if Greece did not accept the Bail out would they then be kicked out of the Euro and have to recreate the Drachma which would essentially be a worthless currency?
Greece .. assuming other Euro currency members sign off on the Bail out what happens if Greece doesnt vote for it? Unlikely but what if?
Next Portugal has to put in xBillion Euros which itself doesnt have so would have to borrow at high market rates...Surely not great for them but part & parcel of being in the Eurozone. What happens if say Portugal in 6 months needs a bail out then say Italy etc etc clearly there would only be France & Germany able to bail them out but where is the point where they say Nein? And also that raises the question if its ok to bail out Greece then why is it not for anohter country - clearly affordability will be a key issue.
Next is if Greece did not accept the Bail out would they then be kicked out of the Euro and have to recreate the Drachma which would essentially be a worthless currency?
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