Interest rates, the pound and good news for Brits

In an environment where the U.S. Dollar is rising and everything is falling, one needs to pay attention to the fine details. For me, its in the UK and its 5% base interest rate.

Oil is now below $117 a barrel, so it stands to reason that inflation hawks around the world can get in the backseat, take a load off and let the economy hawks do the driving. That means interest rates are not going higher. They are going lower. And where does the central bank have the most room to cut? At the Bank of England (BoE).

I expect the BoE to start cutting rates aggressively once its obvious that inflation is to remain muted. The result will be a fall in Sterling and a boost to the UK economy when it needs it most.

I reckon the BoE feels mighty good about its base rate being so high because it gives them lots of room for stimulus. The Fed, with its puny 2% base rate, doesn’t have nearly the same ability to reflate.

  1. pej says

    While I usually agree with what I read here, I strongly disagree with this one.

    And I don’t think that just because oil is correcting for a week or two it means that inflation will get back in control while it has been out of control in the UK since I moved here in 2004 (and it’s probably far worse in the US). The results of all the interest rates cut have not even hit the real world and once the inflation genie is out of the bottle, it’s going to be very difficult to get it back in.

    Also, debasing the currency and stealing the relatively few savers money who refused to take part in this “debt binge” and house price speculation can be confused with stimulus.

    We will have growth once people start producing instead of borrowing, and once they have savings instead of 10 times their earnings as dept and also once they don’t spend 50-60% of their income in subsistence spending (housing/food/taxes).

    Finally, there has basically been no real growth in the UK or in the US since 2000 when you take real inflation figures.

  2. Edward Harrison says

    I can’t argue with most of what you said about inflation. I certainly think it is headed higher over the next month or two in the UK and elsewhere.

    I am just looking at it from a policy maker perspective. These guys want to ease. They don’t want to hold interest rates high when a credit crisis is underway.

    Notice I didn’t recommend their course of action.

  3. Stevie b. says

    I’d rather be in the BOE’s position than the Fed’s. It’s a complete no-brainer that the UK has more room for manoeuvre than the US. I think I read in the Herald Trib. that the US was in a much better position cos their rates were so much lower than the UK. Baloney!

  4. pej says

    5% or 2%, UK’s inflation has been a lot higher in the UK than in the US for quite some years now. Everything that cost 1$ there costs 1£ here.

    If you look at the real life instead of just figures and stats, I think you would see which of the actual people are better off.

    Plus, the US at least has some major tech companies, and some (little) industrie and major conglomerates that produce some things. The UK is just a place for gambling on the markets (equity, credit, housing…) and its real estate bubble is worse than in the US. But you might not get to see that from figures, since the BoE made their lending to banks “top secret” and will *never* reveal what is currently happening and how much it is lending to each bank…

  5. Edward Harrison says

    The CPI in the US is now 5%, which is higher than the UK RPI and CPI. So real rates in the US are much lower than the UK. In the UK real rates are still positive.

    If you really want to be a bank that is sitting pretty, look at Australia with base rates at 7.25%. Lots of room to cut.

    On some level, it doesn’t matter what the real rates are from a policy maker perspective. It just matters how much room to manoeuvre they have (i.e. how much extra stimulus they can provide). As the world slips into recession this is what central bankers are thinking about.

  6. pej says

    Interest rates are not good indicators in my opinion:
    Who cares if the BoE decreases rates when the rates changes don’t affect mortgage rates anymore and that nobody can get into more dept nor have access to credit at all?

    And the Fed, even with 2% interest rates, has just found many ways to debase more and more: Paulson will inject hundreds of billions in Fannie and Freddie, Bush is sending checks to people, the Fed have got their “alphabet soup” of liquidity and no matter the rates, they are printing billions of USD every day.

    The main concern for the UK is that inflation has already been out control for several years, even if it isn’t well reflected in the CPI, the tax rates are super high already, and consumers have beaten the world records of dept.

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