Sunday, May 28, 2006
Too early for a calming rate cut
Posted by David Smith at 11:00 AM
Category: David Smith's other articles

There have been three occasions during its nine years of independence that the Bank of England has reduced interest rates in response to a global financial crisis. How long does the current period of extreme financial-market turbulence have to last before the Bank decides that a calming cut is needed?

If a week is a long time in politics, a day can be an eternity when it comes to reading financial markets. We ended the week stronger but the fragility remains. The stock market’s performance this month gives a fair impression of the old caricature of red-bracered City traders, shouting “buy, buy, buy” in the phone jammed to one ear, and “sell, sell, sell” in the other. One day it’s party time, the next Armageddon.

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It is, of course, an extreme caricature — only throwbacks to the Gordon Gekko era of the 1980s would dream of wearing red braces these days — but it deserves to go alongside other explanations of why financial markets have suddenly become wildly volatile and why, through all the volatility, equity prices are significantly down on their recent peaks.

There is an economic explanation, which can be traced back to the Far East, and the first hints from the Bank of Japan earlier this year that it was contemplating an end to its long period of zero interest rates. That, apart from having a potential impact on so-called carry trades (borrowing at zero interest in Japan and investing in higher-yielding US securities), was also taken as a signal that the cheap-money era is over.

Add in the uncertainty about how far American rates would go up, the European Central Bank’s aggressive tone and the about-turn on UK interest-rate expectations and there was certainly something for the markets to get worried about. Most of this has been known for some time, although it only appears to have kicked in now.

What about the dollar? Some economists trace the current market trouble to the meeting of G7 finance ministers and central bankers on April 21, which apparently put the skids under the dollar. The G7’s statement, saying exchange rates should reflect economic fundamentals, was innocuous enough, but the markets read between the lines to see a strategy of deliberate dollar devaluation.

It is possible that what we are seeing under the general heading of “risk aversion” is a return to more normal conditions. The timing of the volatility in the markets, in other words, is less important than the fact that there are good reasons for it.

Thus zero interest rates could never be a permanent condition in Japan. Nor, perhaps, could extremely low long-term real interest rates. Mervyn King, the Bank governor, spoke earlier this year about both low rates and what he described as the fact that “risk premia have become unusually compressed”, saying “it is questionable whether such behaviour can persist”.

His warning was perceptive. Not only have risk premia dramatically “decompressed” but the Organisation for Economic Co-operation and Development, in its twice-yearly Economic Outlook last week, warned of a further significant rise in long rates, which could put pressure on house prices, notably in America, France and Spain. It noted, however, the “good chances for soft landings” in Britain and Australia.

So, to return to my initial question, how should the Bank and for that matter other central banks respond to these shifts, if at all?

The previous occasions when the Bank did respond, in the autumn of 1998, after the September 11 attacks on America and before and during the Iraq war, were all characterised by extreme market nervousness. In 1998, the Russian and hedge fund (Long Term Capital Management) crises, piggybacked on to the Asian financial crisis. The Bank’s monetary policy committee cut base rate from 7.5% on the eve of its October 1998 meeting to 5% the following June — a dramatic easing of policy.

In the aftermath of the September 11 attacks, which included one emergency MPC meeting, the rate was cut from 5% to 4% in the space of two months. In 2003, base rate was cut from 4% to 3.75% in February, on the eve of the Iraq invasion, and further, to a modern-day low of 3.5%, in May that year.

Was there a common theme in these moves? The 1998-99 episode and the Bank’s post-September 11 response were both part of an international move to cut rates and restore confidence in the global economy. In 2003, too, central banks took the brave decision to ignore rising global oil prices and cut rates because of the risks to growth.

What would it take to produce a similar move this time? In America Ben Bernanke, the new Federal Reserve chairman, will be keen to avoid his version of what came to be called the “Greenspan put” — a term which comes from the options markets — the belief among investors that it was safe to push share prices higher because if anything bad happened the Fed would cut rates and thereby boost the market.

Here, the MPC, whose new member David Blanchflower played a straight bat in evidence to the Commons Treasury committee last week, has got to a position where the expectation is that the next move in interest rates will be up, although probably not for some time. Fellow MPC member Paul Tucker said he was concerned about heightened inflation expectations.

Its reluctance to cut will be based on the risk of a British version of the Greenspan put. The “MPC put”, perhaps, is the belief among homebuyers that if anything bad happens, base rates, and therefore mortgage rates, will be cut. The stock market’s woes will, at the margin, have in any case boosted the case among investors for bricks and mortar.

Not only that but the Bank will have been cheered by tentative signs of a rebalancing of the economy. The CBI’s industrial-trends survey last week reported weak demand at home but an encouraging pick-up in export orders, the strongest for a decade. Business investment also showed a welcome rise in the first three months of the year, official figures showed.

It comes down to a question of two things. Just as the Bank has cited strong equity markets this year as a source of strength for the economy, so a falling market has the potential for generating a decline in confidence and economic weakness. The MPC will have to gauge how powerful this effect is.

The Bank, which keeps a close eye on financial markets, will also be on the lookout for any evidence that the volatility in financial markets is spilling over into the general economy and threatening Britain’s “hard-won stability”.

For the moment, market volatility has probably done enough to snuff out thoughts of base rate going up any time soon, which is good. But markets will have to fall rather more to really put rate cuts back on the agenda.

PS When politicians talk about the work-life balance, as David Cameron did last week, the intention is obvious: to tap into the concern of people up and down the country working all the hours in the day, not to mention the weekends, and never seeing spouse (who may also be under the cosh) or children.

Many people reading this, even if they think the Tory leader’s “money isn’t everything” message last week was a bit rich coming from him, will recognise at least part of his diagnosis. That was the purpose of the Tory leader’s address to the Google Zeitgeist Europe 2006 conference in Hertfordshire. As an aside, it’s hard to imagine Margaret Thatcher knowing what such an event was meant to be, let along speaking at it.

But how downtrodden are we? Everybody knows the claims that Britons work the longest hours in Europe, that as a nation of workaholics we are destroying the family and so on.

In fact, official statistics show that average working hours are declining. The average weekly hours of work for all people in what are described as full-time jobs has come down from 38.8 in 1996 to 37.1 in the first quarter of this year, according to the Labour Force Survey. The male average has come down from 40.9 to 38.9, while the female average has fallen by a smaller amount, from 34.7 to 34.

What’s going on? The European working-time directive has had an effect in bringing down the average, by reducing hours for those previously averaging more than 48 hours. There is also, inevitably, a very wide distribution of working hours within the average. There are, in other words, plenty of workaholics. But there are also quite a lot of people who enjoy an easy life.

From The Sunday Times, May 28 2006

Comments

Current market volatility is due to worries about inflation, which you failed to point out. I think it would change most of your conclusions. The markets now require increases in base rates to calm their nerves.

Posted by: AA at May 28, 2006 02:21 PM

It goes without saying that the markets are spooked by fears of higher interest rates because they think central banks will respond to inflationary pressures. See also the previous week's piece - 'Ghosts of past inflation return to haunt us'. There have been times in the past when the markets have responded favourably to higher rates. I don't think this is one of them.

Posted by: David Smith at May 28, 2006 02:55 PM

I think you'll find that most economists would consider inflation to be a far greater concern than increases in short term rates and tightening of central bank policy. Interest rates have been historically low and carry trades etc have resulted in huge equity bubbles. Increases in interest rates, a calmping down on inflation and a correction in commodities and equities would go a long way towards achieving financial stability in the long term.

Posted by: AA at May 28, 2006 03:14 PM

Inflation on the way up, people up to their eyeballs in debt, housing market bubble... They answer is of course an interest rate cut!

No I don't think so somehow David. You have been talking about interest cuts for years now. Whatever our financial woes an interest rate cut is always called for. But in the real world we have barely managed one (5:4 MPC decision and Mervyn King outvoted).

Inflation is indeed a problem and the answer it not to cut rates. In fact it's quite the opposite.

P.S.

I wonder what the fascination with certains journalists and rate cuts is. The London bombings were shortly followed by presumptions of an emergency MPC meeting and a talk of a rate cut. Of course this never happened.

Posted by: Vincent at May 28, 2006 04:23 PM

I've been talking about rate cuts over the years because we have indeed been moving to a lower interest-rate regime. Each successive peak in rates since independence has been lower than the one before - 7.5%, 6%, 4.75%. I certainly didn't expect an emergency rate cut in July last year - the MPC was actually meeting on the day of the bombings. We did, however, get a cut the next month.

As for this year, I have said for several months that I wouldn't vote for a cut in present conditions. The conclusion of today's piece is that market turbulence would need to got a lot further to make the case for a calming cut of the kind we have seen before.

As for "most economists would consider inflation to be a greater concern", most intelligent economists would look at the absence of second-round effects from high oil prices and conclude there is little case for an early tightening of policy.

Posted by: David Smith at May 28, 2006 05:16 PM

Hello David,

Are you suggesting the MPC members who are concerned about inflation unintelligent? I guess the one who voted for an increase in rates must be downright stupid. Oh dear me.

The last rate cut was not the inevitable certainty that you portray. As Vincent mentioned it was a close 5:4 battle. It could have gone either way.

If your interested in historical data then I suggest you note that each successive house price correction (or 'stablisation' as some like to call it) has been greater than the last. Lower rates would only fuel the fire.

I've heard the 'it's different this time' lark before in the seventies, eighties and nineties (unfortunately I'm probably older than most). Economic cycles can be long (decades). The number of times that I've heard we are in a 'stable economy with sustainable growth' only to see the wheels fall off year after.

Those who have only seen the spring and summer can never imagine the colder times ahead.

Kind regards,

William

Posted by: will at May 28, 2006 06:30 PM

What sets this time apart, of course, is the duration of the stability - 54 successive quarters of economic growth and 13 years of low inflation - during which, at regular intervals, people have been warning that the wheels are about to come off, or that we are about to experience a burst of inflation. Always wrong. This is fundamentally different to the 1970s (a notoriously turbulent decade) and the 1980s. During the 1980s, by the way, I was always writing that it would end in tears. It took a while, but it did.

I'd suggest you have another look at house price history, and the unique circumstances of the early 1990s, the only time since the 1930s when we have seen a significant fall in nominal (cash) house prices. The explanation, which I've given many times, was mainly a doubling of interest rates from 7.5% to 15%.

Last summer's rate cut may have been a narrow vote, but it happened, and whether it is 9-0 or 5-4 doesn't matter - rates were still cut. As for interest rates now, I wasn't suggesting that the single member of the MPC who voted for a hike was unintelligent, but then one of his fellow members voted for a cut, and he is one of our best economists. Most economists, on the MPC and elsewhere, don't think interest rates should be going up.

Posted by: David Smith at May 28, 2006 08:01 PM

In December last year you would have been in the majority, in calling for a rate cut - not any more. The trend in world interest rates is now UP, take, for example, the USA, Candada, Australia, the EU, Japan to name a few important countries. Inflation, as expemplified by the recent rises in metal prices, has been caused by the loose central bank policy of the last ten years. This has been driven by unsustainable increases in money supply provided by central banks to ward off deflationary forces. The very money supply that was used to stimulate growth has also led to phenomenal equity bubbles that are endangering future world economic stability. It is time mop up some of the liquiditiy and move away from historically low interest rates that have always been unsustainable in the long term. That will require some further policy tightening from central banks worldwide. This is simply the economic cycle. To suggest that interest rates will move in one direction only (i.e., in your case, down) in the future is clearly propostorous.

Posted by: AA at May 28, 2006 09:30 PM

The word is preposterous, and it would be if I'd suggested any such thing. What I did say was that each successive peak for rates since Bank independence has got lower. The doesn't mean the process can continue indefinitely. As it happens, I think 4.5% is close to a neutral rate for the UK, and don't forget that we had a tightening cycle long before the other central banks you mention. The question in the piece was: What would it take to produce an emergency rate cut of the kind we've seen before? A 10% fall in the equity market is not enough. A fall of 20% or more, based on past experience, might be. There have been plenty of other occasions where rates have turned abruptly in response to external shocks, some of which I mentioned in the piece.

Posted by: David Smith at May 29, 2006 11:27 AM

Broad money (M4) growth has accelerated sharply over the past two years. It is currently growing at an annual rate of 12%, which even the Bank of England estimates is over **three percentage points** higher than is sustainable over the long term. Mervyn King himself made the comment this month that, "in the long run, if you have rapid broad-money growth, you are going to get inflation."

With this in mind, how do you explain your hypothesis that 4.5% interest rates are close to neutral?

Posted by: AA at May 29, 2006 03:52 PM

That's easy. 1. I'd never base my assessment of the neutral rate on broad money, which led us repeatedly up the garden path in the past, and which has been a lousy predictor of inflation - and anything else - in recent years. 2. I'd also look at the breakdown of M4, which shows a significant slowdown in the rate of growth of lending to the household sector in recent years but a big increase in lending to the financial sector. The M4 acceleration appears to be telling us something about the private equity boom and M & A activity but nothing of any importance about the economy as a whole.

Budding monetarists should take a look at The Rise and Fall of Monetarism, an old book of mine, before placing faith in broad money.

Posted by: David Smith at May 29, 2006 08:17 PM

David Smith,
I think it is very wrong to ignore broad money supply as a lead indicator of price inflation for a number of reasons.
Even if the M4 stats are pointing to greater lending to financial sector it still represents the injection of liquidity, and still will have a devaluing effect on the currency.
Do you actually believe that the CPI measure (as applied by the ONS) accurately measures inflation of consumer prices? How much has your gas bill/electricity bill risen this year? How much more do you pay for petrol? Can you think of any neccessities (not MP3 players) that have fallen in value?
If GB / BoE) do not do something soon then I suspect that the 'hidden' (barely!) inflation of consumer prices will eventually lead the average UK public to an Eastern European standard of living. The NHS is on its way there, and I hear that Nu Labour are now employing up to 70% of working adults in some regions - worse than in most communist countries?? But then I expect this is the real plan/agenda of these champagne socialists.

Posted by: N T at May 30, 2006 08:20 AM

David - are you advocating that the BOE should target asset prices when setting interest rates? E.g. if stock market falls, should cut rates? Or if asset prices start rising too fast, interest rates should rise?

"Just as the Bank has cited strong equity markets this year as a source of strength for the economy, so a falling market has the potential for generating a decline in confidence and economic weakness"

Oof, that's a tough one. I do agree that the wealth effect must be considered when setting policy, but seems to me that central bankers should stay out of guessing what correct price of an asset should be. Especially equity markets.

Maybe asset prices (or some of them) should be included in inflation statistics? Just because a house price purchase is rare doesn't mean it can't be accounted for in the basket somehow.

I've always thought that inflation could be the exogenous variable, and helps drive money supply growth. The fact that M4 >> CPI just suggests that the money is popping up elesewhere (in private equity transaction prices for example! Have you tried to compete with those guys to buy anything? Someone is overpaying big time, driven by % management fees IMHO)

Certainly the deflation caused by Chinese manufacturing could be seen as exogenous, and completely out of monetary policy control. Which suggests to me that BOE neutral rate should be higher. If there is exogenous deflation in tradables, but not untradeables, but the BOE targets a measure that includes both, they ran the risk of keeping rates too low too long, causing distortions.

Basically, it just feels to me that we should accept mild deflation for a while, as China & India catch up, rather than pumping in money to keep inflation going. I've seen deflation in action (in HK) and it isn't a catastophe. Given that long term risk free real interest rates are at the 2-3% level, it isn't until you get deflation more than that that you hit liquidity trap problems.

Oddly enough - I was also in Japan for the start of their problems - I seem to have affinity with recessions! The problem I saw there was structural/ political, not monetary. There was a huge gap in productivity tradeable/ non tradeables, that could no longer be sustained.

The tradeable/ non tradeable problem is an interesting one. E.g. if manufacturing productivity shoots up, how much more should hairdressers be able to charge? Especially in an open economy?

Posted by: Richard at May 30, 2006 11:42 AM

No, I'm not suggesting targeting asset prices - in fact I debated against this proposition recently. I think the MPC should carry on targeting inflation, and I think it would be a mistake to tolerate a period of deflation (if it ever happened) to keep a lid on asset prices. The point I was making was the one to which you alluded - if there is a read-across from the stock market to the wider economy, through wealth or confidence effects, then central banks should be prepared to respond to them, as part of their inflation remit. The route, however, should always be - weak stock market - weak economy - below-target inflation. As I said, we're some way away from that.

On inflation in general, and the earlier comment, I agree that the CPI is an unsatisfactory measure, but the low inflation story stands if you look at RPI or RPIX, which are much more representative. We had a long discussion on this in the forum.

Posted by: David Smith at May 30, 2006 12:03 PM

David,

In regards to your comment:

"I'd suggest you have another look at house price history, and the unique circumstances of the early 1990s, the only time since the 1930s when we have seen a significant fall in nominal (cash) house prices. The explanation, which I've given many times, was mainly a doubling of interest rates from 7.5% to 15%."

If you want to properly interpret the house price inflation (adjusted) graph properly then you can't fail to note that every peak is followed by a very symetrical looking trough. There are no exception to this rule as far as this data series goes back.

The late eighties house price crash was on the back of a large boom. We are at present experiencing the largest house price boom ever. Drawing on historical data we are now looking at a massive correction.

I have often heard you quote that busts are rare. Yes they are, but so are large booms. Noting historical data: a bust following a boom is certainly not rare, quite the opposite. Thus a rare boom is followed by a not unexpected bust.

It's interesting to that you quote historical data to support an unsustainable oil price whilst ignoring the same facts for houses.

On the inflation note a rise from 7.5% to 15% is the equivalent to 3.5% to 7%. A 7% base rate would decimate the market. Come to think of things a 6% would start a meltdown.

Another interesting point (and often ignored point) is that the repo rate was only really under 10% for less than a year. It was under 8.38% for ONLY THREE MONTHS, prior to this it had been much higher. This is not really a long time to have a great impact on the market. Averaging things out we could say a rise of rates from 9% to 15% would provide a more realistic summary from which to derive conclusions. In todays repo environment that would be a jump of 3.5% to around 5.75%.

5.75% is a rather different number to the 15% some individuals seem to think we need to trigger of a house price crash.

I find it difficult to fathom that in a time of global rate tightening and inflation fears that we are thinking of rate cuts.

Now are you confidentally telling me that in the next decade that the repo rate may not climb over 6% (or 7%)? If the answer is no then even you must conclude we are at risk of house price crash.

Are most home purchasers aware of the upside risk? No, of course not. House prices only ever go up... except when they are coming down.


References:

House prices adjusted for inflation.
http://www.nationwide.co.uk/hpi/historical.htm

Historical repo rates (BOE).
http://213.225.136.206/mfsd/iadb/Repo.asp?Travel=NIxIRx

Historical rates graph (small one).
http://www.houseweb.co.uk/house/market/graph.html

Posted by: Werewolves at May 30, 2006 12:13 PM

We've been through this many times before, and I've patiently set out my view - so no point in going there again. That base rate history series, by the way, looks very odd to me, even though it is the Bank's. The point is, however, that rates doubled in the space of 18 months. Even if they were to rise to 7% in the next decade, and who knows?, the suddenness of that tightening would not have been repeated.

Posted by: David Smith at May 30, 2006 01:10 PM

Thanks for the reply. As matter of interest - why do you think it would be a mistake to tolerate deflation? I went through it in HK, and it wasn't so bad, certainly no less distorting than high inflation. Some political problems in reducing civil service salaries, but they got through.

I buy liquidity trap, but (IMHO) deflation has got to be >3% for that to have teeth, given the risk free rate.

Take an economy where one sector has a big deflation shock due to technology or competition - by attempting to keep average inflation positive, you may distort other areas significantly, and do more damage.

Posted by: Richard at May 30, 2006 01:40 PM

If Australia's current residential property price woes are being redefined as a soft landing, it doesn't bode well for the UK.

Notwithstanding that this site focuses on uk economics, I'm glad that you acknowledge the woes to be less to do with Bernake and Brown, and more to do with the Bank of Japan.

The BofJ hasn't actually raised rates yet either. These market falls are a reaction to the expectation of rate rises as greed is replaced by fear.

I know that you don't like the sound of bears saying "I told you so" David, but Japan created the credit boom and Japan will put an end to it.

I imagine Kevin the petulant teenager hearing his mother's cacophanous "I told you so" after the big boys came and spoiled the party and grumbling "It's SOOO unfair!" ...

Posted by: Paul Owen at May 31, 2006 01:43 PM

No, I don't think so. As I said in the piece, you can trace the explanation back to Japan, though I don't find that particularly convincing, certainly in terms of the timing of the volatility, which owes more to recent uncertainty over US inflation and monetary policy.

As for Australia, look at the data - which I quoted the other day - not the "house price crash" fantasy.

Posted by: David Smith at May 31, 2006 05:33 PM

See the data for yourself from the Sydney Morning Herald:

http://www.smh.com.au/news/national/10-fall-in-house-prices-as-demand-heads-west/2006/05/25/1148524820530.html

It must be a collective fantasy. A global fantasy indeed.

Posted by: Paul Owen at May 31, 2006 06:12 PM

I suppose I shouldn't expect any more from somebody who assured me - as fact - that Sydney house prices had fallen by 20%, as had America's. These were precisely the figures I quoted last week:

"The most reliable series, produced by Australian Property Monitors and used by the Reserve Bank among others, suggests Sydney prices have fallen by 3.8% in the past 12 months and are down by 9.6% from their 2003 peak. The Sydney market, with a huge proportion of properties bought by investors, was highly speculative. In other Australian cities prices are still rising, typically by 0% to 4% but in Perth by 24.8% and Darwin by 16.3%."

The OECD has it right.

Posted by: David Smith at May 31, 2006 06:22 PM

The article is dated 26 May 2006. You were actually claiming that prices had not fallen at all in Australia! Oh, and when an article talks about prices "rising elsewhere" it's usually a euphemism for prices rising "nowhere" - and that's why the article is talking about prices sliding in Sydney, not prices booming in Perth, or "elsewhere".

In case you didn't detect it, reports of "0.1% price rises" are also euphemisms for ahem, undetectable rises, ie., falls. Sheesh, the worst things journalists can do is believe their own articles sometimes. Maybe you didn't notice, but most journalists do now apply a pinch of salt when looking at estate agency figures for house prices.

Anyway, good to see that whiffs of kenco instant are having an effect.

Talking of fantasies, have you given up on your equally optimistic prediction that the price of oil will fall to $40 a barrel in the near future, or are you still waiting for things to "settle down"?

Posted by: Paul Owen at May 31, 2006 08:57 PM

Very sad. This is from the piece you quoted. Read it very carefully:

"Nationally, prices rose 1 per cent in the quarter and 3.6 per cent in the year - slightly ahead of the inflation rate."

Posted by: David Smith at May 31, 2006 09:08 PM

In response to Richard - before we were interrupted - my view on the dangers of deflation is the conventional one, reinforced by Japan's experience. Once you get into deflation, in other words, it is hard to get out, and it is normally associated with economic stagnation. The liquidity trap appears to come into play even at modest rates of deflation, if Japan is anything to go by.

You will know more about Hong Kong's deflation, and I'd be interested in your observations, but the particular circumstances - the fixed exchange rate policy and the fact that it followed a sharp fall in asset prices - does not suggest on the face of it a model for others to follow.

Posted by: David Smith at June 1, 2006 10:15 AM

Even sadder ...

"Excluding Perth, national prices have not risen for 18 months"

"Sydney prices peaked in December 2003 and have since fallen 9.7 per cent."

So sorry to interrupt your fantasy. Please do carry on ...

(I see you've banned me from posting at my real email address - that's really quite a sad and desperate way of shutting out reality ... )

Posted by: Paul Owen at June 1, 2006 10:43 AM

Paul

All you seem to be doing is taking out areas of Australia that don't fit your POV. Have these Areas suddenly gained independence from the commonwealth of Australia?

If you said, prices in Sydney have fallen (or crashed depending on your definition) you would be correct. But you said prices in Australia, therefore the current low upwards price movement, is consistent with a soft landing in Australia. Unless of course you want to redefine Australia?

Posted by: Kingofnowhere at June 1, 2006 11:13 AM

In response to Paul Owen, there's no "reality" in inane comments and made-up statistics. People who submit comments to the site do so to provoke intelligent debate, which I welcome, not indulge in immature name-calling or tediously advance fantasy figures. So I'd ask you politely to go elsewhere, or else, regrettably, I'll have to close down the comments for everybody.

Posted by: David Smith at June 1, 2006 12:46 PM

kingofnowhere,

The reality in Australia is that while Perth is enjoying catching up with price rises, Sydney has 4x the population of Perth. A rise in prices in Perth as a percentage of sales therefore isn't as significant as a price drop in Sydney, although deft statistical manipulation can make it appear so, as well as listening to estate agents' opinions rather than statistical facts, as David did on that occassion.

David, if you're going to throw your toys out of the pram because of facts you don't like, then I've no intention of allowing you to use me as an excuse.

I promise I'll not burst your bubble any more. If all you're seeking is reinforcement and approval of your outlook and you don't wish to engage with reality, I'll not stop you.

Posted by: Paul Owen at June 1, 2006 01:10 PM

Paul

Sydney has 3.5M people out of about 10M people living in Australian cities. Perth has about 1.2M therefore Sydney should be wieghted 35% and Perth 12%

http://www.citypopulation.de/Australia-UC.html

So we give perth 12% the weighting and Sydney 35%

Perth up 28.8% over the year, Sydney down 3.1% over the year, gives us a weighted value of Perth 3.4% and Sydney -1% (So contributing +2.4% to the HPI)

As the other rose, We can see that the Australian market is not crash at all. Sydney falling or crashing, but NOT Australia

I really can't see how you can say Australia is falling, when the facts point to a different reality.

http://www.iii.co.uk/news/?type=afxnews&articleid=5654560&subject=economic&action=article

SYDNEY (AFX) - Australian house prices rose 1.0 pct over the three months to March, as measured by the weighted average of eight capital cities, and was up 3.6 pct over the year, the Australian Bureau of Statistics (ABS) said.

The ABS said the result followed the 2.2 pct increase in the December quarter, previously estimated at a 2.1 pct rise

Perth, Up 8.8 pct Qtr Up 28.8 pct over the year
Darwin Up 3.0 pct Qtr Up 17.4 pct over the year
Hobart Up 3.4 pct Qtr Up 9.9 pct over the year
Sydney Down 1.2 pct Qtr Down 3.1 over the year.

Posted by: Kingofnowhere at June 1, 2006 02:29 PM

Sorry to interrupt, but I justed wanted to return back to the issue at hand. If you could put your boxing gloves down for a minute.

The FED is hinting at another possible June rate increase.

The ECB will likely hike by 0.25%, some are even suggesting a 0.5% hike.

In the meantime all eyes are on BOJ to up there rates. Inflation has returned the land of Japan. Property prices have shot up over 10% in the last year.

Can the UK really move against the trend?

My little brain has placed punters into two simple groups. One who suggest the last few years have been unusually low in regards to rates and we are reverting to mean, ie. rates will rise.

The other points to the trend of decreasing interest rate peaks and the caging of the inflation beast. For this group the current low rate environment is not particularly unusual.

I must say I belong the former group. I can't see the UK bucking the trend and I suspect the next interest rate move will be up.

Posted by: Werewolves at June 1, 2006 05:15 PM

That's a good way of describing the debate. A couple of points to ponder: Europe has 2.5% inflation and a 2.5% interest rate. The UK has 2% inflation (on exactly the same basis) and a 4.5% interest rate. America has 3.5% inflation and a 5% interest rate.

Europe has higher unemployment and thus more spare capacity but unemployment has been rising in the UK too.

Britain had a rate-rising cycle - from 3.5% to 4.75% - between November 2003 and August 2004, when everybody else was stable.

What does this tell me? 1. The European Central Bank has been waiting for signs of stronger growth to raise rates to a more normal level.

2. America has more of an inflation problem (and stronger growth) than Britain.

3. There's no longer a case for a rate cut in Britain - barring an external shock (stock markets appear to have calmed down) but it is not clear they need to be higher than now, particularly with the housing market apparently cooling and wage pressures subdued.

Posted by: David Smith at June 1, 2006 05:54 PM

>> and wage pressures subdued

?? fuel related inflationary rises haven't filtered through to wage demands yet. No sign of wage pressure subduing (quite the opposite in fact).

"Oil price rises in some parts of the UK have led to a wage inflation issue" - Kate Barker, 24 May - North Wales-based Daily Post.

Posted by: Dave at June 2, 2006 01:03 PM

Hmmm..

Wednesday May 31, 09:30 AM

Bank's Barker says energy prices yet to affect wages

LONDON (Reuters) - Rising energy prices have yet to feed through into inflationary pressure in the labour market via higher wage demands, Bank of England Monetary Policy Committee member Kate Barker said.

"We have seen these big rises in energy prices, and that has put a squeeze on what people have to spend. But we haven't seen that translate into inflationary pressure in the labour market," she was quoted as saying in Tuesday's edition of the Nottingham Evening Post.


Posted by: David Smith at June 2, 2006 01:29 PM