Friday, 18 October 2013
No rate rise in 2014 says Bank of England
How has it come to this? the Bank of England has a new obsession with 'forward guidance' - which as Terry Smith writes in the Telegraph today is a ridiculous statement, as if there is backward guidance!
But now Spencer Dale has decided to tell everyone that he does not think the economy will be in good enough shape to raise rates in 2014. We are only just into Q4 of 2013, but the sages of finance can see well into the distance.
Well, this tells me a few things:
1 - Clearly the economic recovery is not going to be very good, perhaps even dropping off from here on in. If growth continues at 0.5% per quarter, how can rates not adjust to what we would see a normal growth? therefore, the BOE must believe growth is going to be well below that next year, maybe 1.5% or so.
2 - Who cares about a housing bubble? Certainly not the Bank of England. As it happens, I don't think there is much of one either yet. But I do see an problem, not of 2007 proportions, in Commercial Real Estate. Yields are 5% and falling for prime buildings. Even in regional cities they are 7% for good properties. How these deals will make sense when rates rise I do not know.
3 - Long term huge damage is being done. people now in their mid-twenties do no know what a real interest rate rise feels like, except if they use Wonga perhaps. Debts on property are building up with people thinking 4 or 5 percent is a big mortgage. In the 1970's, 1980's and 1990's we had multiple periods of 10%+ rates and 15%+ mortgages. How are people going to adjust when normality returns? The longer the BOE leave it, the more conditioned to ultra low rates people become.
4 - Savings, what's the point? With super low rates but still mediocre inflation, money and saving have no value, getting into debt becomes the sane choice. It's a huge moral hazard, all taken it the name of defending the Banks and the deficit.