Interest rates: So when will they rise? – 4754

10th June 2011

The chances of a rise have diminished greatly since April, according to reports.

Many economists, noting a fall in inflation in March, began to wonder whether the first rise would be delayed until 2012, says the report.

Interest rate futures, says This is Money point to March/April 2012 for the first increase from 0.50% to 0.75%.

But these market predictions are very volatile, adds the report, and economists and experts haven't got a great record of making the right calls in recent years.

Commenting on Mindful Money blogger Shaun Richard's post, Drf says: "One wonders why the masquerade of the regular MPC meetings continues.  We all know there will be no change.

"The Chancellor has already decided that so why do we have to have the monthly charade of the MPC meeting to decide to do nothing?  Why indeed do we continue to pay them a good deal out of public funds to do nothing? We could do with saving the money to help pay off public debt."

With inflation at double the Bank of England's target, and likely to stay there for some time, many think the Bank should increase rates sooner rather than later in order to combat rising prices, which are eroding consumers' spending power, says a BBC report.

But others say it is still too soon and the Bank's Monetary Policy Committee (MPC) should hold off, for fear of jeopardising the UK's fragile economic recovery, particularly in light of the economy's 0.5% contraction in the final three months of last year.

The BBC asked 22 economists when they thought rates would rise. Fourteen out of the 22 said August, four predicted May, and one each said June, July, November and February.

When asked where rates would stand at the end of the year, twelve said 1%, six said 1.25%, one said 1.3%. Two predicted a smaller rise to 0.75% by the year end, while one, HSBC's Stuart Green, thought rates would still be at 0.5%.

The Guardian also asks a range of experts what they think in this report.

While bets on a May 2011 rise were widespread three months ago, but investors now see it as 50/50 as to whether the bank will move this year, says a report in the Daily Telegraph 

Meanwhile, also in the Daily Telegraph there is a story that the bank rate will rise quickly once Mervyn King makes first decision to increase rates, according to historic data from Lloyds TSB.

Lloyds has analysed past interest rate activity and has revealed that in the past the Bank of England has increased rates by small amounts but in quick succession.

Analysing data from the past 14 years, says the report, the figures reveal that Bank Rate has been cut by up to 1.5 percentage points, but that it only ever rises by 0.25 percentage points at a time.

However, historically the Bank makes several of these small increases in a short space of time.

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18 thoughts on “Interest rates: So when will they rise? – 4754”

  1. Bkester says:

    I don’t know much about the operations of the IMF but I’m under the (possibly mistaken) impression that the organisation almost always demands currency devaluation as part of a rescue package with a view to improving competitiveness.  I’ll be interested to see how this will be achieved in Greece, Portugal, Spain etc.

    1. Anonymous says:

      Estonia is an example of how an internal devaluation can be done. Helps that Estonia’s politicians are relatively honest. Estonia’s PM took a 20% pay cut. This makes austerity  easier to tolerate.

      1. JW says:

        Estonia has the kroon, not in the EZ. Besides , if you are one of the unemployed ( high teens) or left the country ( estimated at 20%) you might have a different view. Estonia currently has lost about 25% of GDP since 2007. This is certainly an ‘example’, but not a very nice one for many involved. Still the Finnish and Swedish Banks are happy as are their ‘vendor’ exporters, debts paid. So IMF work done to spec.

        1. Anonymous says:

          Estonia joined the eurozone 1 Jan 2011.

          Due to convergence criteria Estonia could not allow the Kroon to devalue and had to use an internal devaluation. Yes this has been a painful readjustment, please tell me your less painful solution.

           A devalued currency has a similar effect on real wages. Sterling has devalued 20% against the euro compared to 2007 and just look at how much more expensive food and petrol are.

          Spain’s unemployment is over 20% and Greek unemployment is nearing 20%. The Eurozone’s extend and pretend is not nice for those involved. And they are still sinking where Estonia is improving.

          1. JW says:

            Apologies for missing the 1 Jan date.
            However I don’t understand the logic of your last two sentences.
            As the kroon has been pegged to the Euro for some time, the ‘pain’ is little to do with currency convergence but much more to do with the inbalance of the economy.
            The loss of people and GDP were inflicted by the IMF rebalancing to save the creditors in Sweden and Finland. It may have been triggered by the global credit problems in 2007 but was inflicted to a great degree to ensure overseas debts were paid.
            So yes, the pain was magnified because they couldn’t devalue their currency. The question remains, which is better, or rather less worse? And for which part of the population? The same issues face Greece and Portugal.

          2. Anonymous says:

            1 : Convergence criteria required Estonia to keep the Kroon / Euro exchange rate near constant. This meant the economic readjustment could not be obscured by devaluation. You take a hefty pay cut and be glad you still have a job.

            2 : A currency devaluation would have a similar effect. While you do not get a 20% pay cut, 20% price increases on goods will lower your purchasing power.

            3 : I think the Spanish and Greeks are suffering similarly harsh drops in income and rises in unemployment. Estonia is not unique.

            4 : The Estonians are seeing progress with their suffering, where the euro bailout austerity causes Greece suffering without progress.

          3. JW says:

            ‘The Estonians’ who are benefiting a small percentage of the remaining population. The same is true in Ireland. The ‘economic indicators’ may be looking slightly better, but that disguises the suffering of the vast majority of the population. You are correct  in that Greek, Spanish and Italians will be added to the sacrifice on the altar of IMF ‘progress’.
            Wonderful! 90% of the population ( at least) who had nothing whatsoever to do with the decisions taken in their name end up paying for the mess for years to come. Welcome to the 3rd world.

          4. ExpatInBG says:

             These countries are in crisis because their politicians mismanaged and overspent. I think the remaining options are
            Bad : Austerity

            Worse : IMF recovery program

            Worst : Economic disintegration, currency collapse, starvation and riots.

            What solutions can you suggest ?

          5. JW says:

            Germany has done pretty well from the Euro, especially with ECB helping them out with ‘German-centric’ policies earlier.
            Overall the EZ isn’t in too bad a shape, so its time for some ‘transfers’.
            Either Germany has to provide direct state transfers or it has to allow monetary expansion and the risk of inflation.
            Its too easy to lump the PIIGS together and say they all mismanaged/overspent. Greece is a basket case, but there are many more complicated reasons for the others. Until its property market blew up , financed largely from external banks, Spain’s economy was doing OK, indeed better than Germany on some measures ( remember Germany has over 80% debt, its not a paragon of virtue!). 

  2. JW says:

    Shaun, do you not think its worth digging below the ‘national debt’ issue to find who is actually driving these changes in bond values? Is it not likely that MF Global was but the tip of an iceberg? That the very same ( mainly US institutions) that brought us the US mortgage scam are doing exactly the same thing with a new ‘sub-prime’ ie EZ bonds? The initial banking debt has been added to already high national debt everywhere in the western world. The next stage is the complete socialisation of this debt by monetisation ( inflation), already well under way in US and UK. However in EZ there has been two additional factors. Firstly the brokers/traders can play the repo and CDS game ( exactly as they did with sub-prime mortgages); and secondly Germany refuses to monetise the debt. Its no wonder the US is getting nervous, its no longer AIG sitting with the CDS exposure its now Goldman and JP Morgan.
    The actions of NY FED you identified are a symptom of credit lines etc on the brink again just like 07/08. When she goes this time there are no government bail-outs available, all used up. It probably needs to happen , but its going to be very ugly.

    1. Anonymous says:

      Hi JW

      You are asking a few questions in one go I think but let me pick out a couple of points and answer them.

      1. The collapse of MF Global is an issue on many fronts. Organisations so close to central banks used to be closely supervised by them and it was called the “eyebrows of the Governor of the Bank of England” in the UK some years ago. So yet again the new system has shown a clear flaw.

      For me there is the issue of “client money” as I worked in futures/options departments and we believed that such money was held in segregated accounts which were untouchable. It is clear that they were not untouchable at MF Global which is another system failure. For those that are unaware of what took place it would appear that segregated accounts were indeed dipped into and used.

      It also challenges the broking industry as if clients funds can be dipped into then not many will be willing to leave money with them….

      2. I think that the NY Federal Reserve is still there with its fx liquidity swaps and I would not be surprised if they are called on in major amounts again before this crisis is over.

      1. Anonymous says:

        If the client money accounts have been “dipped into” then the responsible parties should face prosecution …..

  3. Anonymous says:

    Shaun – forgive the ignorance, but what part if any do the IMF Special Drawing Rights have within the context of the incredible plan (?) you have outlined? 

    1. Anonymous says:

      Hi Ray

      SDRs are an area which is little understood and they operate in something of a grey area which suits our political leaders for obvious reasons.

      They are the IMF’s version of a currency although I do not know if any shop accepts them!

      As of yesterday one SDR was worth US $1.56922 although it is now defined against 5 currencies and not just the dollar. For US readers there has been inflation here as it used to be worth only one dollar.

      From the IMF website

      “The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to around SDR 204 billion ”

      So they have US $320 billion and there we get our answer. Maybe a role but nowhere near enough to bail out even Italy let alone any others.

      Care may be needed with the IMF ‘s arithmetic too as there are five not four currencies in the SDR basket (It gets around this by arguing that the other 4 are valued in US dollars).

      Oh and if you take the mainstream media view that there is no risk in all of this then there is the question what is it all backed by? If it is backed then there must be a risk….

      1. Anonymous says:

        Shaun – thank you for your response that clarifies my thinking. Seems to me there’s a huge amount of “funny money” circulating and almost all of it is most certainly NOT risk-free!!

  4. Mr_Kowalski555 says:

    America’s best economist interviewed by a rather obnoxious BBC radio gal trying to pin him as an evil speculator– but there are some of his predictions going forward:

    http://www.bbc.co.uk/iplayer/console/p00lh2jc

    1. Anonymous says:

      Hi Mr.K

      Thank you I particularly enjoyed the “German Pope Italian head of the ECB line”….

      I think that Sarah Montague (who presents Radio four’s Today programme over here) misunderstood the purpose of the programme which was to ask hard questions and not to act “hard”. Accordingly she missed the chance to ask difficult questions of  a man who actually answered the questions he was asked only for her to often talk over him.

  5. Sean Fernyhough says:

    Financial innovation causing problems in Hungary.  It is simple and boring to say it but you need to settle your liabilities/ meet your commitments in the same currency you receive your income in.  The Hungarian government is now spending money – it probably hasn’t got – guaranteeeing borrowers who have bought (and probably been sold) a product that is, if not a ticking time bomb, then a improvised roadside devise ready to blow up as their finances walk past it. 

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