to believe interest rates should be at least 4% already, and rising fast?

[LargeDeviation]

1.75% base rate is pathetic in the face of double digit inflation.

The Bank of England has been much slower than the Fed in raising rates, and this is one of the main reasons why sterling is weakening - not the only one of course. Gas and oil are priced in dollars and energy prices are the dominant contributor to inflation, so we should strengthen the pound wherever we can.

The BoE has been far too timid to raise rates going back to Mark Carney. He had several opportunites to raise rates and even gave unemployment thresholds at which he would do it, but when unemployment went far lower he invariably lost his nerve.

Andrew Bailey is even worse. He should have cut QE and started raising rates as soon as it was clear that vaccines were working in early 2021 - or at least when it was clear that omicron was mild. It was clear far before the war in Ukraine that the post-vaccine boom would cause at least some significant inflation. Even after the war started, he has been so timid in acting! Tiny 0.25% and 0.5% raises.

Yes, raising rates will reduce cashflow, reduce house prices, and even possibly cause negative equity to those on high LTV variable mortgages, or those remortgaging soon. And yes it will reduce credit available to households and businesses, which would be difficult.

However with inflation you need to act fast and act big to get people to believe you are serious about taming it, otherwise expectations take hold and it becomes embedded. It is easy to cut rates again a bit afterwards.

If any of the MPC are reading: stop quivering, stop with the Lilliputian raises, and remember that your mandate isn't about the broader economy but to keep inflation under control!

[AdamRyan]

Google says 100k over 20 years at 1.69% = £492 per month

The same at 15% = £1317 per month

[MarshaBradyo]

@edwinbear

The reality is, interest rate markets have already priced in huge rate rises, meaning the BoE don't need to actually adopt them. 2y GBP swap (fixed) rates this morning are 4.22%, 5y at 3.76%, 10y at 3.40% and 20y at 3.20%. These are the rates at which big corporates are borrowing, meaning the market has actually done the work.

It's generally recognised that whilst the ECB will increase rates by 75bps on Thursday, it will do little to support the EUR.

www.reuters.com/markets/currencies/big-rate-hike-wont-save-euro-energy-shock-deepens-2022-09-06/

It's not guaranteed that raising rates leads to a stronger currency - look at the mess the Central Bank of Hungary have got themselves into. Their base rate equivalent is now 11.75%, inflation is still about 13%, with food price inflation around 50%, and whilst the Forint picked up a little (1.3%), it's still one of the worst performing emerging market currencies. If the economic fundamentals aren't there, you can raise interest rates all you like, but investors won't buy it.

Rises will cause damage to many, it could be good for the pound but I suspect this post is a useful reminder that it’s complex and no certainties

[antelopevalley]

@AdamRyan

Google says 100k over 20 years at 1.69% = £492 per month

The same at 15% = £1317 per month

On an interest-only mortgage I assume? Interest only mortgages are for most people a terrible financial decision.

[ginghamstarfish]

Agree OP, it has been kept too low for too long and should have been rising in small increments over the last few years.

[AdamRyan]

@antelopevalley

On an interest-only mortgage I assume? Interest only mortgages are for most people a terrible financial decision.

Repayment
Check for yourself
www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/

[hop321]

On an interest-only mortgage I assume? Interest only mortgages are for most people a terrible financial decision.

Why do you think that? Ours has been a good financial decision, we've not had to invest as much as the repayment element would have been and our stocks and shares ISAs will exceed our mortgage amount when we come to pay it off.

We could pay our mortgage off now but we're paying 0.99% interest (5 year fix) on our mortgage and we typically make around 20-30% a year on our equity investments. With the exception of the last 9 months.

[antelopevalley]

@AdamRyan Sorry you are right. So it would be very tough for a lot of people. Although mortgage rates are already higher than 1.69%.

[AdamRyan]

@antelopevalley

@AdamRyan Sorry you are right. So it would be very tough for a lot of people. Although mortgage rates are already higher than 1.69%.

Lots of people on fixes like me :(
I'm dreading March when mine ends already

[MidnightMeltdown]

@pd339

You are of course correct. People who over-stretched themselves on mortgages only have themselves to blame.

Young people haven't had a choice because house prices are so high.

There are other ways to deal with inflation. Cut spending. For example, scrap the state pension triple lock. Why should the burden always be placed on the young? People who haven't saved adequately for retirement only have themselves to blame....

[Deguster]

The increase does seem to be baked in despite the notional BoE rate. Our broker advised us to remortgage sharpish and pay the penalty rather than wait until
April. We’ve fixed at just under 4%.

[1dayatatime]

@antelopevalley

"1dayatatime is super naive. It is not as simple as throwing Ukraine under a bus. We have already done that with Crimea. Russia will not stop. Putin thinks the West is decadent and will quickly give up support for Ukraine. His plan is to invade Ukraine and then start invading NATO countries.

If everyone thought Putin would stop at Ukraine, the UK and EU would not have supported Ukraine. They largely understand that Ukraine is the front line. "

++++

The idea that Putin will not stop after Ukraine and start invading NATO countries is scare mongering and not correct. Firstly after the military mauling Russian forces have received against a supposed "weak" opponent of Ukraine means that Russia is in no position militarily or politically to take on a much larger opponent. Secondly to attack a NATO country would invoke a war against all NATO countries which has a real potential to go nuclear. Putin is not stupid and doesn't want this nor does the West.

So I simply don't accept that Russian troops will next move on to Warsaw, Berlin and Basingstoke next. Many cite the example of Hitler from their GCSE History but perhaps a better comparison would be the rush to war on the First World War.

++++

@1dayatatime is wanting simple solutions to complex problems i.e let Putin successfully invade Ukraine so we can get back to normal. That is not realistic.

+++

I hope my previous posts have demonstrated that the solution to high inflation and its causes are incredibly complex with no easy answers and is anything but simple.

The question is how the war in Ukraine and the destruction, loss of life and economic damage can be best ended. Supplying weapons to war zones has historically been shown to not exactly be the best solution to shorten wars. An all out victory over all of Ukraine by Russia is not something the West will now accept. And all out victory expelling Russia from all of Ukraine including Crimea and humiliating Russia is not something Russia will accept without going nuclear.

So that leaves a negotiated peace deal which the Russians are desperate for. Maybe something along the lines of Russia keeping Crimea (which is ethnically 65% Russian anyway) and a referendum for Donetsk and Luhansk would allow a quicker and less costly end to this war. But so long as the West keeps giving a carte Blanche support and supplying weapons to Ukraine the war will grind on, more lives will be lost, more destruction caused and more economic damage inflicted.

Once a peace deal has been reached , gas supplies will resume prices will go down and this will buy time for Europe to go full out on reducing its dependency on "cheap" Russian gas. Something to be fair the US has been warning about for decades.

So I really don't think I am being naive and I really do not see any simple solutions. But I do a very complex and shit fest looming which will require realpolitik and unfortunately some very hard decisions which I recognise will be extremely difficult and unpalatable to many.

[Kashmirsilver]

The inflation is solely being caused by the aftereffects of the pandemic. Raising interest rates would compound the damage already done.
Absolute prices will never go back to pre-pandemic levels. Business is booming in most sectors. However, sectors such as hospitality are facing changes. That sector is flooded with businesses offering poor quality.

[antelopevalley]

@1dayatatime
There is no such thing as ethnically Russian. Russia is a country, not an ethnicity.
Imagine the EU, US and UK agreed a peace deal with Ukraine i.e. say go ahead you can invade Ukraine, we will not interfere. What do you think would happen?
Some Ukrainian soldiers would still fight. Russia would invade and rape and butcher lots of the population. There would be even more appalling atrocities.
Do we just accept that and ignore it?

And China would invade Taiwan. That is looking more and more likely anyway, but the west sitting back will give them the green light.

Russia's military forces have been exposed as inadequate. But it would be fairly easy for Russia to regroup and even develop working alliances elsewhere to increase its military capacity. And then come back and strike. And yes at a NATO country. Why should they worry about a war? It will not happen if EU has already shown that it will appease, appease, and appease rather than stand up. Handing Ukraine over to Russia and ignoring atrocities would be a major appeasement.

[1dayatatime]

@Kashmirsilver

"The inflation is solely being caused by the aftereffects of the pandemic. "

+++

Inflation is predominantly being caused by higher energy costs due to the war in Ukraine. This has a knock on effect on other industries such as bakers (it costs more to heat the oven) etc.

But you are correct that inflation was also rising before the war in Ukraine and was caused massive government borrowing and an increase in the money supply.

[1dayatatime]

@antelopevalley

"There is no such thing as ethnically Russian. Russia is a country, not an ethnicity."

+++

I simply sourced Wikipedia with whom you can debate the definitions of "ethnicity" with:

en.m.wikipedia.org/wiki/Crimea

[MsPincher]

@oiltrader

Agree with the OP. there seems to be a lot of debt junkies here who don't realise that the era of cheap money Is over. The pound must be protected above all else

Why? Increasing interest rates will slow the economy, damage businesses and employment. So will a high pound. Why do you think these are good things?

i know post brexit we aren’t listening to experts anymore but it’s a bit concerning that people who know absolutely nothing about economics are trying to overrule economists.

[LargeDeviation]

@LargeDeviation

@MsPincher They have been consistently wrong the wrong way - they have underpredicted inflation consistently and significantly since the war started.

I would expect them to miss a bit on the upside about half the time, a bit on the downside half the time. This isn't what is happening.

In fact, this has been a systemic problem throughout the Carney and Bailey years, even before the war. See this data analysis over the last 15 years where it shows, amongst other things:

1. there has been a consistent underprediction of inflation
   
2. there is almost no relationship between their prediction 1 year ahead and the actual inflation outcome.
   
   blogs.lse.ac.uk/businessreview/2021/10/20/the-bank-of-englands-response-to-rising-inflation/

@MsPincher Do you agree that the Bank of England has persistently over-estimated inflation? You seem to be ignoring the evidence of the data over a 15 year period, as linked in my earlier post which I have quoted.

[LargeDeviation]

In my post just now I mean of course persistently underestimated

[DeadHouseBounce]

@AdamRyan

Do you think increasing everyones mortgage repayments at the same time as a huge increase in energy bills/food and unemployment? Seems a bit mad to me, but then I am not an economist

It will lead to a house price crash which will mean cheaper property in future, can you imagine how well insulated we would all be now if people were not exposed to silly levels of debt for basic shelter?

[DeadHouseBounce]

@1dayatatime

@Kashmirsilver

"The inflation is solely being caused by the aftereffects of the pandemic. "

+++

Inflation is predominantly being caused by higher energy costs due to the war in Ukraine. This has a knock on effect on other industries such as bakers (it costs more to heat the oven) etc.

But you are correct that inflation was also rising before the war in Ukraine and was caused massive government borrowing and an increase in the money supply.

Higher energy costs, money printing and specifically the Biden money shot at the end of Covid, China lockdowns and rates far too low for too long have caused it. The only good outcome here will be a massive collapse in UK property "values".

[Kashmirsilver]

@DeadHouseBounce

Higher energy costs, money printing and specifically the Biden money shot at the end of Covid, China lockdowns and rates far too low for too long have caused it. The only good outcome here will be a massive collapse in UK property "values".

I do not see any signs of recession.
Unless if course the BOE or the government interferes too much.

[pd339]

@MidnightMeltdown

Young people haven't had a choice because house prices are so high.

There are other ways to deal with inflation. Cut spending. For example, scrap the state pension triple lock. Why should the burden always be placed on the young? People who haven't saved adequately for retirement only have themselves to blame....

I entirely agree that the Triple Lock is a ridiculous policy. State pensions should be means-tested as well, as should additional pensioner freebies.

[Skelligsfeathers]

I don't know about interest rates, but aren't kittens beautiful? So soft and fluffy

[XingMing]

Let me declare my privilege upfront.. I made decisions about my pension 20 years ago; I still hope I made the right call. The Covid years took £50k out of the pot thanks to an insolvency,. What was properly funded suddenly looks much less secure... It is very frightening,, I don''t have 20 years of work to cover the shortfall at 66.

[LakieLady]

@maddening

The inflation is not being driven by consumer demand and spending.

This.

We're experiencing cost-push inflation caused by external factors, so I'm unconvinced that raising interest rates will address it.

Interest rates only need to rise enough for sterling not to crash. It needs to hold its own against the $. A big sterling fall would increase the cost-push because oil etc is traded in dollars.