# Will interest rates rise to 20% again?



## kanda (26 Feb 2013)

Hi All
I grew up in the 1970's and 80's when interest rates hit nearly 20%. When we joined the euro we were assured that this would never happen again. My question always was why not? Since interest rates now are at historic lows they do have to go up. Since extra money has been released into the global economy and metals, oil, natural resources are depleting it is obvious that prices will rise eventually and that interest rates will rise in tandem to counteract inflation. Recently I have heard people say that the bond bubble (bursting) will somehow lead to higher interest rates. Could someone explain this? 
Thank you.


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## Protocol (27 Feb 2013)

Eventaully they will rise from their exceptionally low levels, yes.

To 20%, no.

The ECB's inflation target is "close to 2%".

Assuming they keep inflation on target, and allowing for a 2% real rate on top, then you would expect the nominal short-term interest rate to be 4% over the long-run.

The ECB ST base rate is currently 0.75%.

Long-term bond yields in Ger / NL / are 1.5-3% for 10-20 year bonds.


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## Protocol (27 Feb 2013)

With a 4% ECB base rate, you could see 6-7% SVRs in a normal banking system.


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## jpd (27 Feb 2013)

I don't think 2% inflation will be enough to run-down the real value of the debt - you will need a few years at 5% at least so interest rates will have to rise to 8-10%

The only other way out of the debt hole are default - interest rates will probably rise above 10% in this case and that would  not be the main problem.

Neither option is very appealing


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## kanda (27 Feb 2013)

*Thank you*

Thank you protocol and Jpd for your kind replies. That is very helpful.


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## kanda (2 Mar 2013)

Seems customers on trackers in Britain work up to a nasty surprise this week when a certain bank raised interest rates on trackers by up to nearly 4% on some Buy to Let mortgages leaving some customers paying £500 per month extra. This is happening although Bank of England base rates are 0.5%. 
Could the same happen here and if so what would happen to all the Buy to Let investors already struggling at the moment?
I am beginning to become convinced that interest rates are trending upwards  and this British scenario now confirms that sudden dramatic interest rates rises are not just possible but are actually happening right now.


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## Dermot (2 Mar 2013)

Kanda. I would agree that interest rates are trending upwards but it is extremely unlikely that mortgage rates will reach anywhere near double figures in the medium term.  As regards trackers I am not aware of any trackers in this country that allow the lenders to raise the rate higher than the % above the ECB rate stated in your contract. The English lenders had a condition in some of the tracker rate contracts which allowed them the opportunity where they did not have to go below a certain lending regardless of the BoE base rate


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## Chris (27 Mar 2013)

I believe it is inevitable. The ECB has an inflation target of 2%, which used to be like a ceiling. This has now become the floor. Also, the effects of the massive inflation of the mo eh supply have not come into affect yet, and once that results in very high price inflation there will be no other option than to reduce money supply which will drive up the interest rates.


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