This story in the Telegraph caught my eye. Just look at the graph, it shows the market view of interest rate expectations; In short the high inflation figures hitting the economy have switched the market to expect UK interest rate rises this year.Raising interest rates in the face of a recession will cause the economy to go 'off a cliff' - no if's or but's about it.
Higher interest rates will also mean higher borrowing costs for the government when it is already in deep dark water over the excessive borrowing it is needing at the moment. That will only get worse as tax receipts fall and unemployment claims increase.
Ouch this is going to be tough. As of today all my hopes of a soft landing are gone; the next 18 months is going to really hurt if the above scenario comes true.
I know some of my readers think high interest rates will do us good, but they won't. Forcing small businesses to the wall, homeowners to be repossessed and the government into huge debt is not the answer to our economic problems. When that happens inflation will be a distant memory as the economy shuts down and the bloated public sector goes on strike.
Inflation now is not an indication of inflation tomorrow, it is a reflection of th recent past; as such the BOE needs to keep a sound mind as regards interest rates at this most difficult time.
What do you reckon to Sackers' view on DE- / IN- (flation), CU ?
ReplyDeleteThat's a good chart - it looks to me like 2-year swap rates have been a very good leading indicator of BoE decisions for the past couple of years. So why would they be wrong this time?
ReplyDeleteReally, the thing we need right now is an election.
ReplyDeleteThe main problem right now is the cost of living, and the biggest parasitic influence there is the dead hand of State taxation and inefficient redistribution.
We need tax cuts and welfare cuts (time-limited benefits, anyone?) and we need them sharpish, before the economy collapses and forces them onto us.
Your "18 months" + June '08 is Dec '09 - pretty close to my turning point hunch. Time to place bets on the exact timing? Karl Denninger (March 26, 2008) says:
ReplyDelete"This is a very simple timing signal that requires no more than 2 minutes a week to monitor and yet if you followed it over the last 20 years it has produced very few whipsaws and on balance has had you out of the market for all major bear trends and in the market for all major bull trends.
The use of this strategy is simplicity itself - you buy the SPY (or a S&P 500 mutual fund such as VFINX) when the 20 week moving average crosses the 50 week moving average by more than 1%, and you go to cash (or treasuries) when the 20 week moving average crosses the 50 week moving average in the downward direct by more than 1%."
Faites vos jeux, mesdames, messieurs.
Aren't 2-year swap rates Libor Rates?
ReplyDeleteIn which case the rates incorporate the bank lending spread which has recently blown out, and hence is not a predictor of the bank of England rate?
The 2% target is going to reek havoc with this country. It is a fairly clumsy tool which does not distinguish between different causes of inflation.
ReplyDeleteHigh inflation tends to cause strikes as unions try to force employers to match FUTURE inflated prices with CURRENT wage claims. either the employers or the government like this, since the rising wage claims and lower productivity feed into the inflation cycle. All very dangerous. At the same time rising commodity prices reduces net disposable income reducing spending on other goods. This squeezes disposable spending so much it causes a recession with increasing unemployment. Which is why right now the food markets and oil companies are announcing huge profits but the clothes shops are in the doldrums. So basically we are screwed whether interest rates go up or down. Give inflation its head and we will end up living in a feudal society in no time. Better to get the money supply under some sort of control, in my opinion, so you can start working on the structural problems in the UK economy (too much wealth spending and too little wealth earning - simple really).
ReplyDeleteIn fact, the interest rate predictions in any case are only matching the BoE rate to the actual bank rate increases, caused by the credit crunch. In real terms it might not have such a big impact, since bank rates have now disconnected themselves from BoE rates (i.e. dare I say that they are starting to act as if they are in a genuine free market, and not in some sort of centralised economy where a remote government determines what Mr Jones of 14 Acacia Avenue, Grimethorpe pays for his mortgage).
Problem is that debt spending over a decade is messing with the laws of nature. Mother nature is now going to take the big baseball bat of macro-economic fiscal rectitude and beat us half to death with it to teach us a lesson which we will certainly forget in 30 years time.
Personally I'm all for high interest rates to choke off inflation. Why? Because I work for a German company and whats left of my mortgage is fixed for another 6 years.
Anon, time-limiting benefits is nonsense. If they have to be time limited, they are clearly too generous. Benefits can never replace income from working, but it seems fair enough to me to have a universal cash top-up for low and non-earners in exchange for waiving the much-larger personal allowance (that we should have for all average-and-above earners).
ReplyDeleteAh ... Citizen's Basic Income!
At 5%, interest rates are about "neutral" are they not - inflation being about 5% more or less. Surely the thing to do is throw the CPI target to the wind and hold rates until the recession which we are due starts to cut retail and service inflation?
ReplyDeleteAll true, but if the credit party's got to stop, then, erm, the party's got to stop, no?
ReplyDeleteFiddling figures so that the party can go on a bit longer will just make the correction even worse when it finally does come.
Tough, yes, but tougher still if we duck it.
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