Economics Nerd Central/ The Global Inflation Thread

Fed increased interest rates to 3-3.25% yesterday, Bank of England have just jacked rates up to 2.25%.

There's likely more to go based on the reports of the voting and Fed expected to hit 4.4% by end of year according to consensus.

Expect at least another couple of percent on the ECB interest rate over the next 6 months.

Once again, if you haven't fixed your mortgage rates, do it now.
That's not how it works.

The 10 yr bond rate is based off the expected average rates over 10 years (these expectations are priced into the 10 year rate, so if the BOE is expected to raise rates by 50 bps in two months time and they subsequently do and after they comment that the market is in tune with their thinking, than the 10 yr rate would hardly budge) therefore while the BOE rate is 2.25 now it also comprises of an expected rate of say 2.75 by Nov and 3.25 by Jan and possibly 1.75 in 6years time etc.

So the real question you ask is do you think all these rate rises will lead to a deep recession in which case short term rates may come down quicker than expected (don't fix) or conversely if you think it won't lead to a recession or only a mild one in which case rates will stay higher for longer (which would imply fix now). Similarly another question is how long do you think inflation will remain high.
 
Fed increased interest rates to 3-3.25% yesterday, Bank of England have just jacked rates up to 2.25%.

There's likely more to go based on the reports of the voting and Fed expected to hit 4.4% by end of year according to consensus.

Expect at least another couple of percent on the ECB interest rate over the next 6 months.

Once again, if you haven't fixed your mortgage rates, do it now.
I fixed mine at 2% for 4 years today
 

How bad boy

Full Member
That's not how it works.

The 10 yr bond rate is based off the expected average rates over 10 years (these expectations are priced into the 10 year rate, so if the BOE is expected to raise rates by 50 bps in two months time and they subsequently do and after they comment that the market is in tune with their thinking, than the 10 yr rate would hardly budge) therefore while the BOE rate is 2.25 now it also comprises of an expected rate of say 2.75 by Nov and 3.25 by Jan and possibly 1.75 in 6years time etc.

So the real question you ask is do you think all these rate rises will lead to a deep recession in which case short term rates may come down quicker than expected (don't fix) or conversely if you think it won't lead to a recession or only a mild one in which case rates will stay higher for longer (which would imply fix now). Similarly another question is how long do you think inflation will remain high.
Yes, well aware that the interest rate announcement is much more complex than the headline, so is almost everything else in macro...
But mortgage interest rates tend to track that headline target rate...

It's MV=PY, right? My thesis is that V has recovered, revealing the increase in M during Covid.

Tidying that up means you can still have inflation and a recession, because its hard to control which of P or V you reduce when you reduce M.
And of course, there's the drop in the pound + balance of payments disaster thanks to Brexit also dragging down GDP...

Combined, can make it very difficult to drop interest rates in the recession.
 
Yes, well aware that the interest rate announcement is much more complex than the headline, so is almost everything else in macro...
But mortgage interest rates tend to track that headline target rate...

It's MV=PY, right? My thesis is that V has recovered, revealing the increase in M during Covid.

Tidying that up means you can still have inflation and a recession, because its hard to control which of P or V you reduce when you reduce M.
And of course, there's the drop in the pound + balance of payments disaster thanks to Brexit also dragging down GDP...

Combined, can make it very difficult to drop interest rates in the recession.
The point I'm making is, if you walk into a bank tomorrow to get a mortgage, there will be no immediate benefit by choosing a fixed versus floating rate, as both will be priced to yield the same profit to the bank based on future interest rate expectations. Basically you are being quoted the same rate from their point of view.

It is only if these expectations are proven wrong (which is always the case) that you will either benefit or not based on whatever option you choose.

So it is incorrect to tell people they should switch to a fixed rate unless you think interest rates will exceed expectations and stay there for longer.
 
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How bad boy

Full Member
The point I'm making is, if you walk into a bank tomorrow to get a mortgage, there will be no immediate benefit by choosing a fixed versus floating rate, as both will be priced to yield the same profit to the bank based on future interest rate expectations. Basically you are being quoted the same rate from their point of view.

It is only if these expectations are proven wrong (which is always the case) that you will either benefit or not based on whatever option you choose.

So it is incorrect to tell people they should switch to a fixed rate unless you think interest rates will exceed expectations and stay there for longer.
That's a little too Efficient Market Hypothesis for my liking, i also think interest rates are very heavily priced based on market pricing, far more than future expectations, primarily due to market competition.

You only need one or two competitors in the market who are more bearish on the market to drag the charged rates down, and a mortgage sales manager who can't offer market competitive rates isn't going to be selling many mortgages. I wrapped up my remortgage for 5 years at 1.59% slightly before the start of this thread.

IMO, it was a pretty risky bet on behalf of my mortgage provider, unless they can offload the risk (almost dead certainty) of losing substantial amounts of money on that deal in real terms over the next 5 years.

I honestly haven't been paying attention to what's happening on CDOs, but i presume that's how banks are planning on not going bust (again).

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing"
Citigroup CEO Chuck Prince, 2007

I don't think mortgage interest rates are as forward looking as you claim
 
That's a little too Efficient Market Hypothesis for my liking, i also think interest rates are very heavily priced based on market pricing, far more than future expectations, primarily due to market competition.

You only need one or two competitors in the market who are more bearish on the market to drag the charged rates down, and a mortgage sales manager who can't offer market competitive rates isn't going to be selling many mortgages. I wrapped up my remortgage for 5 years at 1.59% slightly before the start of this thread.

IMO, it was a pretty risky bet on behalf of my mortgage provider, unless they can offload the risk (almost dead certainty) of losing substantial amounts of money on that deal in real terms over the next 5 years.

I honestly haven't been paying attention to what's happening on CDOs, but i presume that's how banks are planning on not going bust (again).

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing"
Citigroup CEO Chuck Prince, 2007

I don't think mortgage interest rates are as forward looking as you claim
A 10 year mortgage rate is priced using the 10 yr interest rate swap (fixed v floating).

This 10 year interest swap curve is calculated using Libor rates going out 10 years, which is totally based on future expectations.

Therefore at day 1 there will be no difference in which mortgage you choose, as no one can tell the future you will either benefit or not depending on how accurate these interest rate expectations prove to be.

Generally banks will sell government bonds they are holding to hedge against giving you a fixed rate. i.e they sell a bond in which they receive a fixed coupon from the government in return for receiving a fixed payment from you, but at a higher rate than the government bond albeit with more credit risk involved, or they will take the other side using interest rate swaps, i.e they pay fixed (10 yr rate) but receive floating (3 mth libor) to another bank which is offset by receiving fixed from you combined with paying floating on a daily basis ( borrowing short term) to finance the mortgage they gave to you. Really the only way they should lose on mortgages is if you default or they are not properly hedged.

Competition as you mention will only eat into whatever extra margin they charge customers as opposed to the market rates they deal with other banks.
 

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