Economics Nerd Central

[How bad boy]

The Bank of England notes that markets now expect Bank Rate to average 5.5% for three years - which implies mortgage misery (2 yr mortgage rates of 6% plus) will be with them till long after the next general election.
View attachment 22337

House price falls and recession to follow?

Yep.

I wonder if there's a reason why the UK's inflation rose higher than other developed economies and is falling slower?




And why is it the markets clearly think inflation is going to stay higher longer term in the UK?



It's a complete mystery.

 

[Stacky]

Yep.

I wonder if there's a reason why the UK's inflation rose higher than other developed economies and is falling slower?

View attachment 22338


And why is it the markets clearly think inflation is going to stay higher longer term in the UK?
View attachment 22339


It's a complete mystery.

They used to have levers, brakes, access to labour from an entire continent as it demanded and now they are in a high inflationary death-loop.

 

[How bad boy]

Eurozone inflation down to 5.5%

https://twitter.com/x/status/1674704326693113856

The contrast with the UK is striking. That said, there's also significant divergence between countries, Spain's inflation is very low, (was 1.6%) Germany's too high (6.8%). Will be interesting to see if there's convergence in the full report, otherwise the ECB has a tricky problem on its hands

 

[How bad boy]

Forecasts for Bank Of England base rate to be between 5.75 (JP Morgan) and 6% (market consensus) by the end of this year.

Stubborn UK inflation may lead to 7% interest rates, economists warn

JP Morgan says risk of ‘hard landing’ for economy heightened, with higher borrowing costs hitting business

www.theguardian.com

It was 0.1% in Nov 2021, 0.75% when this thread was started 15 months ago.

 

[How bad boy]

Forecasts for Bank Of England base rate to be between 5.75 (JP Morgan) and 6% (market consensus) by the end of this year.

Stubborn UK inflation may lead to 7% interest rates, economists warn

JP Morgan says risk of ‘hard landing’ for economy heightened, with higher borrowing costs hitting business

www.theguardian.com

It was 0.1% in Nov 2021, 0.75% when this thread was started 15 months ago.

Base rate is now 5.25%.

If inflation doesn't reduce significantly in August, it'll be going up again, couple of members of the MPC wanted 5.5%.

The majority of pain is yet to come

https://twitter.com/x/status/1686998626667503617

The pain will not be distributed evenly

https://twitter.com/x/status/1687017253114449920

As per way too many other policies, the boomers continue to boom

 

[Happyhonkaman]

I fixed mine at 2% for 4 years today

That was with AIB, they have just announced today that the same mortgage is 3%

As I understand it there are a few more interest cuts due to the ECB rate so thinking next summer might not be a bad time to start approaching the bank with a view to getting a decent rate in place for another 5 years. LTV would be 50% so thats in our favour

What say the PROC brains trust?

 

[How bad boy]

That was with AIB, they have just announced today that the same mortgage is 3%

As I understand it there are a few more interest cuts due to the ECB rate so thinking next summer might not be a bad time to start approaching the bank with a view to getting a decent rate in place for another 5 years. LTV would be 50% so thats in our favour

What say the PROC brains trust?

Simplistic view is that further cuts are likely, a number of forward looking indicators are low (e.g. PMI, GDP), so the zone could use a boost. Inflation is below the target 2% rate:
GDP:

PMI, below 50 is a contraction:

Eurozone inflation rate:



There are a few factors that add a note of caution there.
While PMI is contracting in a number of metrics, it's trending higher in the worst of them.
The Eurozone money supply has returned to levels seen at the peak of the inflationary burst.

They still haven't quite unwound the Covid ramp up:


Economics are a bit divided about this:

ECB Cuts Rates as Expected With Disinflation 'Well on Track'

Besides cutting rates, the European Central Bank amended its language on expected inflation

www.morningstar.co.uk

"In September, only 12% of economists polled by Reuters had predicted an October cut, but most changed their views to predict cuts in both October and December after September inflation data and dovish comments from Governing Council members, including ECB President Christine Lagarde."

Basically, they're quite unlikely to go up. Are they going to go down? Looking more likely, but a long way from guaranteed.
I suspect that if they're lower by next summer, it won't be by much, would expect the ECB to take a cautious approach to dropping interest rates. There's no crisis to push rates lower and if one was to emerge, dropping rates just to support growth would leave no ammunition to deal with an actual crisis.

 

[Happyhonkaman]

Simplistic view is that further cuts are likely, a number of forward looking indicators are low (e.g. PMI, GDP), so the zone could use a boost. Inflation is below the target 2% rate:
GDP:
View attachment 37525
PMI, below 50 is a contraction:
View attachment 37526
Eurozone inflation rate:
View attachment 37527


There are a few factors that add a note of caution there.
While PMI is contracting in a number of metrics, it's trending higher in the worst of them.
The Eurozone money supply has returned to levels seen at the peak of the inflationary burst.
View attachment 37528
They still haven't quite unwound the Covid ramp up:
View attachment 37529

Economics are a bit divided about this:

ECB Cuts Rates as Expected With Disinflation 'Well on Track'

Besides cutting rates, the European Central Bank amended its language on expected inflation

www.morningstar.co.uk

"In September, only 12% of economists polled by Reuters had predicted an October cut, but most changed their views to predict cuts in both October and December after September inflation data and dovish comments from Governing Council members, including ECB President Christine Lagarde."

Basically, they're quite unlikely to go up. Are they going to go down? Looking more likely, but a long way from guaranteed.
I suspect that if they're lower by next summer, it won't be by much, would expect the ECB to take a cautious approach to dropping interest rates. There's no crisis to push rates lower and if one was to emerge, dropping rates just to support growth would leave no ammunition to deal with an actual crisis.

What would your thoughts be on mortgages right now? Fix in for a decent stretch or keep the terms to 4-5 years so you are never on too much of a solo?

Its probably not how banking works but I'd imagine we are an attractive proposition for a bank as the LTV is low and the house qualifies for a green mortgage, which I have at the moment. Maybe they dont give a shite about this stuff and just sell their 'products'?

I think I'd be happy to take a 10 year term if I could get it under 3%

 

[How bad boy]

What would your thoughts be on mortgages right now? Fix in for a decent stretch or keep the terms to 4-5 years so you are never on too much of a solo?

Its probably not how banking works but I'd imagine we are an attractive proposition for a bank as the LTV is low and the house qualifies for a green mortgage, which I have at the moment. Maybe they dont give a shite about this stuff and just sell their 'products'?

I think I'd be happy to take a 10 year term if I could get it under 3%

I think it very much depends on your personal circumstances.

I plan on moving once the youngest leaves nursery, which happens to be shortly after my 5 year fix is up, so a longer fix is not on the cards.
Usually once you're below a 50% LTV, the chances of the bank not getting their money back drop fairly close to zero, hence the best rates if you've got vaguely decent credit.

Fundamentally, the ECB is targeting 2% as an inflation rate. The Taylor rule (https://www.investopedia.com/terms/t/taylorsrule.asp) with no deviation from long term potential growth rate would have a recommended rate of 4%.

The industry has moved away from it over the past couple of decades, but it's not bad to use it as a rule of thumb.

Fundamentally, if you're targeting a 2% inflation rate, you really should only drop below that level if there's an active problem, otherwise the ECB are literally lending money out at a negative real terms rate* against it's target policy.


EU growth is definitely below what it should be, but the ECB doesn't much account for growth in its policy decisions.

If growth is anaemic and inflation drops, expect the ECB to drop rates again, however there is a floor.
So maybe keep an eye on the inflation and growth rates, if they start to creep back up, then a fix isn't a bad idea. My suspicion is that they'll try and avoid dropping to levels over the past decade. In an ideal scenario, rates would be around 5% so that if the shit hits the fan, you can drop the interest rates a few percent to give the economy a short term boost. At 2%, your scope for doing it is massively reduced, with negative interest rates and QE, which has limited effectiveness (as banks don't pass on the falls in interest rates past 1%)




*to explain what I mean, imagine you lend €100 in Year 0 at 1% with inflation at 2% and none of it is paid back over a 5 year term:
Year 1, you are owed €101, Year 0 €100 is now worth €102
Year 2, you are owed €102, Year 0 €100 is now worth €104
Year 3, you are owed €103, Year 0 €100 is now worth €106
Year 4, you are owed €104, Year 0 €100 is now worth €108
Year 5, you are owed €105, Year 0 €100 is now worth €110

If you're paid back at the end of year 5, what you're getting back is equivalent to less than what you lent out once inflation is accounted for (and no, I'm not going to do the NPV variant of this explanation...).
That loan was a bad investment, you are now poorer.

 

[Happyhonkaman]

Cheers HBB, yeah below 50% LTV and credit rating would be fine. Im never moving again so no considerations like your own either. It might actually be worth getting a broker on the case and letting them do the leg work, when we took the mortgage, and when we renewed it both had constrictions for specific reasons in each case so our options were limited, neither of those apply now.