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.


Blue Eyes said...

Agreed. I think confidence is returning but that does not necessarily lead to full-on growth.

5% is a huge mortgage rate, if you bought on a high multiple of income, high LTV at the peak of the bubble. Cough.

Bear in mind that when rates were 10+% inflation was at least as high so while such rates must have been painful at the start, salaries must have been keeping up to an extent and of course the "sufferers" are now sitting on huge capital gains. Forgive me if I don't wring my hands too much over those who hung on during the 80s and 90s.

Savings - the point is to save to rebuild one's capital position before rates go up. Deleveraging I think you finance types call it. Also, there are some cracking big-ticket finance deals about. I am vaguely in the market for a car and I might be tempted to get a new one because you can get a zero up-front 0% APR loan from many manufacturers.

So far the recovery has not been very "balanced". The trick will be to get the confidence side of the economy going well enough to restart investment in real stuff. Timing is everything. If the economy starts to pick up, the Tories win outright in 2015 and then crack on with doing some proper reforms after that then we might be OK. If inflation hits too soon or some other crisis appears we are stuffed for many many years.

Have a great weekend!

Demetrius said...

Been there done that. In the 70's part of the pay package was very low interest loans for cars, needed for the job. So a car would be bought and not too long later traded in getting more or near the original price to move upwards to a better car. It was great. When reality returned it came as a nasty shock.

Electro-Kevin said...

15+ interest rates then we'd see what a bubble the housing market is. The BofE is looking out for a bubble but the last one never went down.

We're at virtually zero interest. Bank of mum and dad has stepped in, as have the gramps, and we're still having to resort to HTB.

The whole thing is still built on sand.

Steven_L said...

On 2.

Was watching some program about folk who live on benefits in Liverpool. A quick look at Zoopla revealed gross yields for renting to minkers on HB in Anfield is about 11%. So gross yields on residential housing range from <3% for prime to 11% for people who decorate with spray paint and keep pythons. No bubble or are investors only looking at return on capital rather than return on assets? If the cost of leverage goes up they get wiped out surely?


No one wants to get into debt. The keep trying to persuade us, the green deal, help to buy etc. But what if all these scheme flop and hardly anyone wants to take on a big loan? I mean, why would anyone want a dirty great 6 figure loan hanging around their necks? Our demographics are skewed toward debt deflation and it could be here for a while.

Blue Eyes said...

While Stephen_L is worrying about graffiti, friends of mine are getting a decent return on capital invested by buying houses in Blackpool and renting them out to sensible HB-receiving tenants.

Steven_L said...

BE, history might suggest that taking the risky high yield stuff and generating as much cash as you can is the best way to play it from this stage of the cycle.

But that's if you are betting on a 'normal' 18 year or so land price cycle rather than Japanese-esque debt deflation or worse.

In the late 90's 20% to even 50% yields were more the norm for that kind of investment. As interest rates fell and house prices surged you could cash in the rubbish to a bigger fool and use it to buy the decent stuff down south.

Only this time interest rates can't really fall and wages and benefits aren't really rising. Buying crap in the north is just a bet on ZIRP hanging around for the next 10 years and the economy not tanking. There's more ways than BTL to make that bet.

MyUsualNameForThisPlace said...

Am I the only one who thinks that the Spanish and Italian economies have collapsed?
Not 'are in recession', not 'are going through a rough patch', but are disintegrating entirely.

The money running around europe like a scalded cat is trying desperately to avoid the inevitable 'bail in' required to prevent total meltdown in the med. How can Britains economy stay afloat when this is realised?

It cant.
Buy all the bedsits you want when the crunch comes you'll need liquidity and the desperation to sell will be spectacular.

I've already written about the desperation and high-jinks occurring in pension funds (commercial property being sold to pension funds so that cash can be released).
The situation in many, many businesses (particularily trad professions who own their offices and have private pensions like accountants, solicitors, engineers) is absolutely dire. They've been taking losses and waiting for an uptick for 5-6 years now and they are nearly totally broke.

This is going to be a disaster unless the govt start dealing with reality.

IronMatt said...

Would take forecasting advice from the BOE with their dreadful record.

SVR also seem very high in relatiom to the base rate, so once rates rise those on SVR will really feel the pinch. I bought my first home in 2000 when the base rate was a lot higher than now but the SVR's were not.

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