Interest rate from 0.5% to 0.75%

[rhys]

The MPC have just voted to increase the base rate from 0.5% to 0.75%, but cable just dropped from 1.32 to 1.31$ per £

Why? Did the markets expect a greater increase in base rate, or have I missed something?

[pje16]

I had heard it was likely to be going up to 1%
The BoE need to grow a pair
Inflation is estimated to be getting up to 7%

[rhys]

https://www.bankofengland.co.uk/monetar ... march-2022

7000 words to explain why they raised the rate just 0.25% !

[Lootman]

The US put up interest rates yesterday as well, so the net effect on GBP/USD should be trivial.

[pje16]

https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/march-2022
7000 words to explain why they raised the rate just 0.25% !

I don't have time read all that waffle

[BT63]

I had heard it was likely to be going up to 1%
The BoE need to grow a pair
Inflation is estimated to be getting up to 7%

The BoE kept us on 'emergency' measures for several years longer than the duration of the true emergency (2008 crash). Far too much easy money has been around in the last few years and it won't be easy to get things back under control.

Raising rates to even half the level of inflation would be far too damaging to the economy and the asset bubbles built upon the excessively easy money.

Interest rates won't catch up with inflation, although the probable looming recession might bring down inflation until the BoE drop rates and print even more money again.

I think we will be stuck with significantly negative real interest rates most of the time for some years. I also think it will lead to a gold mania.

[stevensfo]

I had heard it was likely to be going up to 1%
The BoE need to grow a pair
Inflation is estimated to be getting up to 7%

The RPI is already at 7.8%. (Feb figures).

If the CPI goes higher as well, no doubt they'll just invent a new formula that will keep it as low as possible.

If we all live on water and air, it'll come down to 0%.


Steve

[NotSure]

If we all live on water and air, it'll come down to 0%.

My water and drainage rates went up by about 40% this year. AFAIK, air is still under the BoE target.

US 10-year up above 2% for the first time in a while, but obviously a long, long way from real positive, however you choose to measure inflation.

[xeny]

Why? Did the markets expect a greater increase in base rate, or have I missed something?

Ft article on it suggests that expectations for future rate rises have been lessened.

[Laughton]

I know there are many n here much cleverer than me so hoping someone will be able to explain how, with the economy in the state it's currently in, increasing interest rates is going to lower inflation.

I always assumed that the theory behind raising interest rates was that it would choke off consumption and that would force suppliers to maintain prices or lose sales.

But surely, current inflation isn't being caused by rampant demand - it's a supply problem.

Raising interest rates isn't going to:

Magic a new supply of oil and gas, fertiliser, computer chips and metals
Force Ukraine to plant wheat and other food staples
Solve the current covid problem in China so that supply constaints disapper
I could go on.

This is a serious question - I'm interested to learn the answer

[MrFoolish]

I know there are many n here much cleverer than me so hoping someone will be able to explain how, with the economy in the state it's currently in, increasing interest rates is going to lower inflation.

I always assumed that the theory behind raising interest rates was that it would choke off consumption and that would force suppliers to maintain prices or lose sales.

But surely, current inflation isn't being caused by rampant demand - it's a supply problem.

I suppose this is why the interest rate rises have been so modest. The time has come to ween the country off easy money (it can't last forever and they should have done it sooner), but they have to temper their response to take into account supply problems.

[Nimrod103]

I know there are many n here much cleverer than me so hoping someone will be able to explain how, with the economy in the state it's currently in, increasing interest rates is going to lower inflation.

I always assumed that the theory behind raising interest rates was that it would choke off consumption and that would force suppliers to maintain prices or lose sales.

But surely, current inflation isn't being caused by rampant demand - it's a supply problem.

I suppose this is why the interest rate rises have been so modest. The time has come to ween the country off easy money (it can't last forever and they should have done it sooner), but they have to temper their response to take into account supply problems.

I get that there are, and will be more, supply problems in oil, gas and foodstuffs. But inflation in what is probably everyone's single biggest purchase, a house, is a demand problem which has been ignored for years. It is widely claimed that the extreme house price inflation we have suffered since 2000 is due to easy money and low interest rates. So raising interest rates now might at least solve one major problem.

[TUK020]

I get that there are, and will be more, supply problems in oil, gas and foodstuffs. But inflation in what is probably everyone's single biggest purchase, a house, is a demand problem which has been ignored for years. It is widely claimed that the extreme house price inflation we have suffered since 2000 is due to easy money and low interest rates. So raising interest rates now might at least solve one major problem.

House prices are fundamentally a supply problem.

For decades, the supply of new housing stock has been artificially constrained to well below the population growth, household formation etc.
House prices are a function of average earnings and interest rates. They will continue to be while supply is throttled by our insane planning restrictions.

The Southeast of England (draw a line between the Wash and the Solent) comprises 15% of the land area, 50% of the population and something like 75% of capital expenditure. It is where the jobs and wealth creation is, and hence most of the people.
Within this, we hold the 'Green Belt' as sacrosanct. Drive round the M25 and pretty much all you see is fields of monoculture like Rapeseed. We ban all new house-building so that we can preserve this precious subsidised agriculture.

While this country is governed by a party whose power base is fundamentally in hock to property owning 'haves' who appear to benefit from house price inflation, the 'have nots' are in deep doodoo.

The situation pretty much condemns everyone into a position of spending most of their disposable income on substandard accommodation. Economically it doesn't make much sense, but it seems to be taken as normal in all of our political discussion.

[Nimrod103]

Drive round the M25 and pretty much all you see is fields of monoculture like Rapeseed. We ban all new house-building so that we can preserve this precious subsidised agriculture.

It may be subsidised or not, but it has the advantage of being grown in the UK, when apparently sunflower oil will be in very short supply because of the war in Ukraine. We build over our agricultural land at our peril.

[vand]

I get that there are, and will be more, supply problems in oil, gas and foodstuffs. But inflation in what is probably everyone's single biggest purchase, a house, is a demand problem which has been ignored for years. It is widely claimed that the extreme house price inflation we have suffered since 2000 is due to easy money and low interest rates. So raising interest rates now might at least solve one major problem.

House prices are fundamentally a supply problem.

For decades, the supply of new housing stock has been artificially constrained to well below the population growth, household formation etc.
House prices are a function of average earnings and interest rates. They will continue to be while supply is throttled by our insane planning restrictions.

The Southeast of England (draw a line between the Wash and the Solent) comprises 15% of the land area, 50% of the population and something like 75% of capital expenditure. It is where the jobs and wealth creation is, and hence most of the people.
Within this, we hold the 'Green Belt' as sacrosanct. Drive round the M25 and pretty much all you see is fields of monoculture like Rapeseed. We ban all new house-building so that we can preserve this precious subsidised agriculture.

While this country is governed by a party whose power base is fundamentally in hock to property owning 'haves' who appear to benefit from house price inflation, the 'have nots' are in deep doodoo.

The situation pretty much condemns everyone into a position of spending most of their disposable income on substandard accommodation. Economically it doesn't make much sense, but it seems to be taken as normal in all of our political discussion.

I fundamentally disagree with pretty much all of this supply side thesis.

House prices are high almost entirely because credit is unbelievably cheap. That's pretty much it. When you can borrow for 1.5% against real estate then you shouldn't be surprised that the value of that asset spirals to a price where its income yield is a 2-3% above that level.

A shortage of houses completely fails to explain why house prices have risen in cities and areas that have undergone population decline.

[vand]

The MPC have just voted to increase the base rate from 0.5% to 0.75%, but cable just dropped from 1.32 to 1.31$ per £

Why? Did the markets expect a greater increase in base rate, or have I missed something?

The markets already knew about the certainty of the move to 0.75%.

I suspect that the slight drop was due to the forward guidance that suggests the BoE is going to take a breather while it assesses the economic impact of the Ukraine situation. Many things can be read into the wording of these sort of statements.

[gryffron]

While this country is governed by a party whose power base is fundamentally in hock to property owning 'haves' who appear to benefit from house price inflation, the 'have nots' are in deep doodoo.

That doesn't really follow. We had 13 years of Labour rule, and they also failed to build sufficient houses and indeed deliberately inflated house prices as part of their artificial economic stimulus. We've even had a LibDem coalition who also failed to address the same fundamental problems. So this isn't a party political issue. ALL parties are equally guilty.

Gryff

[dealtn]

But inflation in what is probably everyone's single biggest purchase, a house, is a demand problem which has been ignored for years. It is widely claimed that the extreme house price inflation we have suffered since 2000 is due to easy money and low interest rates. So raising interest rates now might at least solve one major problem.

Housing costs are measured by the ONS in CPIH, and considered by the MPC in assessing the economy and the appropriate monetary policy, even though the "target" is a CPI one.

[TUK020]

While this country is governed by a party whose power base is fundamentally in hock to property owning 'haves' who appear to benefit from house price inflation, the 'have nots' are in deep doodoo.

That doesn't really follow. We had 13 years of Labour rule, and they also failed to build sufficient houses and indeed deliberately inflated house prices as part of their artificial economic stimulus. We've even had a LibDem coalition who also failed to address the same fundamental problems. So this isn't a party political issue. ALL parties are equally guilty.

Gryff

You have a point.
Perhaps the Tories just have a clearer idea of what works for their Nimby roots

[Nimrod103]

While this country is governed by a party whose power base is fundamentally in hock to property owning 'haves' who appear to benefit from house price inflation, the 'have nots' are in deep doodoo.

That doesn't really follow. We had 13 years of Labour rule, and they also failed to build sufficient houses and indeed deliberately inflated house prices as part of their artificial economic stimulus. We've even had a LibDem coalition who also failed to address the same fundamental problems. So this isn't a party political issue. ALL parties are equally guilty.

Gryff

Under Blair's Labour Govt real house prices went up 2.6 times, from £100,000 to £260,000 (https://www.housepricecrash.co.uk/indic ... inflation/).
During the subsequent Coalition and Tory Govts, average house price inflation has to a certain extent levelled off.