Saturday, 15 January 2011

Bank of England; History says they will get it wrong on interest rates

Two charts for the weekend. One shows UK GDP since before the recession and the other the Bank of England reaction with interest rates.

The key part to look at is the timing in 2007/8. Northern Rock went under in 2007, that was the start of the credit crunch. Yet, despite calls from all sides, the Bank of England was concerned at rising inflation and raised rates. In fact, only the Lehman crash made them take any action. Suffice to say this is not a glorious phase in the Bank's history.They did better in the crisis, but now that is over, its 1-1 with 20 minutes still to play.

It does signal how slow the Bank of England are to sense the change in the macro-inflationary environment; which bodes ill for the end of the current recession. The Bank seemed fixed on not raising rates for some time to come, yet inflationary factors are everywhere. Apparently not people's pay, but that can change in an instant.

History says the Bank are too slow to move, and it does look like history will repeat itself. of course, this is GREAT news for those who are heavily indebted as the price of money is held low their real debt is eaten up. Less good for savers, as has been the trend for sometime now.


Anonymous said...

I still think that to a great extent increasing base rates will not have a big impact on the majority of private individuals or businesses.

Highly credit-worthy people / businesses (I cannot speak for v. large businesses / rich people or v. poor people) borrow between 5-9% if lucky and asset backed and a lot more (9-15%) otherwise.

If Interest rates triple to 1.5%, this may well become 6.5 - 16.5 - 30%->10%

So, not too good for those with big interest only mortgages, otherwise not much change.

measured said...

this is GREAT news for those who are heavily indebted as the price of money is held low their real debt is eaten up Well, Osborne owes a bob or too.

These inflationary pressures are outside the Bank's control. Furthermore, consider the pressures that will be passed on in everything from increased wheat prices. Foreign workers have to feed their families.

Now, if interest rates are put up, mortgage rates go up and that makes the pressure for wages increases rise even more. Also higher rates would exacerbate the financial pressure on companies.

I don't know if they will get it right, but it would not have done much to put up interest rates this month.

It isn't going well for Osborne. Btw is sovereign debt still Tier 1 capital for the banks? :-o (Basle I, unchained in Basle II)

::[ducks below parapet]::

Mark Wadsworth said...

Those two charts look identical to me. What have I missed?

I'm not sure what relevance the BoE base rate has to anything.

Imagine you are the high st bank and people are prepared to pay (say) 4% for a mortgage loan and the BoE is prepared to pay 0.5%.

The mix between putting your money on deposit with BoE (as spare cash in case the government really starts calling in the bail out funds of allegedly £400 - £800 billion) and lending it out at much higher rates is not going to be much affected if the Boe then starts paying 1% or 2%, is it?

Aren't mortgage interest rates (apart from those contractually agreed as BoE tracker rates) dictated more by corresponding bond interest rates?

Budgie said...

The MPC (BoE) will not put up its rate this side of the budget. They know which side their bread is buttered.

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