What next for interest rates
Posted: 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.
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.
