Interest Rates – The Next 18 Months

Interest Rates – The Next 18 Months

19:37 PM, 8th June 2024, About 6 days ago 17

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If you blinked this week, or if you just don’t follow the Central Banks of the World more closely (what are you playing at?) then you might have missed the fact that the Bank of Canada, and the European Central Bank, both cut their interest rates. The first “major” central banks to do so, in this current cycle of inflation-combatting rate hikes which started in late 2021 or early 2022, depending on how asleep at the wheel those banks were.

What happened? In a nutshell, Covid was a gigantic stimulus gun, pumping trillions into the world economy – that money then needed to find a home, central bankers and economists were lazy after 10+ years of ZIRP (zero interest rate policy), and all thought “well, rates can’t go up. The economies couldn’t afford it”.

Then inflation happened, then rates HAD to go up, then those economies afforded it against all the odds. And they all lived happily ever after. The end.

OK – this isn’t a fairy tale. But – it is fair to say that if you’d asked 100 economists or central bankers to predict the interest rate in the middle of 2024, in the middle of 2021, none would have been at or above the current rates of interest. No chance. However, the wheels haven’t come off yet.

Why do we care about those central banks? Well, because traditionally it is accepted that the Bank of England and the ECB “Follow the Fed”. This is not really true, like most “accepted facts”. Let me reframe it. When something global happens, the central banks tend to move together in their response. That makes sense. 2008 – Great Financial Crisis – global. Covid – global. NOW though – because of different policy responses during Covid – there is much more likely to be divergence than for a long time.

This is already uncharted territory – the ECB has only EXISTED for 25 years and this is the first time ever that it has beaten the Fed to a cut. The Fed “won’t care” – but they will. The prevailing wisdom now is that the Bank of England CAN’T cut in June for fear of looking political, when they are supposed to be independent. I also think there’s enough evidence for them to still be very cautious about a cut, but I do think a cut in August looks very likely.

Why? It’s difficult. The central banker’s job is to predict 6-24 months into the future, and act accordingly. Of the major banks, ONLY the Bank of England sees inflation below 2% in 3 years’ time. That’s based on 6 cuts between now and then (the market implied path at the last Bank meeting). That 3-year point is the one that really matters, and +/- 0.5% is acceptable in terms of tolerance. That might well be trending downwards, and if – in August, since they only produce a proper report once a quarter – it is, then a cut will definitely be on the cards.

It would favour the UK to decouple from the Fed in this instance, to be honest. This is predicated on my analysis which suggests that the USA has much more of an inflation problem to deal with, from here, as at today, than the UK does. This would mean higher rates for longer as a rule, OR an acceptance of inflation >2.5% for quite a while (or even 3%).

That coupling is keeping UK gilt and swap yields high – and we care, because those are the numbers upon which the mortgage rates are truly based. Best Ltd company BTL at the moment nears 6% interest (if you amortise arrangement fees and add them to the loan) – best personal name is more like 5%, but that combined with Section 24 won’t help you. A proper decoupling from the US – combined with the right conversation and communication, which is definitely not Andrew Bailey (the Governor)’s speciality – could talk yields down 0.25% or more in this instance.

What does this mean? I am personally still taking fixed rates now and managing the rate down during the process if it does come down. I expect yields to come off about 0.5% by the end of the year, if this plays out as expected from hereon in. Labour being elected and making financial missteps – which anger the bond markets – looks like a racing certainty (in terms of being elected) but highly unlikely with the missteps – Rachel Reeves is a credible economist. She will turn the air blue in many of the households of the top 25% – I’m sure – with her planned tax hikes (12-14 was the number I heard more than once today). That will be from council tax to capital gains, most likely – to prepare you.

Sitting and waiting for rates to come down looks like a fools’ errand. Taking a 2-year fix hoping for better rates in 2 years time? All being equal they WILL be lower, but what’s the price for the next 2 years in terms of all the frictional costs of the loan, and then the valuation and solicitors? You are unlikely to be better off unless you really think interest rates will crater (that was a popular opinion in 2022 but very few people seem to be holding that opinion today).

Get on and fix, is my mantra at this time. If it doesn’t stack up – sell it if you can’t convert to HMO/SA with a fast payback and leave yourself with a great asset at the end of it. Brutal. Savage. Quick. Effective. BSQE.

*Rates in 6 months – 5yr gilt 3.5%ish. 12 months – 3.25%ish. 18 months – 3%ish. Plus or minus half a percent. Any big shocks to the system, wars, pandemics, hamsters chewing through the power grid – all bets are off.

Interested, as always, to hear other opinions.

*Add 1% on for buy to let personal name products, add 2% on for limited company buy to let. Rule of thumb!


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Comments

Cider Drinker

19:53 PM, 8th June 2024, About 6 days ago

My view is that interest rates will fall ahead of the general election. I wouldn’t rules out a 0.5% cut on 20th June. Cynical? Perhaps.

However, over the term of the next Parliament, I think rates will need to rise if the U.K. is to have any iPhone of holding on to its credit rating. I think it will be bad enough if the Tories win (extremely unlikely) but it will be much worse if Labour win.

Remember Labour’s Liam Byrne’s note ‘I’m afraid there’s no money’? We’ll, this time, there’s no money today, no money tomorrow and no money for generations up to come.

The country is broke.

JB

20:35 PM, 8th June 2024, About 6 days ago

You've lost me a bit Adam but I'm going to give my opinion and make a prediction about the economy. Actually, it's Fred Harrison's prediction (of the 18 year property cycle) which my gut feeling says is about right - as long as WW3 doesn't break out. He reckons house prices will increase up to 2026 and then there will be a recession which will eclipse the events of 2008 and we will be in unchartered waters.
The existential crises will include a sharp uptick in migration from Sub-Sarahan Africa, invasion of Taiwan which President Xi has warned will happen before 2028, and the effect of Trump being re-elected.
Let's hope Farage is leader as Labour won't be able to handle it.

Adam Lawrence

7:43 AM, 9th June 2024, About 5 days ago

Reply to the comment left by Cider Drinker at 08/06/2024 - 19:53
It's not as bad as that picture - the problems as they stand are:

The tax take is not high enough for a massively increasing (in real terms) health service and welfare state. Bold reforms are needed. Agreed - neither main party will do that.

Productivity has suffered since Covid and Covid offered new ways of "opting out" of the system which feed back to reform of the welfare state. It also, of course, left behind scars - not just on people's lungs but also on psyches. Inflation will be bullying people into work for longer, though, and has been for a couple of years.

Real terms cuts on everything, pretty much, aside from health and pensions are already baked in.

The economy is once again creating jobs rather than freezing hires - the economic cycle looks as cheery as it has done since about early 2016 actually - and there's no immediate reason to see anything more miserable.

This will lead to some near-term revisions upwards in what the UK can afford in terms of debt payments and spending. The next round of PFI (or however Labour are badging it) sounds like a good idea - and has its redeeming qualities - but is going to be done when interest rates are expensive rather than cheap. That will be a "shame" and something we will pay for for 60+ years in some instances.

Rachel Reeves is the best Labour chancellor ever, on paper. Brown did a decent job (there are obvious lowlights) but Reeves looks equipped for the 21st century. The country will be fine - for another 5 years - but if they don't take the bold steps (some of which really won't sound very "labour" - the benefits situation which Sunak laid out some weeks back, all forgotten about now, was accurate for example) - then I will have two larger fears:

1) Who will the country vote in next time around?
2) When will someone eat the frog and sort these massive issues out?

Either way at least it isn't "leave the country" territory!

Adam Lawrence

7:46 AM, 9th June 2024, About 5 days ago

Reply to the comment left by JB at 08/06/2024 - 20:35
I'm not a big fan of the 18-year property cycle - it's mostly a marketing gimmick. Fred Harrison is great but that was to sell books and get clicks I'm afraid.

The boom better hurry up and arrive - things are fairly flat/below wage growth at the moment and the deals are already being agreed that will influence house prices on the record until the end of 2024......our proper crack-up booms tend to last much longer than 18 months or so, although Covid was "different" and ended differently as well because of Truss. It also all, in the end, ended up being inflation.......

We will see - migration I can see being a big number whoever is in charge - Farage has even less economic ability and credibility than Truss so unless we want mortgage rates at 9% I hope to goodness that never happens, although there's definitely a chance. He's a talker, not a doer - typical career politician.

JB

8:16 AM, 9th June 2024, About 5 days ago

Reply to the comment left by Adam Lawrence at 09/06/2024 - 07:46
How can you say Farage is not a 'doer' when he facilitated Brexit?
He is for small state, low taxes.
I have no ecconomic training, just a few years on the receiving end of disasterous policies from those at the top.
I'll bet you a fiver Fred's right!

Beaver

10:30 AM, 10th June 2024, About 4 days ago

Reply to the comment left by JB at 09/06/2024 - 08:16
I think Farage was riding a wave. He correctly understood that people at the lower end of the economic scale suffer the adverse effects of free migration even if people up the food chain benefit from it.

Neilt

10:39 AM, 10th June 2024, About 4 days ago

Reply to the comment left by Cider Drinker at 08/06/2024 - 19:53
Please give us some hard evidence that the country is broke. And not from mainstream media, please.
As a 77-year-old I have heard this story so many times, and yet here we are doing amazingly well, IMO.
I'm all for positivity although the thought of Labour getting in weakens that more than a little

JB

10:43 AM, 10th June 2024, About 4 days ago

Reply to the comment left by Neilt at 10/06/2024 - 10:39
The National Debt is £2.7 trillion, which is 97.9% of GDP

Neilt

10:52 AM, 10th June 2024, About 4 days ago

Reply to the comment left by JB at 10/06/2024 - 10:43
Thanks, it's good to know that in relation to the size of the economy, UK debt figures are still low compared with much of the last century, and also compared with some other leading economies.

JB

10:56 AM, 10th June 2024, About 4 days ago

Reply to the comment left by Neilt at 10/06/2024 - 10:52
That's OK then - not! Of course it will go up when Labour get in

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