As the FT noted yesterday:
Investors are right. It is time that the central banks of the world - including the Bank of England - said what they are going to do with interest rates.
Those banks put up rates without need to tackle an inflationary episode that interest rate rises could never address, and now we are apparently stuck with interest rates that are well in excess of those that economies, let alone people and businesses, can afford to bear, and nothing is being said about what happens next.
Markets are undoubtedly cooling. In the light of the full frontal assault that they have had from central banks that is hardly surprising.
The big fear is that central banks have massively over-done that attack. The likelihood - most especially in the UK where the transmission mechanism from interest rate rises into the real economy is very slow because we have so many fixed-rate mortgages - is that the chance of a dramatic overshoot, with interest rate rises already in place now likely to cause considerable economic harm, is high.
So, what we want to know is when will rates start falling, and by how much, over what period? As an economy, we need to know that. People need to know that. Businesses need to know that. And if the Bank of England does not have the answer to that question, it should not be in charge of setting interest rates.
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Wholeheartedly agreed about the BoE and interest rates.
Very angry that the BoE seems to think its actions are not accountable to anyone.
Don’t hold your breath! Today’s headline is “Central Banks prepare to rebuff investors over path of interest rates”.
I know
That is why I offer a contrary view
Central Bankers are in face saving mode. To cut now would demonstrate that the last few hikes were ill-judged… and that would never do. They will wait until either “an event” allows a change of direction or the economic data becomes pressing.
It’s a strange world where the “bond vigilantes” (a term coined by Ed Yardeni) are pushing for lower rates!
Indeed
Every month the bond vigilantes insist the Bank of Japan must cut rates THIS time. And every month the BoJ says, in its ever-so-polite way, “don’t be stupid, wage growth is still insufficient to keep the economy afloat.”
It’s massively frustrating to me that this counterpoint is never raised when the media repeats the central banker lie that high rates are needed to tackle inflation. Is no mainstream economics journalist capable of independent thought?
An interesting article by economist James Galbraith is “In Defense of Low Interest Rates” (click “Policy Note 2023/3”) explains why John Maynard Keynes supported low interest rates, and how policy was changed in 1979 by Federal Reserve Chairman Paul A. Volker, with monetarism peaking and failing in 1982 with interest rates hitting 20%
Source: https://www.levyinstitute.org/publications/in-defense-of-low-interest-rates
Thanks
Interesting read. Thank you, Ian
He could have just said “Japan.” 🙂
On a side note about inflation,
I see that the “debate” about the price of items like Quality Street and Roses etc.. is in full swing, how they have got smaller for less.
A £5 tin of Quality Street in around 1978 should be priced at around £26 today according to the Bank of England inflation calculator.
I think that there is a genuine issue that a lot of people do not understand inflation.
Whether you agree with it or not, why businesses have to increase prices, labour costs, supply costs business rates etc…
I really do think that financial education is seriously lacking in this country.
Agreed
I don’t recall that many Quality Streets in a box back then
Mind you, I have not had one for a long time
What’s the mix of ingredients now compared to then? Are we really comparing like for like?
Central banks like the US Fed and Bank of England have given fairly clear communications about how we can expect base rates to evolve over the next year or so – this can also be backed out from market pricing of different fixed and floating rate securities.
You refer to the proportion of fixed rate mortgages (which is indeed pretty high – around 75%), but was is equally important is the term of those fixed rate mortgages.
Unlike the US and Continental Europe, we don’t typically have 10-year, 20-year, 30-year fixed rate mortgages. Instead we have 1-year, 2-year, 3-year fixed mortgages. 5-year is considered an outlier and is fairly unusual.
So the impact of interest rate changes has a much more immediate impact in the UK than other countries.
We have a transmission mechanism into mortgages here
They don’t
As to the rest, you seem to miss the point. Is that deliberate?