GOLDMAN 555

Looks like the government has failed to keep the lie about no inflation under wraps. The problem is here.


By the way the upshot of this is mortgage rates will head towards 10%+.....soon

PeteBrant

No we won't.

The rise in inflation is as a direct result of the increase in Fuel and food prices.

Increasing the interest rate will not change the fact that people need to buy these things, and will thesefore have zero efffect on inflation.

Hence a drop in interest rates is unlikely, but so is a rise.

StickyMicky

link missing?

PeteBrant

It's on the BBC site - CPI has hit 3.3%

Mitchy260

To curb inflation Pete, surely mortgage interest rates have to go up?

Prediction of 3 interest rate rises in the next 6 months...

Inflation shock leaves markets fearing three interest rate increases this year - Telegraph

I think it is very highly likely

(Those of you pondering on fixed rate mortgages, fix fix fix now now now )

The average 75% LTV mortgage sold last month was 6.27% (So no-where near the 5% BOE BR)

Wonder what they'll be with BOE BR @ 5.75% (+1.27% above at moment)

Take that into consideration with the falling housing market, the sub 75% LTV mob at the moment may have to remortgage at 90-95% LTV in a year. We could possibly be seeing rates as high as 8-9%

PeteBrant

How will raising interest rates curb inflation?

If your mortgage goes up by half a percent, will you stop having to go to work or eating?

The problem is not overspending by the public on luxry goods because we have lots of spare cash. Thats when raissing interest rates affects inflation.

We are spending lots of money because we don't have a choice, hence a rates rise will serve no purpose other than to make people more miserable.

john banks

They do have a mandate to control CPI using interest rates, but they always project it two years out and have been missing it greatly recently. I can see why they don't raise rates though because it would make the economy crash even faster.

I think that if they don't then GBP will get trashed, already is a little bit. As a saver I don't like negative real interest rates which we risk/are getting near to on some measures of inflation compared to interest rates. I hold some gold as a hedge, it should do well in these circumstances.

The Fed like to use core inflation which excludes food and energy, the reasoning being that these are external/outwith their control.

Mitchy260

Pete, i assumed thats the way the government controlled inflation? By hiking up interest rates?

edit... JB answered above

Mitchy260

Mortgage rates soar to highest in eight years as Bank interest freeze fails to apply brakes | Mail Online

Average IR sold in May 08 = 75% LTV 6.27%

Not looking rosey, especially for those coming off of artificially low 4% fixed rates soon.

Leslie

RPI and CPI are calculated in a manner convenient to the authorities.

Real inflation is very much worse and that is what will really affect interest rates etc. in the future.

Les

PeteBrant

It's one way ,yes ,but it only works in certain circumstances.


The problem with rising them, is that you risk affecting the economy adversely. Now this isn't a problem when everyone has money coming out of thier ears and we are all spending it on new cars, and iPods and Plasma TV's, beacuse a slight curb in spending is good, and it won't mean that "J Bloggs & Son Family Butcher" go out of business, because the economy can handle it.


The problem arises when an interest hike is brought in with a fragile economy, such as we have now.
As I said, the rises in spending are not down to us frittering away money on niceties, it is being spent on basic goods - Food, gas, electric, petrol, Diesel.

Raising interest rates in these circumstances, as John says, will just expediate a recession. Why? Because rather than go to "J Bloggs & Sons" for your sausages, you will go to Tesco Value. Rather than get thart new sofa to replace the old one, you'll wait - And all of this has a knock on effect.

PeteBrant

They really, really, really, aren't.

There is an argument for a basic "cost of living" rate. But CPI has weighting to ensure that the cost of, say, a loaf of bread, has more impact than the cost of a plasma TV.

lozgti

We fixed for 10 years at 5.25%

Whatever people want to try and argue about why things won't spiral out of control,I prefer the common sense approach.

Somehow this country has had wacky mortgage rates for far too long,presumably to fuel the housing purchase extravaganza.That is over*

It's all over now and the true situation re inflation is emerging and we probably will get back to normal rates on mortgages too ie about 10%

*and just to say that again,it really does seem the good times have gone and normality is back

MJW

I don't think there will be any significant interest rate hikes as the housing market is now just beginning to see a glimmer of hope with house prices dipping. An interest rate increase would result in knocking people off the ladder who need to get on it. Also good luck in finding a fixed rate mortgage without having to pay a massive fee, they're like rocking horse manure according to the last broker I spoke to.
Anyway, even if the BoE keep the rate the same the high street banks will probably ignore it as they have done recently as they're all strapped for cash themselves.

Mitchy260

Well 6.27% @ 75% LTV last month, its only a sign of things to come. Some 90/95% mortgages have already gone through the 7% bracket.

I fixed last June for 5 yrs at 5.89% and thought it was a crap rate at the time. Glad i fixed now, god help those that are coming off low rates any time soon

Mitchy260

I believe there are 2 rates, the BOE BR and the libor rate.

Libor i believe is what banks lend money to 1 another at. I believe current libor rate is over 6% so BOE BR has very little to do with it.

Pete..You may be able to correct me?

PeteBrant

Oh im just an interested observer - JB and fastbloke are experts.

But yes, the LIBOR rate is the rate at which banks lend (unsecured) to each other - And it's used for the basis of all sorts of financial deals.

NACRO

As Mitchy says it would appear that the BofE rate setting seems to have little to do with the actual LIBOR rate.
Interest rates on mortgages have gone up while the rate was cut and then held.

In my opinion the BofE needs to raise at least twice this year (if not more) and it needs to do it quick to reduce inflation. Sadly I think political pressure will mean they will hold back despite it having no real effect on LIBOR and thus the housing market.

One positive note however, these are interesting times we are living in and there remains the potential to profit from the mess that is the UK economy.

unclebuck

"Government's measure of inflation might as well stand for Chinese Prices Index"

A more accurate assessment here:

Government's measure of inflation might as well stand for Chinese Prices Index - Telegraph

Still underestimated imo - more like 12-15% and rising.

Can't wait for interest rates to start rising again.

john banks

I'm not an expert, just trying to profit from the mess as NACRO suggests.

fastbloke is a financial professional.

Mitchy260

Surely if anyone wants to make a quick buck with housing at the moment, sell now, bank the profit into a high interest account. Wait until house prices bottom out, and then buy again?

Too easy??

JB...I believe thats what you are doing, you just done it a lot earlier??

PeteBrant

Would raising the interst have a hit on inflation when it is "essentials" that are driving up prices?

NACRO

An interesting question and I suspect the reason that the BofE will hold back (incorrectly in my opinion) from increasing rates next time round. I assume they will wait to see what effect inflation is having on the general level of consumer spending and on wages and act accordingly.
Something I think people aren't taking into account is that so called 'essentials' aren't necessarily being consumed in an effecient manner. Perhaps one side effect of these price rises is that people are going to stop being so profligate with them?
Certainly I see interest rate rises as absolutely necessary in order to stop the price of these commodities rising even faster than they are at the moment with the added effects of inflation.
Interest rates are a blunt tool but just about all the BofE has to try to stave off rampant price increases.

john banks

Mitchy260, I wouldn't like to try to sell now, except perhaps where you live. Maybe I called it about 10 months early.

The problem with high interest accounts is getting a real return after tax and inflation. So I have a mixture of 7% fixed 1 year, RPI linked NS&I, equities and precious metals. This, along with savings from renting vs interest only mortgage on similar properties should mean I outperform the house price index to about 2011 by somewhere between 10 and 20% a year.

PeteBrant

Certainly a valid point - If a thing happens to make us a less wasteful society, then there is certainly some good in that.
Agreed re:commodities - my only fear is that there is a fine balance at the moment, and it won't take much to tip us into recession - Despite the minimal growth forecasts announced yesterday. And it will be "the man in the the street" that will bear the brunt of it.

NACRO

The UK is already in recession Pete depending on what definition you want to use.
The real question is how can the impact of the fall be cushioned. An increase in rates would be a good start. The housing market is screwed, all intervention on it's behalf is going to do is to make the end result all the more worse.

PeteBrant

Agreed we are in recession with regards to the housing market - but we aren't in terms of the economy as a whole - Our GDP is still projected to be up on last year (albeit by a mere 1.5%).

I absolutely agree that intervention to delay a house market recession is completely the wrong this to do, for precisely the reason you outline - It just makes the inevitable hit even harder. However, I am not sure that trying to avert an "overall" recession has quite the same consequences?

Mitchy260

Im in a part of the country that i would think would be pretty safe from a crash, but i have just recently noticed monthly drops up this way too. Still strong YOY growth at 15-20% but its dwindling away every month now.

The brave man in me says... sell now, bank the profit, let the market crash, buy again when market is low and that way i am not watching any profit/equity i have made dwindle away.

The sensible man in me says..... stay put and trust my instincts that Aberdeen will survive the ''crash'' Along with the hassles of selling, moving, renting and moving a young family.

Make a quick buck now or ride the storm, decisions decisions

lozgti

What actually is our economy made up of now?

What do we make or sell that keeps this country going?

I thought it was a housing based economy that kept labourers in jobs and the public generally down the shops?

john banks

Mitchy260, you could have shorted the Halifax house price index to hedge or partly hedge any drops in prices. The trouble is the spreads on this are a bit wide, there are financing costs and also the price you can get now already reflects the expectation of a crash, so you only make money on a short if it crashes even more.

If I still owned a house, by now I would no doubt have taken out a short on the index.

As for you, living in Aberdeen and working in the oil industry (IIRC) has already been a bit of a hedge for you already against inflation, its just that you might have already seen the good times.

For me, working in the bloated public sector has also had its payoff, although I would have given it up to remove the present bust and government interference/bloat in public services.