Does raising base rates really reduce inflation?

[Nimrod103]

Which you keep saying but not acknowledging the UK moved first and has also tightened policy through QE reversal. Perhaps you can flesh out your argument here and provide some evidence to back it up?

I don't need to. Look at the respective rates.

TJH

Well since the GFC in 2009, the Fed was the first to start raising rates off the floor in 2016. Because of Covid they then dropped them abruptly before starting a renewed round of tightening in Feb 22.
The UK had no real tightening move from 2009 until Dec 21. So arguably the Fed was the first to ditch ZIRP.

In addition, for almost all of the last 50 years UK base rates have been above US rates, so the present situation of UK rates below the US is highly irregular, and suggests policy is about to enter a phase of volatility.

[servodude]

I don't need to. Look at the respective rates.

TJH

Well since the GFC in 2009, the Fed was the first to start raising rates off the floor in 2016. Because of Covid they then dropped them abruptly before starting a renewed round of tightening in Feb 22.
The UK had no real tightening move from 2009 until Dec 21. So arguably the Fed was the first to ditch ZIRP.

In addition, for almost all of the last 50 years UK base rates have been above US rates, so the present situation of UK rates below the US is highly irregular, and suggests policy is about to enter a phase of volatility.

Indeed.
In the absence of the external pressures currently in play I would expect the relative rates to reflect the degree to which a place wanted to attract foreign money as well as control internal lending.

[Tedx]

Sledgehammer to crack a nut ... the estimates of where interest rates are heading are just that, so they nudge up in small increments and watch, before they do it again or wait.

AiY(D)

Well 8.5% by September......how do you like them apples ?

Well Jeremy Hunt said he'd be quite happy to see a recession if it saw inflation falling. Still, it doesn't really affect him does it?

[GoSeigen]

Which you keep saying but not acknowledging the UK moved first and has also tightened policy through QE reversal. Perhaps you can flesh out your argument here and provide some evidence to back it up?

I don't need to. Look at the respective rates.

TJH

It's rare for me to agree with TJH in monetary/bond matters but...



From FT Alphavile, quoting Deutsche Bank research supporting the idea that the BoE is behind the curve:

Deutsche Bank put out an interesting chart earlier this week, showing how the Bank of England has struggled to close the gap between current interest rates and market expectations of the terminal rate:



Deutsche’s Shreyas Gopal and Sanjay Raja wrote:

[The] market had assessed the BoE to be inching in the right direction, with the distance between the policy rate and the terminal rate priced by the market falling from September to March. Much of that hard work has been washed away of late though, with pricing suggesting that the UK is just as far away from its landing zone as it was late last year.


Real interest rates in the UK are still negative, approximately 200bp below their long-term average level. [Which is not to say I'd criticise the BoE, they are in an impossible position. Blame lies squarely with government fiscal policy and general economic incompetence.]

GS

[Nimrod103]

https://www.thisismoney.co.uk/money/mar ... icism.html

Bank of England launches external review into how it forecasts inflation, following criticism of interest rate setter's wide-of-the-mark predictions

BoE's David Roberts tells Treasury Committee the bank is calling in external help
It has consistently underestimated the pace and 'stickiness' of inflation

It must be almost unprecedented for civil servants to admit that they have got things so badly wrong.
Personally speaking, I have always thought that BoE targetting/modelling which ignored house prices is likely to give seriously wrong results. Locally house prices ramped up significantly during the ZIRP experiment, and particularly got out of hand during Covid, which was a clear indication that monetary policy needed to be tightened.

[anteos]

Pretty much as expected. The boe would only add a meaningful measure of houseprices into their equations when they are falling

[Charlottesquare]

It was an "as frothy" rather than a "frothy" comment, a relative term rather than an absolute.

Certainly Edinburgh tends not to experience the bigger drops, New Town tends to be rock solid, as you move out less solid until say Dalkeith (where my nephew stayed in negative equity for years post 2007) where prices can and do yo yo.

I should mention the property we bought back in 1997 we still own, I suspect if we sold the gain today would be circa 375%( SP now nearly 5 times what we paid), but this is really not that uncommon, the Edinburgh property my father bought in 1967 for £6,750 he sold for £50,000 in 1981/82 (should have been £60k but found some dry rot) ,last time it was for sale circa 5 years back it was o/o £850,000 and I expect today it would easily be o/o £1m (Three storey end terrace house in Learmonth Place)

Significant price escalation has been with the Edinburgh market certainly since the late 1950s/mid 1960s, it is not new.

This is a good example of just how absurd UK house prices have become.

So in 1967 someone on average UK earnings of about £1,000 could have bought a nice Edinburgh property for about 6x the average UK salary.

And now in 2023 that same property will cost about 30x the average UK salary.

So long as people keep feeling “richer” every year through ever rising UK house prices, it will be very difficult to get UK inflation under control.

Inflation in the UK will not be properly controlled until UK house prices are strangled, negative equity is routine, and UK house prices have fallen by at least 30% or 40% in real terms.

They could not have bought back then, nobody back then would have lent more than 3x main earner earnings and besides you would have had to have saved with the building society for at least a couple of years or have had equity. My father was not an average earner in 67, by then he was a
40 year old partner in an Edinburgh legal firm, and this was the fourth house he had bought, he had started in the housing chain in the early 50s .

[scotia]

They could not have bought back then, nobody back then would have lent more than 3x main earner earnings and besides you would have had to have saved with the building society for at least a couple of years or have had equity.

We (newly married) bought a flat in Edinburgh in 1969 for £3400 - slightly more than 3 times salary - but we were helped by father in law with a substantial deposit. I notice now that these houses are selling for around £200000. If I were in the same junior academic position today, I would probably have increased my salary about 30 times, which is about half the increase in the house price. But then, for many years I paid a substantial mortgage interest rate - much greater than has become common (until the recent rises). So what will happen when the new rates hit home?

Moving off from the effects of base rates on the housing market, the rising rates will be a welcome relief to oldies trying to obtain a decent annuity rate.

[Tedx]

Bloomberg:

Britain faces recession and a flood of job losses if rates hit 6%

Chancellot and Multi millionaire Jeremy Hunt has said he is quite happy for that to happen.

'Its for your own good' he (probably) added.

[Mike4]

Bloomberg:

Britain faces recession and a flood of job losses if rates hit 6%

Chancellot and Multi millionaire Jeremy Hunt has said he is quite happy for that to happen.

'Its for your own good' he (probably) added.

Best we cap base rates at 5.99% then, and avoid all this pain.

(I'm definitely getting the hang of this 'economics' stuff now aren't I?)

[servodude]

Bloomberg:

Britain faces recession and a flood of job losses if rates hit 6%

Chancellot and Multi millionaire Jeremy Hunt has said he is quite happy for that to happen.

'Its for your own good' he (probably) added.

Best we cap base rates at 5.99% then, and avoid all this pain.

(I'm definitely getting the hang of this 'economics' stuff now aren't I?)

You missed the winkie thing... again!

If you don't then someone will be along to explain to you why that bawhair doesn't matter; or worse... to agree ("so if we only heat the planet by 1.499deg we're fine?")

[Mike4]

Best we cap base rates at 5.99% then, and avoid all this pain.

(I'm definitely getting the hang of this 'economics' stuff now aren't I?)

You missed the winkie thing... again!

If you don't then someone will be along to explain to you why that bawhair doesn't matter; or worse... to agree ("so if we only heat the planet by 1.499deg we're fine?")

Dammit you're right! (Again )

[dealtn]

Bloomberg:

Britain faces recession and a flood of job losses if rates hit 6%

Chancellot and Multi millionaire Jeremy Hunt has said he is quite happy for that to happen.

'Its for your own good' he (probably) added.

Can you provide the quote for what he actually said as I am fairly certain it won't have been what you claim

[GoSeigen]

Bloomberg:

Britain faces recession and a flood of job losses if rates hit 6%

Chancellot and Multi millionaire Jeremy Hunt has said he is quite happy for that to happen.

'Its for your own good' he (probably) added.

Can you provide the quote for what he actually said as I am fairly certain it won't have been what you claim

I'd guess the above was posted more for entertainment value than for economic enlightenment...


GS

[Tedx]

Bloomberg:

Britain faces recession and a flood of job losses if rates hit 6%

Chancellot and Multi millionaire Jeremy Hunt has said he is quite happy for that to happen.

'Its for your own good' he (probably) added.

Can you provide the quote for what he actually said as I am fairly certain it won't have been what you claim

You could easily find it yourself. But....

https://twitter.com/TomBoadle/status/16 ... iness-live

[dealtn]

Can you provide the quote for what he actually said as I am fairly certain it won't have been what you claim

You could easily find it yourself. But....

https://twitter.com/TomBoadle/status/16 ... iness-live

I did, and as expected, he didn't say he was happy for there to be a recession and a flood of job losses.

[Tedx]

Comfortable = happy.

Semantics.

[dealtn]

Comfortable = happy.

Semantics.

This is the Economics board, a serious place, not a playground.

This isn't semantics at all. You chose to substitute a word for one with a different meaning claiming it was something that was said. It wasn't said, nor would it be something he, or likely anyone would say. Your reasons for doing so are unknown to me but don't belong in a serious discussion on the subject.

[Nimrod103]

Comfortable = happy.

Semantics.

Happy is certainly one of the synonyms of comfortable (https://www.thesaurus.com/browse/comfortable), but I presume Hunt meant that he would accept Britain being plunged into recession if that’s what it takes to bring inflation down. Whether the British population would be comfortable with that is a different matter.

[GoSeigen]

Comfortable = happy.

Semantics.

This is the Economics board, a serious place, not a playground.

This isn't semantics at all. You chose to substitute a word for one with a different meaning claiming it was something that was said. It wasn't said, nor would it be something he, or likely anyone would say. Your reasons for doing so are unknown to me but don't belong in a serious discussion on the subject.

dealtn, Tedx cheerfully plays the rôle of court jester here, TMF used to have a picture of a jester, here we have actual Tedx to entertain us Fools (see site domain name).

If he uses a bit of hyperbole that's just part of the act surely. And fair game if the target is a politician. Personally I can imagine quite a few of his [Hunt's] party popping the champagne if a recession comes along.

GS