The Lemon Fool

Bank of England poised to raise rates by most in 33 years

1. British inflation running above 10%
2. BoE to raise rates by 75 bps, analysts say
3. Hike comes after period of intense turmoil in Britain
4. BoE set to start selling off bonds stockpile

Bank Rate expected to peak at about 4.75% in 2023, down from more than 6% before the sudden end of "Trussonomics."

AiY(D)

AsleepInYorkshire wrote:Bank of England poised to raise rates by most in 33 years

1. British inflation running above 10%
2. BoE to raise rates by 75 bps, analysts say
3. Hike comes after period of intense turmoil in Britain
4. BoE set to start selling off bonds stockpile

Bank Rate expected to peak at about 4.75% in 2023, down from more than 6% before the sudden end of "Trussonomics."

AiY(D)

I don't remember any mention of 6%. Maybe 5.75%. But don't forget, interest rates will peak lower because of Sunak's contractionary and deflationary policies which will land us in a recession (in fact we are already entering one). It is classic Osbornomics, and I note Osborne has been an early visitor advising the new PM.
I still think there is a fair chance of the BoE going for a 0.5% rise. They always talk a lot tougher than their subsequent actions warrant.

It's hard to filter through all the noise and headlines. The current generation are used to ultra low rates so any rises seem "massive" An older generation will point to times when rates were in the teens.

A 0.75 rise is a lot in the current situation although many think that rates should have risen much sooner and then it would have been done over a longer time period.

What should be the normal run rate over the medium to longer term? 5% maybe. Again many pensioners would welcome earning a return on their cash savings. (assuming inflation comes under control). I know many who don't want to put their money into shares which they deem "risky"

Well we will know for sure soon. I might allocate a bit more cash to holdings in future. 0.2% rates in a 2% inflation wasn't great. 5% rates in a (falling) 10% situation might be better.

Utilities and cost of living might be more effective than Bank of England rate rises anyway at cooling the economy.

Looking at the commodity prices most are well off their highs, but very many business are jacking up prices to what ever the market will take. A classic example being natural gas which is back to where it was a year ago but utilities are offering contracts that are several times the prices of a year ago.

My guess is that the central banks are happy to have inflation rip as it effectively reduces the size of their debt and that there will be no effective attempts to stop the gouging of consumers till we have had several years of inflation and national debts have been eroded.

I expect a complete focus on lagging indicators and for bonds to fall more. Presumably UK pension funds will have had to find some creative way around their mandates to hold a lot of guilts as otherwise the pension industry goes over and with it the banks via counter party risk.

If things proceed as normal we can expect property prices to get hurt and many buyers to be in negative equity situations, while others are murdered with higher mortgage payments. I expect the politicians to present this has a happy and needed period of consolidation.

Regards,

odysseus2000 wrote:
My guess is that the central banks are happy to have inflation rip as it effectively reduces the size of their debt and that there will be no effective attempts to stop the gouging of consumers till we have had several years of inflation and national debts have been eroded.

What Central Bank Debt?

odysseus2000 wrote:
I expect a complete focus on lagging indicators and for bonds to fall more. Presumably UK pension funds will have had to find some creative way around their mandates to hold a lot of guilts as otherwise the pension industry goes over and with it the banks via counter party risk.

Why would pension funds not want to buy more Gilts? Why do they need to be creative? Why do you think they "go over"? Pension funds are healthier now and have smaller deficits, generally, as rates have risen.

Which rates are we talking about.

BoE rate is 2.25%

5 year gilt 3.6 %

5 year fixed mortgage 6%

dealtn wrote:

odysseus2000 wrote:
My guess is that the central banks are happy to have inflation rip as it effectively reduces the size of their debt and that there will be no effective attempts to stop the gouging of consumers till we have had several years of inflation and national debts have been eroded.

What Central Bank Debt?

odysseus2000 wrote:
I expect a complete focus on lagging indicators and for bonds to fall more. Presumably UK pension funds will have had to find some creative way around their mandates to hold a lot of guilts as otherwise the pension industry goes over and with it the banks via counter party risk.

Why would pension funds not want to buy more Gilts? Why do they need to be creative? Why do you think they "go over"? Pension funds are healthier now and have smaller deficits, generally, as rates have risen.

Pension funds were forced by government legislation to buy gilts even when the rates were very low. When the Truss government policy produced a rise in interest rates the price of guilts reversed and at that point all the pension funds, who had been using gilts as collateral for counter party trades with the banks started to get margin calls which they could not support, effectively sending the banks towards bankruptcy as they had leant money to the pension funds based on the gilt collateral. This forced the boe to buy gilts to get the price up and null the margin calls.

Regards,

odysseus2000 wrote:Looking at the commodity prices most are well off their highs, but very many business are jacking up prices to what ever the market will take. A classic example being natural gas which is back to where it was a year ago but utilities are offering contracts that are several times the prices of a year ago.

My guess is that the central banks are happy to have inflation rip as it effectively reduces the size of their debt and that there will be no effective attempts to stop the gouging of consumers till we have had several years of inflation and national debts have been eroded.

I expect a complete focus on lagging indicators and for bonds to fall more. Presumably UK pension funds will have had to find some creative way around their mandates to hold a lot of guilts as otherwise the pension industry goes over and with it the banks via counter party risk.

If things proceed as normal we can expect property prices to get hurt and many buyers to be in negative equity situations, while others are murdered with higher mortgage payments. I expect the politicians to present this has a happy and needed period of consolidation.

Regards,

With great respect I think there is a great deal of muddled thinking here but I am not going to get involved except to say that as you may or may not know, both gas and electricity suppliers will have forward contracts for the supply of these commodities for quite some way ahead so the reduction in the spot price is not going to help them for some time.

The lack of forward contracts was the cause of many of the second rate electricity suppliers going bust.

Dod

odysseus2000 wrote:

dealtn wrote:

odysseus2000 wrote:
My guess is that the central banks are happy to have inflation rip as it effectively reduces the size of their debt and that there will be no effective attempts to stop the gouging of consumers till we have had several years of inflation and national debts have been eroded.

What Central Bank Debt?

odysseus2000 wrote:
I expect a complete focus on lagging indicators and for bonds to fall more. Presumably UK pension funds will have had to find some creative way around their mandates to hold a lot of guilts as otherwise the pension industry goes over and with it the banks via counter party risk.

Why would pension funds not want to buy more Gilts? Why do they need to be creative? Why do you think they "go over"? Pension funds are healthier now and have smaller deficits, generally, as rates have risen.

Pension funds were forced by government legislation to buy gilts even when the rates were very low. When the Truss government policy produced a rise in interest rates the price of guilts reversed and at that point all the pension funds, who had been using gilts as collateral for counter party trades with the banks started to get margin calls which they could not support, effectively sending the banks towards bankruptcy as they had leant money to the pension funds based on the gilt collateral. This forced the boe to buy gilts to get the price up and null the margin calls.

Regards,

I do not think this is correct.

Dod

odysseus2000 wrote:

dealtn wrote:

odysseus2000 wrote:
My guess is that the central banks are happy to have inflation rip as it effectively reduces the size of their debt and that there will be no effective attempts to stop the gouging of consumers till we have had several years of inflation and national debts have been eroded.

What Central Bank Debt?

odysseus2000 wrote:
I expect a complete focus on lagging indicators and for bonds to fall more. Presumably UK pension funds will have had to find some creative way around their mandates to hold a lot of guilts as otherwise the pension industry goes over and with it the banks via counter party risk.

Why would pension funds not want to buy more Gilts? Why do they need to be creative? Why do you think they "go over"? Pension funds are healthier now and have smaller deficits, generally, as rates have risen.

Pension funds were forced by government legislation to buy gilts even when the rates were very low. When the Truss government policy produced a rise in interest rates the price of guilts reversed and at that point all the pension funds, who had been using gilts as collateral for counter party trades with the banks started to get margin calls which they could not support, effectively sending the banks towards bankruptcy as they had leant money to the pension funds based on the gilt collateral. This forced the boe to buy gilts to get the price up and null the margin calls.

Regards,

This is incorrect on so many points. Rather than correcting you it might be better for you to go and actually acquire some knowledge (hint there are even threads about this very subject on this site).

What I will add to my last comment is that I do not think there was legislation re pension funds holding gilts although there might have been encouragement from the regulator; I do not know.

What I am confident about is that banks were being sent nowhere near bankruptcy by the short lived pensions panic, in fact I doubt that it even caused a ripple for them.

Dod

dealtn wrote:

odysseus2000 wrote:

dealtn wrote:

odysseus2000 wrote:
My guess is that the central banks are happy to have inflation rip as it effectively reduces the size of their debt and that there will be no effective attempts to stop the gouging of consumers till we have had several years of inflation and national debts have been eroded.

What Central Bank Debt?

odysseus2000 wrote:
I expect a complete focus on lagging indicators and for bonds to fall more. Presumably UK pension funds will have had to find some creative way around their mandates to hold a lot of guilts as otherwise the pension industry goes over and with it the banks via counter party risk.

Why would pension funds not want to buy more Gilts? Why do they need to be creative? Why do you think they "go over"? Pension funds are healthier now and have smaller deficits, generally, as rates have risen.

Pension funds were forced by government legislation to buy gilts even when the rates were very low. When the Truss government policy produced a rise in interest rates the price of guilts reversed and at that point all the pension funds, who had been using gilts as collateral for counter party trades with the banks started to get margin calls which they could not support, effectively sending the banks towards bankruptcy as they had leant money to the pension funds based on the gilt collateral. This forced the boe to buy gilts to get the price up and null the margin calls.

Regards,

This is incorrect on so many points. Rather than correcting you it might be better for you to go and actually acquire some knowledge (hint there are even threads about this very subject on this site).

Thanks, Yes. That is why I did not reply in detail although you will see that I have made one or two additional comments.

Dod

I see Eurozone inflation reached 10.7% in October so it's not just us!

scrumpyjack wrote:I see Eurozone inflation reached 10.7% in October so it's not just us!

German Inflation at 11.6%

AiY(D)

The requirement for pension funds to hold gilts was specified in the MFR:

https://www.ipe.com/pension-funds-in-gi ... 94.article

For pension funds, much of the ‘blame’ for the rush into gilts, is directed at the minimum funding requirement. The MFR was introduced as part of the Pensions Act in 1995, which was drawn up on the recommendations of the Goode Committee after the Maxwell affair.

This heavy holding of gilts led to the near collapse of the pension industry:

https://www.theguardian.com/business/20 ... t-meltdown

Regards,

odysseus2000 wrote:This heavy holding of gilts led to the near collapse of the pension industry:

No it didn't. Nor did it lead to the near bankruptcy of the Banking industry as you previously claimed.

If things were really that bad then there is something seriously wrong with the whole system. Why has the bank of England allowed the system to become unstable over some simple events. They must have been aware of LDIs

There isn't much financial stability if tax cuts being muted can cause total destruction. Maybe we need a total blackout on MPs saying anything for fear it might do the same.

What if rates rise again for other reasons not government related.

The problem wasn't a few tax cuts. It was a 'budget' involving signifcant cuts to revenue, combined with very large spending committments which the OBR had not been allowed to forecast on, consultation with the BoE, taking place as the longstanding head of Treasury was fired, and with no detail on the supply side planned for 6 weeks. It could not have been better done to spook the markets if they'd tried - and who knows, maybe they were.

So there were very rapid, unflagged, rises in interest rates. Completely abnormal. It was the speed of the changes and the lack of warning that broke the system. That's not to excuse those who got too involved with LDIs, or those who failed to indentify the risks, but without Truss/Kwarteng the problem would probably never have arisen.

dealtn wrote:

odysseus2000 wrote:This heavy holding of gilts led to the near collapse of the pension industry:

No it didn't. Nor did it lead to the near bankruptcy of the Banking industry as you previously claimed.

This was the description put on events by the boe as out lined inr guardian article:

https://www.theguardian.com/business/20 ... t-meltdown

Had the Bank not intervened with a promise to buy up to £65bn of government debt, funds managing money on behalf of pensioners across the country “would have been left with negative net asset value” and cash demands they could not have met.

“As a result, it was likely that these funds would have to begin the process of winding up the following morning,” the Bank said.

The central bank said the meltdown was at risk of rippling through the UK financial system, which could have then caused “excessive and sudden tightening of financing conditions for the real economy”.

Are you saying this is all boe propaganda & didn’t happen or what?

Regards,

odysseus2000 wrote:

dealtn wrote:

odysseus2000 wrote:This heavy holding of gilts led to the near collapse of the pension industry:

No it didn't. Nor did it lead to the near bankruptcy of the Banking industry as you previously claimed.

This was the description put on events by the boe as out lined inr guardian article:

https://www.theguardian.com/business/20 ... t-meltdown

Had the Bank not intervened with a promise to buy up to £65bn of government debt, funds managing money on behalf of pensioners across the country “would have been left with negative net asset value” and cash demands they could not have met.

“As a result, it was likely that these funds would have to begin the process of winding up the following morning,” the Bank said.

The central bank said the meltdown was at risk of rippling through the UK financial system, which could have then caused “excessive and sudden tightening of financing conditions for the real economy”.

Are you saying this is all boe propaganda & didn’t happen or what?

Regards,

Just because it is in the Guardian doesn't make it true. I worked alongside the pensions industry (and the Bank of England) for many years. I would postulate I know more about this situation than the average person, and posters here too.

This isn't "propaganda". It is closer to media misunderstanding and hyperbole. The BoE only intervened to provide orderly markets in securities over which it had a regulatory responsibility. In the end actual interventions were very small. Far from your claimed "negative net asset value " (whatever that means!) most pension funds exited the recent disorderly period in the interest rate markets with improved balance sheets representing lower deficits.