June interest rate rise increase of .5% now more likely

The_Conductor

Interesting article on the front page of the business section of today's Sunday Times (continued on page 2). It suggests that with the massive decline in the dollar over the past week, that the likelyhood of a .5% instead of a .25% increase in ECB rates at its June meeting has now increased substantially. This is backed up by the Q1 inflation figures released by the ECB on Thursday.

A May increase had previously been ruled out 3 weeks ago- presuming this is still the case, a double-up in June, followed by 2 further .25% increases in the autumn?

Me not happy.....

kippy

I'd say what you have outlined will almost definetly happen.
Rates will go up over the next two years till they get to around 5% me thinks.
Lets hope that the people with the big 100% mortgages out can take the hit.
This may cause a stabilisation in house prices though and could lead to minor price falls in houses as demand decreases.
Just what I reckon.
Kippy

whizzbang

I think this could be the pin that pricks the property bubble. But who knows? We seem to keep buying more of the stuff no matter how hard it is to pay the loans back!

Will this just lead to 50 year mortages?!

lomb

generally a depreciation of a currency like the dollar against the euro would lead to a FALL in interest rates to stop currency speculators putting cash into euros and therefore converting dollars.
the germans who control europe have never really paid alot for borrowing historically, i cant see interest rates climbing to over 5% in the next 10-15 years. long term fixed mortgages reflect my conviction.

Zynks

lomb wrote:

generally a depreciation of a currency like the dollar against the euro would lead to a FALL in interest rates to stop currency speculators putting cash into euros and therefore converting dollars.

Spot on. The worrying part is that if the dollar keeps falling even with the rate rise by the fed, it will be very hard for the EU to keep rates low to counteract the american financial mess (negative balance, deficit in budget, etc). There are more countries switching their reserves to the Euro... I wonder if the dollar is heading towards a continued downwards spiral, in which case it is time to index mortgages to the dollar.

lomb wrote:

the germans who control europe have never really paid alot for borrowing historically, i cant see interest rates climbing to over 5% in the next 10-15 years.

True, I use the German historic interest rates as reference for my guesstimates, but at some stage in the 70's they were close to 8%...

lomb

Zynks wrote:

Spot on. The worrying part is that if the dollar keeps falling even with the rate rise by the fed, .

why is it falling so badly? im not in touch with the currency markets at all.

Zynks

There has been a bit of bad news recently. One of them was a country (can't remember which) announcing the switch of part of their reserves to Euro (meaning more dollars on sale in the market), and the fed suggested there may not be further raises in their rates for a while ( I suspect the markets/currency speculators were counting on these raises). Another ongoing issue is the growing suspicion that the deficit in the American economy is not sustainable.

lomb

ahh i c
keeps fuel prices low for us anyway as crude is in dollars:D
also maybe the yanks want a weak dollar to help the manufacturers export, can only help domestic industry and american business interests globally.

The_Conductor

lomb wrote:

ahh i c
keeps fuel prices low for us anyway as crude is in dollars:D
also maybe the yanks want a weak dollar to help the manufacturers export, can only help domestic industry and american business interests globally.

Not necessarily- Abu Dhabi and two of the other emirates (damned if I can think of their names) now price crude in Euro (as they were worried about getting paid in a currency like the dollar). They switched over in 2004.

Its not necessarily that the Yanks *want* a weaker dollar- they need a weaker dollar. They ran a deficit last year of greater than 800 billion dollars- and need a net in-flow into their economy from abroad of slightly over 4 billion dollars a day just to keep afloat. Obviously something has to give- its clearly unsustainable.

Re: Dollar falling and Euro interest rates going up- the rise in fuel costs has added I think .4% to German inflation figures (oddly enough France seems to import only about a 10th as much fuel per capita and is thus not as badly affected). Inflation figures there are now around 3% (about .6% below us but at the top of the ECBs target range). They have a VAT increase coming up (I think in September) too which is all going to feed into the inflation rate. While we needed higher interest rates here 3 or 4 years ago, its only now that Germany needs them (arguably Italy, Greece and a few other countries are dreading higher rates).

The ECB has publicly stated that they consider 4.5% to be a "normalisation" of their rates (i.e. 2% above their current levels).

Another way to look at this is- if they allow the Euro to increase in value, it increases our purchasing power from abroad, and can in itself be a mechanism to moderate inflation.

I predict tracker mortgages to be at 5.45% by autumn '07.

lomb

smccarrick wrote:

I predict tracker mortgages to be at 5.45% by autumn '07.

Well the market doesnt share that belief, u can fix for less than that for 5 years, and remember the banks are buying a hedge that costs money.

Victor

smccarrick wrote:

Re: Dollar falling and Euro interest rates going up- the rise in fuel costs has added I think .4% to German inflation figures (oddly enough France seems to import only about a 10th as much fuel per capita and is thus not as badly affected).

The vast majority of French electricity comes from nuclear, not oil.