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What next for interest rates

Gilts, bonds, and interest-bearing shares
Gan020
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What next for interest rates

#447682

Postby Gan020 » October 4th, 2021, 10:59 am

Over the last 10 days or so bond prices have weakened marginally as the BOE (and others) see interest rate rises happenning a bit more soon than expected.

It's hard to get exact figures as a retail investor but we seem to be looking at 2 rate rises next year. One around Feb to 0.25% and another perhaps in the middle of the year to 0.5%. That's still very low by historical standards.

Like many others I have tried to anticipate this by holding short duration bonds or bond funds and a few interest rate floaters. Most of my long duration got sold over the last 2 weeks.


So, my question is what is likely to happen to interest rates after the 0.5% rise. I'm not really bothered if it goes to 1%. Whether I'm on the right or wrong, that's manageable. But what worries me is if it went to 3%. I know that seems unlikely but again by historial standards it's not.

I am conflicted because this is what I think will happen. Inflation is going to run hotter than longer than both the central banks and markets expect and whatever the published rates it's already uncomfortably high and getting ingrained in wage rises. It seems there is a shortage of labour supply which seems counter-intutative given the unemployment rate.
This leads to central banks being forced to raise rates to dampen things down as shown by interest rate rises in Russia, Brazil and a few others I've forgotten.

But then at some later point, tax rises will dampen inflation as disposable income falls and I think this impact could be considerable. Indeed I worry there's a really concerning tipping point here because the Treasury is withdrawing fiscal support at the same time as monetary support. i.e. cutting universal credit at the same time increasing stamp duty, then 6 months later freezing indexation of personal allowance and introducing the new 2.5% health and social care tax. In the middle of this QE stops around December if not before and then in Feb mortgages start going up as soon as people's fix rate deals expire. And then Corp tax goes up to 25% a year later along with whatever other taxes get introduced along the way.

So, I'm kind of arguing for very strong inflation for about 9-12 months and then things start to bite as the supply/demand equation changes and inflation falls fast or even goes negative. Of course if you smooth the peaks and troughs the average inflation will still have been ugly but we won't be worrying about that in 18 months time.

More than anything I don't understand this massive pool of labour which is apparently not willing to go back to work in a meaningful way. If that were to unwind that would assist GDP, keep the economy bumbling along much better and could signicantly affect the supply/demand equation.

I'm completely conflicted as to what to do. I'm minded to keep trying to invest in short duration as if I'm wrong at least I get to run my bond to maturity and reinvest it later. Mostly I'd just like to sit on the fence but there's a time cost of money thing where not being invested creates no return with the possibility of investing at a higher rate later vs getting some return now. Only problem is most of short duration I already own or looks expensive or is on my list of things never to buy ever.

Any views would be greatly appreciated. TIA.

vagrantbrain
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Re: What next for interest rates

#447849

Postby vagrantbrain » October 4th, 2021, 7:14 pm

I think some of the labour issue is down to people not being interested in working in a crap NMW job for a marginal gain over being on benefits. I think the removal of the UC topup and rising wages will encourage some back to work.

Anecdotaly, I know of a few people who've been made redundant recently and are content to live off what they've saved over the last 18 months while they find a decent job rather than jump into the first one that comes around.

Gan020
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Re: What next for interest rates

#448000

Postby Gan020 » October 5th, 2021, 11:40 am

In 24 hours one reply so I guess people don't have a strong view either way. Or perhaps are as confused as me :lol:

I think I've decided to sit on my cash and wait for some clarity although I suspect I'm not going to get that any time soon.

I note some of the prefs have fallen back a bit over the last month on fairly small volume. Also some of the bond IT's with longer duration and some some of the energy IT's and some property REITs which have bond proxy characteristics.

pje16
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Re: What next for interest rates

#448006

Postby pje16 » October 5th, 2021, 11:48 am

They'll have to go up a LONG way before they get my attention, equities and other investments win hands down and have done for years
I know they won't get back to the late 80s when I had a deposit account that paid interest at rates in double digits :o

dealtn
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Re: What next for interest rates

#448025

Postby dealtn » October 5th, 2021, 12:55 pm

Gan020 wrote:In 24 hours one reply so I guess people don't have a strong view either way. Or perhaps are as confused as me :lol:



Asking on a Board where there have only been contributions to 4 threads in the last month I'm not sure what you were expecting. If your question is about interest rates maybe try

The Economy

viewforum.php?f=62

(although this is also rarely visited, possible as its tucked away among the "polite discussions" rather than in the investment part of the site.

Or try

Macro and Global Topics

viewforum.php?f=76

Adamski
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Re: What next for interest rates

#448040

Postby Adamski » October 5th, 2021, 2:24 pm

Hi gan020, in a period of uncertainty so difficult to predict where interest rates will go. But my 2 cents is we're entering a period of high inflation, or turbulent inflation, so interest rates will continue to rise.

So makes sense to have some hedge against inflation. Property prices and gold tend to do well to keep up with prices. So owning and improving your home and/or rental property good idea. Also holding gold in a portfolio can help and sometimes protects if we get a correction. Another way is some crypto assets might offer protection. Bp, shell been outperforming with oil prices rocketing. Growth stocks will suffer in a high inflation environment.

I was a child in the 70s but that was a time of high inflation, high energy prices and poor stockmarkets. The economy was in a state. Might be like that, but hopefully this bounce back will settle down, and things in 2022 will be more stable.

AsleepInYorkshire
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Re: What next for interest rates

#448080

Postby AsleepInYorkshire » October 5th, 2021, 3:51 pm

I'm not an economist. I'm not sure the BoE has ever predicted interest rates corrections very well at any time in their past?

If raising interest rates is the only way to fight inflation I'd have to suggest the economists have a very small toolbox. I also wonder if there's an argument that the recent inflationary pressures are a bump and will soften over the next 12-18 months?

As I've said I'm not an economist

AiY

pje16
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Re: What next for interest rates

#448090

Postby pje16 » October 5th, 2021, 4:08 pm

AsleepInYorkshire wrote:I'm not sure the BoE has ever predicted interest rates corrections very well at any time in their past?
AiY

They must be able do better now that clown Carney has gone - he was useless
https://www.thisismoney.co.uk/money/mar ... wrong.html
btw they don't predict them they decide on them

AsleepInYorkshire
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Re: What next for interest rates

#448103

Postby AsleepInYorkshire » October 5th, 2021, 4:32 pm

pje16 wrote:
AsleepInYorkshire wrote:I'm not sure the BoE has ever predicted interest rates corrections very well at any time in their past?
AiY

They must be able do better now that clown Carney has gone - he was useless
https://www.thisismoney.co.uk/money/mar ... wrong.html
btw they don't predict them they decide on them

I stand corrected :lol: I thought they also made predictions about future movements?

AiY

pje16
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Re: What next for interest rates

#448107

Postby pje16 » October 5th, 2021, 4:46 pm

AsleepInYorkshire wrote:I stand corrected :lol: I thought they also made predictions about future movements?
AiY

No probs - for that you need a gypsy woman with a crystall ball :lol:

dealtn
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Re: What next for interest rates

#448114

Postby dealtn » October 5th, 2021, 5:02 pm

AsleepInYorkshire wrote:
pje16 wrote:
AsleepInYorkshire wrote:I'm not sure the BoE has ever predicted interest rates corrections very well at any time in their past?
AiY

They must be able do better now that clown Carney has gone - he was useless
https://www.thisismoney.co.uk/money/mar ... wrong.html
btw they don't predict them they decide on them

I stand corrected :lol: I thought they also made predictions about future movements?

AiY


They do.

The MPC target is centred around an agreed framework broadly based on a 2 year horizon. They use their judgement, combined with internal BOE forecasts of both inflation and interest rate levels, and the market forecast derived from interest rate futures (and other markets) in arriving at their policy decision as 9 individuals, and a the committee in aggregate.

Their predictive record either isn't accurate (the outcomes don't match the future path of interest rates) or accurate (they are as good as other forecasters in predicting what is difficult) depending on your point of view.

pje16
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Re: What next for interest rates

#448122

Postby pje16 » October 5th, 2021, 5:12 pm

Yes that's how they work it out, but predictions are never published AFAIK

dealtn
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Re: What next for interest rates

#448128

Postby dealtn » October 5th, 2021, 5:22 pm

pje16 wrote:Yes that's how they work it out, but predictions are never published AFAIK


Always used to be in the quarterly inflation reports, and the accompanying press conferences. But it's been over 5 years since I was in that market so it might have changed.

As a collective, and individually, based on then ones I met, the MPC were very keen on openness, at least within the confines of rules and guidelines affecting insider trading etc.

(Once applied to be Governor of the Bank of England, but never invited to sit on the MPC!)

88V8
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Re: What next for interest rates

#448148

Postby 88V8 » October 5th, 2021, 6:58 pm

Gan020 wrote:It's hard to get exact figures as a retail investor but we seem to be looking at 2 rate rises next year. One around Feb to 0.25% and another perhaps in the middle of the year to 0.5%. That's still very low by historical standards.

I expect that the BoE will cling as long as possible to the notion that inflation is temporary. So rates will not rise very much.
They will be anxious to avoid problems in the housing market. and given that mortgage rates are so low even a small rise will represent a large percentage increase.
That being the case I do not see a compelling case developing for Prefs or other FI, other than as short-term parking place.
And the nearer we get to the next election the more desperate the govt will be to find some fudge that will avoid locking in long-term rate rises.
So much as I would like the certainty of topping up on FI, at the moment I'm not tempted.

Nor for that matter am I tempted by anything much at all, really. Even though it's time in the market that usually pays.

V8

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Re: What next for interest rates

#448192

Postby JohnW » October 5th, 2021, 10:57 pm

Gan020 wrote:So, my question is what is likely to happen to interest rates after the 0.5% rise.

I'd suggest you're wasting your time, as entertaining a time-waster as it is. It's as hard as knowing which way the stock market is likely to go.
'Yes, 100% of economists were dead wrong about yields' https://www.marketwatch.com/story/yes-1 ... 2014-10-21

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Re: What next for interest rates

#448365

Postby hiriskpaul » October 6th, 2021, 6:44 pm

My view is that the risk of inflation and so the risk of interest rate rises has increased. Energy prices, falling pound, post-Brexit labour shortage policy all looking inflationary. Whether the risk materialises is anyone's guess, but as we have increased risk I am trying to shorten duration and hold more cash. Have come out of various low yielding short dated, but happy to keep holding my higher yielding short dated stuff (Co-op Group, Enquest, IPF), but not add to it at present.

Bit reluctant to reduce prefs this year any further as I will end up paying CGT on any disposals. I might do that anyway though and take the CGT hit. I am waiting for the Autumn Statement to see if we get any hints on CGT rises or any other worrying stuff before making any decisions.

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Re: What next for interest rates

#449471

Postby 88V8 » October 12th, 2021, 9:49 am

hiriskpaul wrote:My view is that the risk of inflation and so the risk of interest rate rises has increased.

Looks as if the FI market at last agrees - NWBD now below the 175p support level where it's been since the tender.
For me, not tempting to buy, yet.... a 5%+ yield with 6% upcoming inflation.
But a move in the right direction.

V8


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