Interest rates to remain high for 2 years

[mc2fool]

Yeah, my point was that 13% sounds like lots, but if inflation is, say, 10% and there's 25% income tax, then the 13% gross becomes 9.75% net and so is less than inflation. And of course if inflation was even higher ....

lots of people on here get excited today at 5 and 6%.. just saying

And I'd be excited about 5 and 6% if inflation was only at 2%, but rates now are less than inflation ... and possibly even more so after tax, so it's not only the headline rate that counts. Just saying.

[pje16]

THAT was my point ....

[Tedx]

Maybe they shouldn't have bothered putting up rates at all.

You're on actual crack!


GS

Fud.

Maybe I should quote some obscure rule guff to keep you happy.

The main question I have is 'has raising interest rates from near zero to 5.25% brought down inflation? Or has it come down / coming down all by itself?

Secondly, has raising interest rates actually contributed to inflation (there is another thread on here discussing that)?

All views are welcome.

[Dod101]

I am not at all sure that I agree with you but then I am not at all sure of your point either.

Dod

I prefer a weighted average to a simple average

I am a simple fellow.

Dod

[EthicsGradient]

Another point that connects interest rates and inflation: if comparable regions (Eurozone, USA) put their interest rates up (as they did), and the UK does not, then there will be a flight of capital out of the UK, to get the better rates. This will cause the pound to fall, which raises the cost of imported goods, which raises inflation.

[vand]

Another point that connects interest rates and inflation: if comparable regions (Eurozone, USA) put their interest rates up (as they did), and the UK does not, then there will be a flight of capital out of the UK, to get the better rates. This will cause the pound to fall, which raises the cost of imported goods, which raises inflation.

Indeed. That is why developed markets are increasingly connected There's an unwritten but well understood agreement that they will all basically sing from the same songsheet for maximum effect. These days most of the main central banks basically take their cue from the Fed.
For all the economics and analysts working at all the major central banks around the world, you just need to look at what the Fed is doing to know where everyone is heading - there is absolutely no need to go any deeper than that.

[bluedonkey]

The BoE interest rate changes have a lag before they have an effect on the economy. Higher interest rates today/this year = slower economy tomorrow/next year.

[GoSeigen]

You're on actual crack!

Fud.

Maybe I should quote some obscure rule guff to keep you happy.

The main question I have is 'has raising interest rates from near zero to 5.25% brought down inflation? Or has it come down / coming down all by itself?

Secondly, has raising interest rates actually contributed to inflation (there is another thread on here discussing that)?

All views are welcome.

Fud?? That's a new one to me. "Slang term for vagina" perhaps?

If you've never heard of the Taylor Rule that's your problem. I even linked to info about it at the Atlanta Fed. You are discussing monetary issues and don't know anything about how the obscure Federal Reserve Bank carries out its monetary function?

What you completely ignored is the contemporary example of Turkey. Turkey carried out a wonderful experiment where they would lower rates when inflation was high, why? presumably because "high interest rates cause inflation" Their inflation rate hit 80% last year and take a look at their exchange rate and think how Turks with any savings feel about that: collapsing currency, rising prices AND pathetic income for their savings. Okay perhaps it was wonderful for foreigners who want to come in and buy all the Turks' assets, but is that what you aspire to for the UK??? Your fellow Fools might not be so keen...

I don't know why you're pushing this nonsense, you must be getting some strange stuff in your social media feeds!

GS

[ReformedCharacter]

Fud?? That's a new one to me. "Slang term for vagina" perhaps?

GS

No! Fear, Uncertainty and Doubt!

RC

[SteadyAim]

Interested to hear any thoughts how that affects our investment decisions. Short term deposit fixes versus longer term? Etc.

I don't think rates will stay high for that long. Inflation is falling everywhere else, UK is just ~6 months behind. (e.g. we didn't restrict the rise in energy prices like many countries did.)

Divisia M4 is an interesting indicator (ok, this is the US, but others have said, economies and markets are increasingly interlinked nowadays).
https://centerforfinancialstability.org/amfm_data.php
(first chart on right)

[vand]

Remember when the coordinated message was "as low as possible for as long as possible?"

We at a complete 180 for that now. Banks are talking tough even as all the evidence mounts that their tightening work is done.

[scrumpyjack]

Looks like Bernanke will be telling Bailey what to do. We might then have some sensible decisions

[spasmodicus]

If you've never heard of the Taylor Rule that's your problem. I even linked to info about it at the Atlanta Fed. You are discussing monetary issues and don't know anything about how the obscure Federal Reserve Bank carries out its monetary function?

What you completely ignored is the contemporary example of Turkey. Turkey carried out a wonderful experiment where they would lower rates when inflation was high, why? presumably because "high interest rates cause inflation" Their inflation rate hit 80% last year and take a look at their exchange rate and think how Turks with any savings feel about that: collapsing currency, rising prices AND pathetic income for their savings. Okay perhaps it was wonderful for foreigners who want to come in and buy all the Turks' assets, but is that what you aspire to for the UK??? Your fellow Fools might not be so keen...

I don't know why you're pushing this nonsense, you must be getting some strange stuff in your social media feeds!

GS

I had to Google the Taylor Rule - it's apparently notghing to do with Taylor series, but is a "principle", e.g. what we have been observing economists say for years:
Principle. implies that when inflation rises, the real interest rate should be increased. The idea that the nominal interest rate should be raised "more than one-for-one" to cool the economy when inflation increases (that is increasing the real interest rate) has been called the Taylor principle.

However, our Mr Bailey apparently hadn't heard of it as a "rule" either. When confronted by rising inflation a year or two ago he dismissed it as temporary e.g.https://www.reuters.com/world/uk/boes-bailey-warns-against-over-reaction-rising-inflation-2021-07-01/
So it seems that there are different types of inflation after all, i.e. "temporary", treated by burying your head in the sand and "wage-price-spiral-shock-horror", which we allegedly have now, to which the only possible reaction is utter panic.

S

[vand]

Not quite a race to the bottom just yet... but signs that the peak is being priced in

Halifax joins rivals in cutting mortgage rates
https://www.bbc.com/news/business-66459129

[NeilW]

What you completely ignored is the contemporary example of Turkey.

Just as you have ignored the contemporary examples of Japan and Argentina. Japan has practically zero interest rates and no accelerating inflation (contrary to the beliefs of the interest rate obsessed), whereas Argentina has massive interest rates and rampant inflation.

As for Turkey, you can't just put the interest rate down. You have to suppress luxury imports to give up import space for needed imports, start taxing effectively to drain excess Lira from the system and then look at the Lira banking policies and the firm insolvency rules so they stop making things worse.

And, yes, the idea of making the currency go down, and suppressing luxury imports to control the price of needed imports is so that 'abroad' will invest in Turkish firms, bringing in the 'patient' money that can eliminate the 'hot' money of foreign currency loans that need regular servicing. A debt for equity swap in other words.

However in Turkey's case Erdogan is still fully signed up to 'export led growth' neoliberalism. He just has a religious problem with interest. So he's not adopting any alternative economic strategy at all.

As to the Taylor rule, nobody follows it - because it is mathematical bunkum.

The best explanation of how the Taylor rule works in the standard NK model is in the PHD macro II lecture notes of Eric Sims. Eric Sims is a highly respected mainstream macroeconomist, and his lecture notes have often been recommended to me as the best source of knowledge on how the NK model works. These notes are from a PHD macro II class he teaches.

According to Eric Sims when Taylor originally proposed the Taylor rule he thought it would control inflation in the following way. In his view, peoples’ propensity to consume is based on the real interest rate. In order to reduce inflation the central bank must reduce consumption, and it does so by raising the real interest rate. To do so it must raise the nominal interest rate by more than the increase in inflation, since the nominal interest rate is approximately equal to the real interest rate plus the inflation rate.

However, Sims states that Taylor’s original intuition is not how the Taylor rule works in the standard NK model. Instead, the central bank uses the Taylor principle to rule out indeterminacy by creating explosive inflation dynamics. If inflation gets above target the central bank increases inflation further, ensuring that the inflation rate eventually goes to infinity. Somehow solutions with infinite inflation in inflation are ruled out, and so by destabilising the economy the central bank ensures inflation will stay on target.

https://themountaingoateconomics.com/2023/07/24/new-keynesian-macroeconomic-models-are-worse-than-you-think/

[vand]

Found this from the archives.

Pay attention to BoE "forecasts" at your own peril:

https://www.morningstar.co.uk/uk/news/2 ... -says.aspx

[Walkeia]

https://moneymovesmarkets.com/journal/2 ... -data.html

Milton Friedman “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

A pure monetarist economist has a very gloomy outlook for economic prospects. On the plus side they think inflation is about to collapse.

An interesting topic gaining traction with central banks is to consider tweaking their mandates to target higher levels of inflation. Perhaps 2-3% CPI as opposed to close to 2% say. None wish to make any major changes this cycle to avoid the risk of credibility loss… changing the goalposts in the midst of the first inflation fight in 30 years wouldn’t be a good look. However, in the next economic downturn / cutting cycle I expect this to be adjusted.

[GoSeigen]

https://moneymovesmarkets.com/journal/2023/8/31/disastrous-european-monetary-data.html

Milton Friedman “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

Friedman assumed the quantity of money would always be approximately constant. That assumption was blown away in the GFC.

A pure monetarist economist has a very gloomy outlook for economic prospects. On the plus side they think inflation is about to collapse.

The author seems to feel that broad money leads by about 2 years (chart 8). By that reckoning, 2024 should be a gangbuster year as inflation cools and markets look forward to falling rates. If rates don't fall rapidly the anticipation will still fuel the markets, but will portend an even worse recession when it comes, presumably. The deflationary problem would start to hit in late 2024 (if the author is correct).

GS

[Walkeia]

Hi GoSeigen,

Agreed the author believes in an approximately 2 year lag between movements in broad money and inflation. I have read the blog for many years and I enjoy reading a monetarists perspective on the outlook as the views can, at times, differ from the consensus.

Given the approximately 2 year lag, the author believes in, I think it would be very difficult to base investing / portfolio allocation exclusively of money supply but it does feed into my world view: which is currently that we have raised interest rates too high, central bank base rates are close to peaking, inflation will fall rapidly and that the recent fall in economic activity indicators (such as the PMIs) will be sustained for a subdued period of growth.

I could see a scenario as you describe below; but remain cautious equities given events such as SVB can change sentiment quickly. Instead I have been rebalancing my portfolio (via investing incoming funds) towards fixed income. I’d be interested in your view of economic prospects / impact and future path for interest rates if you have any strong views.

All the best