Uk interest rates expected to double by feb

[gracedentssketty]

Read in telegraph and Bloomberg this morning that the markets are betting on this with one analyst saying they are likely to hit 4%

are we all screwed?

But it's not just fuel prices. While I appreciate fuel prices have a knock on impact on other products, food and drink prices have also risen substantially (or shrinkflation has occurred).

I understand economic theory is not perfect but I can't see a way for inflation to be forced down without interest rises. Surely it gets more out of control without BoE intervention?

The trouble is the BOE need to also protect the pound

👏 exactly

As @oiltrader says the BOE need to try to protect the £ which has already fallen and is at real risk. They know that raising base rates will worsen the recession and will cause defaults and falling asset prices and business failures but they still need to protect the currency. If they don't do this, we have a sterling crisis and import costs will rise hugely, worsening inflation much further. The BOE will likely need to raise rates even more if politicians start cutting taxes. The UK economy is indeed in a total mess.

Sorry, that post sat there for a while and I see that others have posted the same thing now.

Does the BoE have protecting the pound in its remit? PPs may think so but only if you tie exchange rates to 'The Bank of England (BoE) is the UK's central bank. Our mission is to deliver monetary and financial stability for the people of the United Kingdom.' Even if you do, exchange rates tend to be informed by the markets' views on medium term economic performance. Charitably, it is uncertain raising interest rates based on supply side inflation will benefit monetary and financial stability.

Energy is priced in dollars.

The more the pound falls against the dollar the more energy prices increase over and above their intrinsic price increase.

How’s it going to deliver monetary and financial stability without protecting the pound?

The UK economy is indeed in a total mess.

they are stuck between a rock & a hard place

UK bank rate must follow US bank rate to prevent a run on the pound. Rates will revert to the mean, say 5 percent, which is arguably the real price of money without quantitative easing. Money will flow from speculative assets, housing mainly, into productive infrastructure and innovation.
Uk gov has already floated the idea of lifetime/ multi generational mortgages to protect the banks against housing defaults and repossessions.

Although it will be painful it's probably best that interest rates return to a more normal level. People on this thread are talking about how rate increases will cut down on discretionary spending, but high housing costs have already been causing this for years and no one seemed to mind. The more money you spend on your mortgage/deposit the less you have to spend on everything else. Higher interest rates will make this worse, but they aren't the root cause.

I'm in my 30s so I know a lot of homeowners that have only ever known low interest rates and rising prices. I have empathy for people that may have overextended themselves and will struggle to make ends meet. It's not their fault that they had to buy into such a dysfunctional market.

However, I have also watched a lot of people make a lot of questionable financial decisions since becoming a homeowner. People who have taken out the maximum mortgage rather than live in a slightly less desirable area nearby, then a few years later when they'd built up some equity take on six-figure loans to extend, happily telling everyone who will listen just how much everything cost as if it was monopoly money (and reducing the number of homes suitable for FTBs in the process). They are willing to take on debt that may be larger than they are initially comfortable with because they think there is no risk.They also tend to save less because they assume their equity will be enough to fund their future moves up the ladder or their retirement.

This is across all social classes. I have many friends in London and my DP is from an industrial town up north. I have lost count of how many people have told me "my house earned more than me last year" as if that's a good thing. They are happy to ignore their stagnant wages because the housing market has tricked them into thinking they're wealthy. But being "house rich cash poor" is a real thing. We actively avoid certain groups of people now because all they ever talk about is how much their house value has gone up.

Having a population that understands that interest rates can go up, property prices can go down, and there are risks associated with borrowing large sums of money is a good thing in the long term. It's just really unfortunate that the government has let the housing market get to this state and so many people will have to suffer so much hardship.

An entire generation has been forced to mortgage themselves up to the eyeballs to stand a chance of getting on the property ladder. Taking on less debt to future-proof against potential interest rate rises was not a choice for many, unless you count not buying property at all and remaining in rented accommodation.

Interest rates going up massively would be catastrophic for a lot of people and I would guess for the economy at large.

At this stage every option is pretty catastrophic.

I think we'll just have to weather the storm.

Interest rates going up massively would be catastrophic for a lot of people and I would guess for the economy at large.

The problem is that the current inflation rate would also be catastrophic for the economy as a whole.

I'm a home owner with a mortgage but there are people, such as pensioners, who have struggled to generate a risk-free income stream with near zero interest rates. Not everyone is a net loser.

Looking at this graph:

tradingeconomics.com/united-kingdom/interest-rate

The range was 5% to 15% from 1979 to around 1995. So 3 to 3.5% would still be a low interest rate. It was unlikely to remain at sub-1% on a semi-permanent basis.

They are happy to ignore their stagnant wages because the housing market has tricked them into thinking they're wealthy.

loads think this though & it's why as you say stagnant wages are less of an issue. And even though there might be more disposable income people are still happy to spend because they feel wealthy. And for some people it really has made them very wealthy. I know people who have "cashed in" more than a million pounds just from house prices growth.

less not more disposable income

The thing is they have to rise the rates to keep up with the federal reserve and other countries. If we don't, the pound will devalue and we will be even more fucked.

Just pointing out 'protecting the pound' didn't appear to be the BoE's explicit remit, just (medium term) inflation [and there is recognition that some external factors should be ignored if they lead to temporary inflation exceeding the 2-2.5% target hence scope for the exchange of letters explaining why decisions might not be made to raise interest rates].

I did try to say 'only if you tie exchange rates' to inflation but when I pasted what looked like the BoE's actual remit, it over-wrote 'to inflation'.

For the PPs who are focused on 'How’s it going to deliver monetary and financial stability without protecting the pound?', you might want to wonder if exchange rates are also informed by an assessment of the relative performance of economies to hence the attractiveness of holding Sterling, part of which is informed by interest rates and part by whether the economy doesn't have someone fundamentally mismanage it compared with other economies. The Uk seems to be somewhat of an outlier but perhaps not in fabulous ways. Economic growth seems lowest relative to comparable economies and inflation higher though other economies are more dependent on imported energy. Odd that. Perhaps history might appear to show exchange rates will deteriorate over time if an economy under-performs irrespective of whether interest rates are used to prop up an economy. Some medications can treat the symptoms of a medical condition with side effects but the dosage required often increases and eventually cause more problems that the condition they are trying to treat.

you do understand that when the pound tanks, imports go up and thus drive inflation???

It’s not only energy that’s tied to the dollar most imports are, if it’s any consolation the Euro is under the same pressure. It’s going to be a long hard winter and until Ukraine is settled it’s not going to change.
The government will try to hold sterling steady but I can see it going to £1.10 maybe lower against the dollar

Lunchtime's bombshell prediction from CitiGroup: inflation at 18.6% by January and interest rates at 7%. It is going to be somewhere between bumpy and hell on wheels.

Yeah brilliant if you have anything to save 🙄if like many of us though you are just simply going to end up paying more on your mortgage when only just coping not so good

It’s going to be pretty shit for everyone @workiskillingme. Particularly people whose fixed mortgage deal ends and those on variable rates. Nobody’s going to get away without feeling the pain, though.

Haven't denied it, just pointed out relative economic performance can also influence exchange rates. hence the part of the post that said "you might want to wonder if exchange rates are also informed by an assessment of the relative performance of economies to hence the attractiveness of holding Sterling, part of which is informed by interest rates and part by whether the economy doesn't have someone fundamentally mismanage it compared with other economies."

Lunchtime's bombshell prediction from CitiGroup: inflation at 18.6% by January and interest rates at 7%.

it's a bit scary & I wonder in a month if it will be 19%. To think the BOE thought it was a blip!