Comments: How high is the next peak in base rates?

Hello Dave and thanks for opening the weblog.

Well the BoE inflation report came, sounded bit hawkish but since RPIX will be phased out to the HCIP in the near future, there's somewhat limited value and insight to thinking of the board. Personally I think the "harmonised" statistics are garbage a'la creative accounting Enron-style, but this true to the Noo Lapour form. Plus politically this is a true win-win for the troubled Chancellor, chance to halve the inflation rate in the country by stroke of pen and gearing up the GBP for eventual EUR entry (now some commentators say Gordie Brown is dead opposed against the EMU entry, however I believe this only applies when he is the Chancellor. If he would take over the as PM , then again ... )

Anyways, us City folk been marvelling the reaction of Short Sterling (ie. the interest rate futures, which predict the future rates) lately, as the market is pricing now 5.0% by Sep-Dec 2004, guaranteed. Now this full +100bp of hikes, which would set the pace to approx 25bp per quarter and seems more or less in touch with the age old "lets look at what happened in last cycle" method. Farther to the 2 year part of swap curve , markets are pricing even more hawkish picture...

Now I tend to agree with your more dovish view of things , since I still think the US economy is experiencing "statistical recovery induced by unseen levels of stimulus". I doubt very much the growth is going to be sustainable and equity market valuations are extremely optimistic. US markets generally set the trend and any weakness there will be reflected at our side of the pond too.

Second, I think the British consumer has dug himself into a very DEEP hole by overborrowing on the mortgage and consumer credit side. The net disposable income of private sector workers has moved very little and the picture is getting gloomier with Neuerarbeitspartei running into deficit land and will be probably forced to push the ever increasing tax burden even higher. Steep increases in the base rate would truly hurt the consumer more now than say back in '80s as the indebitness is far more reaching this time and greater sums have been borrowed.

Third then, as always the bane of BOE has been the Sterling. Sterling has rallied heavily against the USD during this year, thereby making commodities inputs (all priced in USD) cheper. And the continuing dollar weakness seems to be running trend in the market. I cannot see a Sterling crises around the corner as majoirity of trade is within the eurozone and GBP does have a quite strong correlation with the EUR.

So all in all, I tend to agree with your prediction for 4.0% to 4.5% reached sometimes next year...

Posted by Front4uk at November 12, 2003 10:11 PM


A slight correction to your statement "majoirity of trade is within the eurozone". This is a common Europhile twisting of the truth.

Of our export trade that goes into the northern European sea cargo terminals, approx 50% stays on the boat to complete its journey to its destination outside the EU.

However, the Europhiles pretend that this is an "export to the EU" to boost their figures, even though it never touched dry land.

Posted by Ron at November 13, 2003 12:30 AM

Very good reminder of the much more narrow range of reasonably expected parameters, some plus minus 20-30% variation rather than 100%. This victory for monetarism should prolly mean that fiscal effects are more important. But perhaps, too, the effects of rules and paperwork overhead may be an undercovered problem?

Posted by Tom Grey at December 27, 2003 07:04 AM
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