BOE Base rate held, But what if it was not?
BOE Base rate held, But what if it was not?
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Discussion

Manks

Original Poster:

28,176 posts

252 months

Friday 8th April 2011
quotequote all
The MPC held base rate at 0.5% yesterday amid continued calls for it to be raised against a backdrop of high inflation.

But if they had raised rates by 0.25% yesterday, or they do next month, what would be the impact upon inflation?

Would it have the desired result, or is consumer spending under sufficient pressure now anyway? Would it simply cause economic damage without achieving its aim?

What do you think?

anonymous-user

84 months

Friday 8th April 2011
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I don't see a rise in interest rates at the moment making any difference, inflation is not exceeding it's target due to the economy overheating. It is down to other external pressures. VAT Rise, increase of price of fuel affecting just about everything physical that we buy and the devaluation of the pound making imports more expensive.

anonymous-user

84 months

Friday 8th April 2011
quotequote all
Bluequay said:
I don't see a rise in interest rates at the moment making any difference, inflation is not exceeding it's target due to the economy overheating. It is down to other external pressures. VAT Rise, increase of price of fuel affecting just about everything physical that we buy and the devaluation of the pound making imports more expensive.
+1

fido

18,918 posts

285 months

Friday 8th April 2011
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Bluequay said:
the devaluation of the pound making imports more expensive.
-1. The level of interest rates are a big factor in the value of the pound relative to other currencies. We are kidding ourselves if we think we can get away with near-zero rates forever .. there's no such thing as a free lunch, or free money.

carreauchompeur

18,328 posts

234 months

Friday 8th April 2011
quotequote all
Would an increase in the base rate have a direct impact on mortgage SVRs? I am currently "stuck" on an SVR mortgage, since the value of my property has declined since purchase and the mortgage was a high percentage LTV.

I suspect a lot of people are in the same position, since a lot/most of the promotional 2-5year deals struck in the boom years have now expired. If the SVRs start climbing up then I suspect a lot more people will be getting into financial difficulties.

anonymous-user

84 months

Friday 8th April 2011
quotequote all
fido said:
-1. The level of interest rates are a big factor in the value of the pound relative to other currencies. We are kidding ourselves if we think we can get away with near-zero rates forever .. there's no such thing as a free lunch, or free money.
The main reason for the devaluation of the pound is down to quantitive easing not our interest rates, if you print more money it's value lessens against countries who don't. That's why we haven't devalued much against the dollar as the US have also followed a similar policy but have experienced a massive devaluation against the Aus$ as they haven't.

Manks

Original Poster:

28,176 posts

252 months

Friday 8th April 2011
quotequote all
carreauchompeur said:
Would an increase in the base rate have a direct impact on mortgage SVRs? I am currently "stuck" on an SVR mortgage, since the value of my property has declined since purchase and the mortgage was a high percentage LTV.

I suspect a lot of people are in the same position, since a lot/most of the promotional 2-5year deals struck in the boom years have now expired. If the SVRs start climbing up then I suspect a lot more people will be getting into financial difficulties.
Yes, as base climbs so will SVRs generally.

It seems to me that from an inflation control in the wider market perspective, inflation is in itself managing the problem. The cost of "essentials" is taking money out the consumer's pocket, reducing the available spending power for other things. The economy is not expanding on the back of an expansion of consumer disposable income.

I am not seeing much wage inflation.

I also believe that the MPC recognises that there are a great many people in your position and whilst inflation is the overriding priority it is not their only consideration.







youngsyr

14,742 posts

222 months

Friday 8th April 2011
quotequote all
carreauchompeur said:
Would an increase in the base rate have a direct impact on mortgage SVRs? I am currently "stuck" on an SVR mortgage, since the value of my property has declined since purchase and the mortgage was a high percentage LTV.

I suspect a lot of people are in the same position, since a lot/most of the promotional 2-5year deals struck in the boom years have now expired. If the SVRs start climbing up then I suspect a lot more people will be getting into financial difficulties.
The impact on SVRs of a BoE rate change tends to be dependent on which direction the BoE rate moves - if it goes up, expect SVRs to be increased immediately and for at least the same amount.

If the BoE goes down, some SVRs won't move, some won't move the full extent of the BoE move and those that do will be delayed for as long as the banks feel that they can get away with it.

fido

18,918 posts

285 months

Friday 8th April 2011
quotequote all
Bluequay said:
The main reason for the devaluation of the pound is down to quantitive easing not our interest rates, if you print more money it's value lessens against countries who don't. That's why we haven't devalued much against the dollar as the US have also followed a similar policy but have experienced a massive devaluation against the Aus$ as they haven't.
Agree that QE is the big driver in the short-term (and has already resulted in inflation between 2008 and now) but in the medium to longer term near-zero rates signal a inflationary solution to our debt problems. Well at least some of the big fund managers agree with me, or vice-versa.

http://www.ftadviser.com/InvestmentAdviser/Investm...

"The Bank, it seems, is prioritising supporting growth and assuming that this objective can be traded off against higher inflation. Such an approach is both misguided and in conflict with its inflation-targeting remit"

Edited by fido on Friday 8th April 10:32

Gargamel

16,392 posts

291 months

Friday 8th April 2011
quotequote all
Because one way out of this mess is devaluation of the pound, so low interest rates - especially when the Eurozone are raising theirs and a high inflation rate will help to mitigate the size of our debt, an improve our global competitiveness.



It is a deliberate policy dressed up as an unintended consequence (or blundering by merv)

Frankeh

12,558 posts

215 months

Friday 8th April 2011
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It feels like I'm never going to see a 7% savings account ever again..
Fml.

illmonkey

19,827 posts

228 months

Friday 8th April 2011
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Frankeh said:
It feels like I'm never going to see a 7% savings account ever again..
Fml.
Ah yes, but my tracker mortgage is low, so I can over pay. Good times.

Frankeh

12,558 posts

215 months

Friday 8th April 2011
quotequote all
illmonkey said:
Ah yes, but my tracker mortgage is low, so I can over pay. Good times.
FTB gets screwed again..

youngsyr

14,742 posts

222 months

Friday 8th April 2011
quotequote all
Gargamel said:
Because one way out of this mess is devaluation of the pound, so low interest rates - especially when the Eurozone are raising theirs and a high inflation rate will help to mitigate the size of our debt, an improve our global competitiveness.



It is a deliberate policy dressed up as an unintended consequence (or blundering by merv)
Telegraph said:
...That's the conventional wisdom, anyway, but it is also largely rubbish. Wednesday's analysis of the public finances by the Office for Budget Responsibility provides further evidence of why elevated inflation can never be economically benign.

Three powerfully negative effects are identified by the OBR. As a result of higher than expected inflation, living standards will fall for longer than previously anticipated, public borrowing will end up higher, and real terms cuts in public spending will have to be deeper...
Full article: http://www.telegraph.co.uk/finance/comment/jeremy-...



anonymous-user

84 months

Friday 8th April 2011
quotequote all
fido said:
Agree that QE is the big driver in the short-term (and has already resulted in inflation between 2008 and now) but in the medium to longer term near-zero rates signal a inflationary solution to our debt problems. Well at least some of the big fund managers agree with me, or vice-versa.

http://www.ftadviser.com/InvestmentAdviser/Investm...

"The Bank, it seems, is prioritising supporting growth and assuming that this objective can be traded off against higher inflation. Such an approach is both misguided and in conflict with its inflation-targeting remit"

Edited by fido on Friday 8th April 10:32
I agree that keeping interest rates low is storing up inflationary problems for the future, but the question was would raising interests rates now have any effect on inflation and I stand by my original statement that it wouldn't. A rise in interest rates wouldn't cause a stampede of buyers for our currency to bring the cost of imports down, especially as we haven't ruled out further QE in fact at least one member of the MPC has been calling for an increase in the past months.

LooneyTunes

9,472 posts

188 months

Friday 8th April 2011
quotequote all
carreauchompeur said:
Would an increase in the base rate have a direct impact on mortgage SVRs? I am currently "stuck" on an SVR mortgage, since the value of my property has declined since purchase and the mortgage was a high percentage LTV.

I suspect a lot of people are in the same position, since a lot/most of the promotional 2-5year deals struck in the boom years have now expired. If the SVRs start climbing up then I suspect a lot more people will be getting into financial difficulties.
This ^^^ is why they're now between a rock and a hard place. Add in the fact that margins over base on new mortgage deals appear to have increased and even modest rises in base rate could have a significant impact on borrowers...

BoRED S2upid

21,072 posts

270 months

Friday 8th April 2011
quotequote all
We would all be penniless, homelessness would skyrocket, people would be throwing themselves under trains...

Or we wouldn't notice much difference, even if it increased by 1%.

carreauchompeur

18,328 posts

234 months

Friday 8th April 2011
quotequote all
BoRED S2upid said:
We would all be penniless, homelessness would skyrocket, people would be throwing themselves under trains...

Or we wouldn't notice much difference, even if it increased by 1%.
I agree that the mountains of people who are merrily overpaying trackers at the moment wouldn't be affected, however I think that a significant number of people would start to feel increasingly squeezed. 1pc on a 100k mortgage is nearly £100/month extra. This obviously impacts on people's disposable income which doesn't help the economy...

youngsyr

14,742 posts

222 months

Friday 8th April 2011
quotequote all
carreauchompeur said:
BoRED S2upid said:
We would all be penniless, homelessness would skyrocket, people would be throwing themselves under trains...

Or we wouldn't notice much difference, even if it increased by 1%.
I agree that the mountains of people who are merrily overpaying trackers at the moment wouldn't be affected, however I think that a significant number of people would start to feel increasingly squeezed. 1pc on a 100k mortgage is nearly £100/month extra. This obviously impacts on people's disposable income which doesn't help the economy...
It's all well and good saying a modest interest rate rise would have a significant impact on many mortgage holders, but this ignores the fact that many have seen their mortgage repayments drop through the floor over the past 3 years. Even a 1% increase in interest rates would still leave these people's mortgage repayments lower than they were 2 years ago.

LooneyTunes

9,472 posts

188 months

Friday 8th April 2011
quotequote all
youngsyr said:
It's all well and good saying a modest interest rate rise would have a significant impact on many mortgage holders, but this ignores the fact that many have seen their mortgage repayments drop through the floor over the past 3 years. Even a 1% increase in interest rates would still leave these people's mortgage repayments lower than they were 2 years ago.
Which would be fine... if they've not reallocated the cash elsewhere (to deal with general inflation for example).