BoE Base Rate, What if...
Discussion
Efbe said:
Hadn't really considered it going down, but I suppose it could quite as easily, and could well be instigated by a further downturn in the economy, which could quite possibly happen with the uncertainty over the EU vote.
Downturn in the economy will be barely affected by uncertainty of the EU vote IMO. What will be a factor is numbers are not looking good out of the USA, and in 2008 the can was kicked rather than any problems solved.Money is a market like any other, subject to the laws of supply and demand, with interest being the "price" which elasticities effect. The reason interest rates have remained so low is QE, which dumped immense amounts of money onto the market, deflating interest rates. This should have caused inflation, which in turn would have triggered interest rate rises.
However this has not happened yet because of a number of factors. A sluggish economy in our main trading partners, a collapse in commodity prices, uncontrolled immigration keeping wages down and a high exchange rate for the pound. The huge problem is that the artificially low rates have cause huge distortions throughout the economy as people indulge in an orgy of debt fueled spending. Bubbles in asset values, from house prices to GT3 and Monet values are all the evidence you need. When interest rates go up there are going to be a lot of tears out there as values correct and the bubbles are pricked.
And they will go up. The commodity price benefit has worked through, and some are going back up. The pound has become less valuable. And the National Living Wage is going to increase the cost of a lot of labour by 50%. The cost of money will return to normal. Andrew Sentance is the economist to read on this, he was on the MPC and is considered to be a hawk.
Of course the cheap money proponents have an answer and they call it a "helicopter drop". Basically just printing money and dumping it into the economy, by, say, giving every tax payer a few thousand pounds one month of newly created money. But obviously this would just dilute the existing money supply and so precipitate further inflation.
As has been noted earlier the government, as usual, have become a huge problem in the market. UK official government debt is more than £1.5tn or £46K per taxpayer. But if you factor in all government liabilities, including state and public sector pensions, the real national debt is closer to £4.8 trillion, some £78K for every single person in the UK. Servicing this debt, even at very low interest rates, costs us more than we spend on national defence. As money becomes tighter the government demand for it will push up interest rates, so the cost of servicing it will increase, increasing the deficit further in a vicious circle.
IMHO we should have built our way out of recession by massively relaxing planning permission, as has worked in previous recessions. Throwing money at the economy with QE has created huge economic distortions that must blow up in our faces. Gordon Brown created a ticking time bomb.
However this has not happened yet because of a number of factors. A sluggish economy in our main trading partners, a collapse in commodity prices, uncontrolled immigration keeping wages down and a high exchange rate for the pound. The huge problem is that the artificially low rates have cause huge distortions throughout the economy as people indulge in an orgy of debt fueled spending. Bubbles in asset values, from house prices to GT3 and Monet values are all the evidence you need. When interest rates go up there are going to be a lot of tears out there as values correct and the bubbles are pricked.
And they will go up. The commodity price benefit has worked through, and some are going back up. The pound has become less valuable. And the National Living Wage is going to increase the cost of a lot of labour by 50%. The cost of money will return to normal. Andrew Sentance is the economist to read on this, he was on the MPC and is considered to be a hawk.
Of course the cheap money proponents have an answer and they call it a "helicopter drop". Basically just printing money and dumping it into the economy, by, say, giving every tax payer a few thousand pounds one month of newly created money. But obviously this would just dilute the existing money supply and so precipitate further inflation.
As has been noted earlier the government, as usual, have become a huge problem in the market. UK official government debt is more than £1.5tn or £46K per taxpayer. But if you factor in all government liabilities, including state and public sector pensions, the real national debt is closer to £4.8 trillion, some £78K for every single person in the UK. Servicing this debt, even at very low interest rates, costs us more than we spend on national defence. As money becomes tighter the government demand for it will push up interest rates, so the cost of servicing it will increase, increasing the deficit further in a vicious circle.
IMHO we should have built our way out of recession by massively relaxing planning permission, as has worked in previous recessions. Throwing money at the economy with QE has created huge economic distortions that must blow up in our faces. Gordon Brown created a ticking time bomb.
Jockman said:
So if neither of the variables in the delta alter then there is no need to alter the mortgage rate? (apologies if I've misunderstood).
No. All I mean is the absolute spread is relatively fixed.Post-crunch in the chart it is around 350bps (although has dropped since then).
That means at 50bps BoEBR, average mortgage costs 4%.
And if rates went up (as you say) to say 2% the average rate would immediately jump to 5.5%.
The spread (350bps) is fixed, because that is what banks need to charge to make a profit.
The same would happen if BoEBR went from 0.5% to 0% - the average rate would be 3.5%.
The reason that there was a change in spread from the pre-crunch 200bps to post-crunch 350bps is nothing to do with what the BoEBR was at the time.
So saying, "mortgage rates stopped tracking BR below a certain point" is wrong.
Low interest rates and then QE in desperation are attempts to increase the money supply. Try googling for "UK M3 money". You should get a link to tradingeconomics and it'll let you draw graphs. If you can find an M4 chart, even better. M3 has flat lined since the crisis and M4 is still shrinking. From a monetary point of view, we are still in the s
t.
t.ATG said:
Low interest rates and then QE in desperation are attempts to increase the money supply. Try googling for "UK M3 money". You should get a link to tradingeconomics and it'll let you draw graphs. If you can find an M4 chart, even better. M3 has flat lined since the crisis and M4 is still shrinking. From a monetary point of view, we are still in the st.
Nah! This thread proves everyone is sensible and we'll be absolutley fine: http://www.pistonheads.com/gassing/topic.asp?h=0&a...t.
ATG said:
When I see that the market price of my aging Chimaera has increased I start looking for four blokes on horses and the anti-Christ.
gibbon said:
Slightly off topic, but I was reading something about a guy thinking his 2002 996 c2 tip in bogo silver and savanah grim beige interior was going up in value. That was never really a good car, the worlds gone mad.
Weak signals! Some of the crap considered 'classic' now is not a sign of good things to come. Least of all the actual exotica which will be back on the market having not been well maintained due to cost... Looks like a bubble, smells like a bubble....pop!walm said:
Jockman said:
So if neither of the variables in the delta alter then there is no need to alter the mortgage rate? (apologies if I've misunderstood).
No. All I mean is the absolute spread is relatively fixed.Post-crunch in the chart it is around 350bps (although has dropped since then).
That means at 50bps BoEBR, average mortgage costs 4%.
And if rates went up (as you say) to say 2% the average rate would immediately jump to 5.5%.
The spread (350bps) is fixed, because that is what banks need to charge to make a profit.
The same would happen if BoEBR went from 0.5% to 0% - the average rate would be 3.5%.
The reason that there was a change in spread from the pre-crunch 200bps to post-crunch 350bps is nothing to do with what the BoEBR was at the time.
So saying, "mortgage rates stopped tracking BR below a certain point" is wrong.
Jockman said:
Ahh...starting to get the picture. So the 3.5% margin is based on an average rate. Was the increase to 350bps an attempt to remove an element of risk?
The rise from a 200bps spread to a 350bps spread was owing to a bunch of things, all of them credit crunch related.- Fewer players - less competitive market, wider spread.
- More due diligence on lending - higher costs to the bank, wider spread to recoup that cost.
But yes, mostly it was the simple fact that they THOUGHT 200bps would give them enough profit to cover defaults, but actually the credit crunch proved them dead wrong and they needed FAR more because the loans were a lot more risky than they thought!
walm said:
The rise from a 200bps spread to a 350bps spread was owing to a bunch of things, all of them credit crunch related.
- Fewer players - less competitive market, wider spread.
- More due diligence on lending - higher costs to the bank, wider spread to recoup that cost.
But yes, mostly it was the simple fact that they THOUGHT 200bps would give them enough profit to cover defaults, but actually the credit crunch proved them dead wrong and they needed FAR more because the loans were a lot more risky than they thought!
Is that actually true?- Fewer players - less competitive market, wider spread.
- More due diligence on lending - higher costs to the bank, wider spread to recoup that cost.
But yes, mostly it was the simple fact that they THOUGHT 200bps would give them enough profit to cover defaults, but actually the credit crunch proved them dead wrong and they needed FAR more because the loans were a lot more risky than they thought!
Actual default rates have been pretty minimal, certainly compared to peak historical levels. At best it is an increased 'uncertainty' premium rather than an additional margin for increased expected defaults. Not least because most of this stuff is securitised to bankruptcy remote vehicles and hence doesn't sit on the bank balance sheet in the first place!
More likely the need for higher margins is a result of the massive amount of additional regulation and capital requirements that have been foisted on banks since the crisis.
Those continually calling for tighter regulation me higher capital often seem unaware as to where the cost of this is met...!
sidicks said:
Is that actually true?
Actual default rates have been pretty minimal, certainly compared to peak historical levels. At best it is an increased 'uncertainty' premium rather than an additional margin for increased expected defaults.
More likely the need for higher margins is a result of the massive amount of additional regulation and capital requirements that have been foisted on banks since the crisis.
Those continually calling for tighter regulation me higher capital often seem unaware as to where the cost of this is met...!
That is a great question actually.Actual default rates have been pretty minimal, certainly compared to peak historical levels. At best it is an increased 'uncertainty' premium rather than an additional margin for increased expected defaults.
More likely the need for higher margins is a result of the massive amount of additional regulation and capital requirements that have been foisted on banks since the crisis.
Those continually calling for tighter regulation me higher capital often seem unaware as to where the cost of this is met...!
I only know most of the detail from my work in the US, and I may have assumed that it was similar here when the fallout might have been far less.
You may well be right, sorry!
walm said:
That is a great question actually.
I only know most of the detail from my work in the US, and I may have assumed that it was similar here when the fallout might have been far less.
You may well be right, sorry!
I only know most of the detail from my work in the US, and I may have assumed that it was similar here when the fallout might have been far less.
You may well be right, sorry!
My understanding is that the US is a non-recourse market - if you can't afford your mortgage you simply give the keys back and aren't at risk for any further losses if the value of the house (fire sale) is less than the amount borrowed.
This is not the case in the UK where you still owe any shortfall, so people keep paying their mortgages as long as possible.
Hence actual losses in the UK would be expected to be much lower than in the US.
Edited by sidicks on Friday 22 April 16:02
sidicks said:
My understanding is that the US is a non-recourse market - if you can't afford your mortgage you simply give the keys back and aren't at risk for any further losses if the value of the house (fire sale) is less than the amount borrowed.
It varies state by state but in many, yes!I would still be amazed if the standard default assumptions haven't risen a bit in the uk.
Going from "no they never will" to "oooh... perhaps they may now and again" leads to quite a big difference on the margin you need to charge!
Default rates have been remarkably low in the UK (comfortably sub 1% of mortgages outstanding), I suspect in part because it's harder to walk away from a mortgage debt in the UK. We haven't had the same fall in house prices in the UK that we've seen in some part of the US and so, combined with the recourse on UK loans, you don't see the same willingness to simply hand the keys back and walk away as was seen in Florida and the like.
fblm said:
Uk rates arnt going up any time soon and if they did the BoE would be forced to cut em again pretty quick. The over borrowed have safety in numbers! In any event why would they go up?
Inflation?Asset bubbles?
Exchange rate competitiveness?
Market forcing government to pay higher rates?
etc etc etc
I'm not sure the Bank of England gives much of a st about where sterling is, they've been fairly explicit that they see it as a balancing mechanism. Asset bubbles maybe, although they've adopted a prudential approach on housing and we'll see how that works out. Inflation's always a possibility, but given productivity it's hard to see much unless they start the printing machines again.
t about where sterling is, they've been fairly explicit that they see it as a balancing mechanism. Asset bubbles maybe, although they've adopted a prudential approach on housing and we'll see how that works out. Inflation's always a possibility, but given productivity it's hard to see much unless they start the printing machines again. Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff