# Will interest rates drop?



## elki (18 Mar 2006)

I know there is a lot of speculation over interest rates and the current thinking is that the ECB willl raise them another 2-3 times over the next while. In the dilemma now of fixing or continuing on the variable rate. Switching to a 3yr fixed or a 5 yr fixed will cost me approx an extra 110/130 euro per month. I cant believe that interest rates will rise to match that. (my mortgage currently at 209K @3.7% variable rate)

However my real question is, will interest rates drop again or will they continue to rise from this point? I know there is no real answer to this but would welcome some opinions! Thanks


----------



## askalot (18 Mar 2006)

What rate are you getting for the 3 year fixed? Based on the repayment increase it seems high. First Active have a 3 year fixed at 3.9, that's not much more than your current 3.7 variable. It's just one example so shop around for the best rate or you could switch to a tracker. 

My guess is that rates will continue to rise over the next 18 months and will probably remain there for the following year at least. Inflation has pulled well ahead of the ECB stated target ''of close to but just below 2.0 percent''. This and the Europe wide credit boom all points to the fact that the era of 2 percent interest rates is over. If over the next two years Europe i.e. Germany starts to experience sustained growth above 2 pecent then I think rates will settle at the more 'historical' level of 3.5 to 4 percent.

As I say that is guess work; as is anything written by the 'experts'.


----------



## Duplex (19 Mar 2006)

Well if you believe that the Bond markets are a good indicator of future interest rates, you should check out the yield on 5 and 10 year Euro Bonds.


----------



## ClubMan (19 Mar 2006)

Read the many other fixed versus variable/tracker discussions on the site. Only fix if you need to and not in an attempt to save money.


----------



## dockingtrade (22 Mar 2006)

interest rates will rise & rise.


----------



## walk2dewater (22 Mar 2006)

I can't believe my eyes.  The IMF is articulating what I've suspected for years now and why I've felt interest rates will have to go far higher than anyone currently expects.  Ultra low rates has and is pulling up the prices of everything, including oil prices.  The ultra low rates 'experiment' of Greenspan and co. has created an inflationary monster.  The next recession might be worse than even I expect.


----------



## beattie (22 Mar 2006)

Very interesting read and if the outcomes it recommends actually are implemented it will really throw the cat among the pigeons. The excessive liquidity that central banks (mainly the Fed) have pumped into the market has allowed a massive asset bubble (namely housing) to occur which could have serious consequences for the economy as a whole (Friends First report of potential dangers from housing correction). Unfortunately no heed will be paid to this report until interest rates go up.

Could we see ECB rates of 6-7% in a 24-36 month timeframe?


----------



## bearishbull (23 Mar 2006)

no way rates will hit 6+% in next 36months ,Eu economy would be put into a massive recession but ,maybe eu leaders want a recession that could  lead to a reform of the rigid labour laws in mainland europe and in long run making the economy stronger...mmmm


----------



## walk2dewater (23 Mar 2006)

bearishbull said:
			
		

> no way rates will hit 6+% in next 36months ,Eu economy would be put into a massive recession but ,maybe eu leaders want a recession that could lead to a reform of the rigid labour laws in mainland europe and in long run making the economy stronger...mmmm


 
The ECB's #1 prority is maintaining the integrity of the euro-- inflation is like cancer for paper currencies.  Go read the Monthly Bulletin for March on www.ecb.int.  Read the editorial and look at the charts on page S-39.  Rates are going MUCH higher from here.

Anyone here old enough to remember what stagflation is like?


----------



## walk2dewater (23 Mar 2006)

Anyone who thinks the ECB will choose economic growth over price stability needs to read Chp3 of this... page 42 should suffice.

http://www.ecb.int/pub/pdf/other/monetarypolicy2004en.pdf

If price stability were to be sacraficed to prevent a recession, not entirely beyond the realm of possibility, I reckon the ECB would have to be closed down.


----------



## ivuernis (23 Mar 2006)

walk2dewater said:
			
		

> I can't believe my eyes. The IMF is articulating what I've suspected for years now and why I've felt interest rates will have to go far higher than anyone currently expects. Ultra low rates has and is pulling up the prices of everything, including oil prices. The ultra low rates 'experiment' of Greenspan and co. has created an inflationary monster. The next recession might be worse than even I expect.


 
Oil nudged up to $63 in NY yesterday. Whilst the ultra low rates of the past few years have indeed elevated spending to new levels their report fails to mention the elephant in the living room... inevitable supply contrasts and contraction as the world's oil production peaks in the coming years. Raising interest rates to reign in demand to match supply is fine if supply remains static or increases but what if supply begins to fall on a year-on-year basis of 2% as is predicted. Competing demand for a diminishing resource resulting in uncontrollable inflation? How high could interest rates possibly go then?


----------



## walk2dewater (23 Mar 2006)

There are so many moving parts to this that I don't think anyone really understands whats going on.  We are in uncharted territory.  My gut feeling remains that the ultra-low interest rate experiment will end up causing a major depression/recession/crash (call it what you like), real negative rates has proven highly seduction, addictive to the common man, and has made us borrow from the future excessively.  Payback is a bitch.


----------



## ivuernis (23 Mar 2006)

David McWilliams, in his column in yesterday's Irish Indo, speculated that if the worst came to the worst and the Irish banking system was threatened with collapse as a result of debt defaulting by borrowers in the event of rising interest rates on the back of a resurgent German economy that the government may be faced with no other alternative but to withdraw from the EMU in order to regain control over Irish interest rates. 

I know we can't bail out the banks like we did before because of EU regulations but I can't really see this happening even in a worst case scenario, or how it could benefit the country from pulling out of the Euro even if it prevented the banks from going bust? Couldn't they just let the bank suffer the consequences of the their lax lending policies? It would be chaotic but wouldn't other banks that are not so exposed to such a bust be able to enter into the Irish market?


----------



## walk2dewater (23 Mar 2006)

ivuernis said:
			
		

> David McWilliams, in his column in yesterday's Irish Indo, speculated that if the worst came to the worst and the Irish banking system was threatened with collapse as a result of debt defaulting by borrowers in the event of rising interest rates on the back of a resurgent German economy that the government may be faced with no other alternative but to withdraw from the EMU in order to regain control over Irish interest rates.
> 
> I know we can't bail out the banks like we did before because of EU regulations but I can't really see this happening even in a worst case scenario, or how it could benefit the country from pulling out of the Euro even if it prevented the banks from going bust? Couldn't they just let the bank suffer the consequences of the their lax lending policies? It would be chaotic but wouldn't other banks that are not so exposed to such a bust be able to enter into the Irish market?


 
If we exit the euro and go back to punts Irish debt will still remain denominated in Euros.  If we exit the EMU we would have to jack up rates to keep the New Punt from dropping like a rock. Or if we let the New Punt devalue against the euro all that massive euro debt would cripple irish debtors.  I'm afraid there's no getting out of having to pay it all back AND at whatever interest rate Frankfurt says.


----------



## gearoidmm (23 Mar 2006)

walk2dewater said:
			
		

> If we exit the euro and go back to punts Irish debt will still remain denominated in Euros. If we exit the EMU we would have to jack up rates to keep the New Punt from dropping like a rock. Or if we let the New Punt devalue against the euro all that massive euro debt would cripple irish debtors. I'm afraid there's no getting out of having to pay it all back AND at whatever interest rate Frankfurt says.


 
Similar argument has been used against the Italians leaving the Euro and devaluing the new Lira - the rise in their public debt would bankrupt the country.


----------



## ivuernis (23 Mar 2006)

walk2dewater said:
			
		

> If we exit the euro and go back to punts Irish debt will still remain denominated in Euros. If we exit the EMU we would have to jack up rates to keep the New Punt from dropping like a rock. Or if we let the New Punt devalue against the euro all that massive euro debt would cripple irish debtors. I'm afraid there's no getting out of having to pay it all back AND at whatever interest rate Frankfurt says.


 
Agreed, I couldn't see how exiting the Euro would be of any benefit regardless of what's at stake. 

It's not going to have a pretty ending is it... unless you believe in NCB's ideal world scenario where reality is thrown out the window


----------



## beattie (23 Mar 2006)

ivuernis said:
			
		

> It's not going to have a pretty ending is it... unless you believe in NCB's ideal world scenario where reality is thrown out the window


 
About 95% of people will choose to believe the NCB however and will get burned unfortunately, but alot of powerful figures will make a great deal of money along the way.


----------



## ivuernis (23 Mar 2006)

beattie said:
			
		

> About 95% of people will choose to believe the NCB however and will get burned unfortunately, but alot of powerful figures will make a great deal of money along the way.


 
As is always the way I suppose... a small few will get rich while the rest will get shafted before they know it's even happened. 

Where has common sense gone? Marx said "Religion is the opiate of the masses"... seems like blind faith in unbounded growth is our drug of choice these days.


----------



## walk2dewater (23 Mar 2006)

The drug is money, other peoples, loaned at ridiculously low rates.


----------



## Mininv (23 Mar 2006)

beattie said:
			
		

> Very interesting read and if the outcomes it recommends actually are implemented it will really throw the cat among the pigeons. The excessive liquidity that central banks (mainly the Fed) have pumped into the market has allowed a massive asset bubble (namely housing) to occur which could have serious consequences for the economy as a whole (Friends First report of potential dangers from housing correction).
> 
> 
> 
> ...


----------



## walk2dewater (23 Mar 2006)

My humble advice to anyone who wouldn't class themselves as a sophisticated or experienced investor is to pay down debt, sell your non-core property(s), then save up cold hard cash and stick it in an inflation-proofed or guaranteed deposit product, in that order

Now is not the time to experiment if you have serious money, in my experience you only learn how to invest for yourself the hard way.  Do not f*ck around with any nest egg greater than your annual gross salary


----------



## thewatcher (23 Mar 2006)

walk2dewater said:
			
		

> My humble advice to anyone who wouldn't class themselves as a sophisticated or experienced investor is to pay down debt, sell your non-core property(s), then save up cold hard cash and stick it in an inflation-proofed or guaranteed deposit product, in that order
> 
> Now is not the time to experiment if you have serious money, in my experience you only learn how to invest for yourself the hard way. Do not f*ck around with any nest egg greater than your annual gross salary


 
What is that ?

And all because the government did nothing to keep speculators/investors out of the market.If prices had remained at reasonable levels at least the debt would have been somewhat serviceable.


----------



## conor_mc (24 Mar 2006)

ivuernis said:
			
		

> David McWilliams, in his column in yesterday's Irish Indo, speculated that if the worst came to the worst and the Irish banking system was threatened with collapse as a result of debt defaulting by borrowers in the event of rising interest rates on the back of a resurgent German economy that the government may be faced with no other alternative but to withdraw from the EMU in order to regain control over Irish interest rates.
> 
> I know we can't bail out the banks like we did before because of EU regulations but I can't really see this happening even in a worst case scenario, or how it could benefit the country from pulling out of the Euro even if it prevented the banks from going bust? Couldn't they just let the bank suffer the consequences of the their lax lending policies? It would be chaotic but wouldn't other banks that are not so exposed to such a bust be able to enter into the Irish market?


 
As an alternative to bailing out the banks, which is no longer permitted by EU law, and since we can't control our own interest rates, would it be an alternative for the government to simply increase tax relief on mortgage interest to the point where they are effectively bailing out the banks by maintaining a situation where Average Joe can continue to afford his repayments?

Does tax relief constitute public spending and therefore contribute to inflation?


----------



## gearoidmm (24 Mar 2006)

conor_mc said:
			
		

> As an alternative to bailing out the banks, which is no longer permitted by EU law, and since we can't control our own interest rates, would it be an alternative for the government to simply increase tax relief on mortgage interest to the point where they are effectively bailing out the banks by maintaining a situation where Average Joe can continue to afford his repayments?
> 
> Does tax relief constitute public spending and therefore contribute to inflation?


 
The problem with this is that if property was to go belly up due to interest rates and property sales fell, the government would be losing a significant amount of its income which is currently derived from stamp duties etc. Where would they get the money to give such a selective tax cut to home-owners? Not to mention how unequitable that would be for those who did not have a mortgage.


----------



## Howitzer (24 Mar 2006)

conor_mc said:
			
		

> As an alternative to bailing out the banks, which is no longer permitted by EU law, and since we can't control our own interest rates, would it be an alternative for the government to simply increase tax relief on mortgage interest to the point where they are effectively bailing out the banks by maintaining a situation where Average Joe can continue to afford his repayments?
> 
> Does tax relief constitute public spending and therefore contribute to inflation?


 
In this case it would. 

In this scenario the textbooks would say that the govt should be running a massive budget surplus in order to take money out of the system whilst times are good and release it back in during any downturn in the form of infrastructural spending.


----------



## conor_mc (24 Mar 2006)

gearoidmm said:
			
		

> The problem with this is that if property was to go belly up due to interest rates and property sales fell, the government would be losing a significant amount of its income which is currently derived from stamp duties etc. Where would they get the money to give such a selective tax cut to home-owners? Not to mention how unequitable that would be for those who did not have a mortgage.


 
Yep, can see that point, but wouldn't the same apply to bailing out the banks? Surely it'd be more equitable to help out Average Joe than bail out Irish banks to the tune of a few hundred million each, where Average Joe still loses his house because he can't afford his mortage repayments?

It's a simplistic view, I'll admit, but due to the lack of control over interest rates, surely it's unique(ish) in history, cretainly in Irish history?


----------



## Neffa (24 Mar 2006)

conor_mc said:
			
		

> It's a simplistic view, I'll admit, but due to the lack of control over interest rates, surely it's unique(ish) in history, cretainly in Irish history?


 
Were interest rates not shared with the UK prior to the punt's independence in the late 1970's?


----------



## conor_mc (24 Mar 2006)

Neffa said:
			
		

> Were interest rates not shared with the UK prior to the punt's independence in the late 1970's?


 
Could have been, not old enough to remember....


----------



## dam099 (24 Mar 2006)

Neffa said:
			
		

> Were interest rates not shared with the UK prior to the punt's independence in the late 1970's?


 
In theory they should be close as with no currency risk one would expect the Irish banks and speculators etc to borrow from the UK if rates were cheaper there thus driving down the Irish rate to similar levels.

However back then we had exchange controls, I'm not sure if they applied to sterling, but if they did this could have allowed an interest rate differential by restricting access to cheaper money in the UK.


----------



## walk2dewater (28 Mar 2006)

"Experts ratchet up their rate expectations"
http://biz.yahoo.com/usat/060326/13477459.html?.v=1

IMHO, global rates -- higher and faster than most currently expect.  But don't believe me, do you own DD, take a close look at ECBs March Bulletin.


----------



## ivuernis (28 Mar 2006)

The Fed has raised the US rate to 4.75% with further hikes signalled at.


----------



## Howitzer (29 Mar 2006)

So where do people think ECB rates will be by the end of the year? A good while ago on this board I went for probably 3.25%, possibily 3.5%. Leaning more towards 3.5% now with the ECB moving towards an increase every 2 months from May. 

This isn't simply a stick your finger in the air kind of thing. The ECB by their own admission want to be predictable, so it should be a relatively straightforward matter to predict what the rates will be. No more of the 'oh my God, I can't believe my mortgage has suddenly gone up, why didn't anyone tell me this would happen!'. 

Any FX traders out there want to tell what the market has factored? I know there are percentages attached to this sort of thing.


----------



## ivuernis (30 Mar 2006)

I don't think they'll be too hasty by raising on a 2-monthly basis. I think they'll stick to a 3-month cycle as they normally do. This would still give a rate of 3.25% by the end of 2006 and well on the way to 4% during 2007.


----------



## gearoidmm (30 Mar 2006)

Howitzer said:
			
		

> Any FX traders out there want to tell what the market has factored? I know there are percentages attached to this sort of thing.


 
From Bloomberg.com

"Traders raised bets the ECB will lift rates to 3.25 percent this year, futures prices show. The yield on the three-month Euribor contract due December 2006 rose to 3.455 percent yesterday. 
The contracts, traded electronically on the London International Financial Futures Exchange, settle to the three- month euro interbank offered rate, which has averaged 0.16 percentage point over the ECB rate since 1999."

This is interesting because up until the Ifo data came out this week on German business confidence, the markets had priced in a hike to just 3%.  That said, the European Parliament is preparing a draft resolution condemning the ECB for raising rates the way it is.


----------



## power1 (31 Mar 2006)

Interesting to note that Inflation in the Eurozone has dropped to 2.2% for March, down from 2.3% in February and 2.4% in January. Although it is still above the 2% target rate, the reduction may sway the ECB from rising rates every 2 months. I think 3.25% by the year end still looks the most probable with the next rate rise in May and then every 3 months.


----------



## soma (31 Mar 2006)

power1 said:
			
		

> Although it is still above the 2% target rate, the reduction may sway the ECB from rising rates every 2 months.


Maybe I'm reading too much between-the-lines in the ECB's bulletins and public comments by it's members.. but I do believe that the line "we're raising rates to combat inflation" is only partially true.. I feel it is a partial-cover-story (which is more easible digestable by the media & the general population) used by the ECB,  and that one of their main reasons for raising rates is to combat the 'liquidity bubble' that some of it's members have aluded to.


----------



## walk2dewater (31 Mar 2006)

soma said:
			
		

> Maybe I'm reading too much between-the-lines in the ECB's bulletins and public comments by it's members.. but I do believe that the line "we're raising rates to combat inflation" is only partially true.. I feel it is a partial-cover-story (which is more easible digestable by the media & the general population) used by the ECB, and that one of their main reasons for raising rates is to combat the 'liquidity bubble' that some of it's members have aluded to.


 
Bingo.
But, from my read of [the latest docs on] their website I don't think there's much cover up.  It appears pretty black and white to me.  But then again I spent 6yrs in university learning all the lingo.


----------



## soma (31 Mar 2006)

walk2dewater said:
			
		

> Bingo.
> But, from my read of [the latest docs on] their website I don't think there's much cover up.


To be honest, that's as good as burying those documents 12 feet under ground cos:

1) The average punter's financial education is very very poor and they're highly unlikely to be perusing the ECB's website.
2) Investigative/non-vested interest journalism is very rare these days.


----------



## bearishbull (31 Mar 2006)

yes ,headline consumer price inflation isnt only reason for rate rises ,it wells know the euro bankers are unhappy about asset price inflation in europe.france spain etc have had large house price rises due to in the opinion of the bankers easy credit/negative real interest rates.


----------



## beattie (3 Apr 2006)

The business section of Dunphy's show this morning commented that the FT are running a story that there is a slight chance that rates could go up on Thursday.


----------



## Howitzer (3 Apr 2006)

ivuernis said:
			
		

> I don't think they'll be too hasty by raising on a 2-monthly basis. I think they'll stick to a 3-month cycle as they normally do. This would still give a rate of 3.25% by the end of 2006 and well on the way to 4% during 2007.


 
I'm confused. The ECB raised rates in Dec 05 (first change in 2 years), then again in March (3 month gap). They'll probably raise again in May (2 month gap).

Where does the '3-month cycle as they normally do' come from? There's no sequence there as far as I can see.


----------



## ivuernis (3 Apr 2006)

Howitzer said:
			
		

> I'm confused. The ECB raised rates in Dec 05 (first change in 2 years), then again in March (3 month gap). They'll probably raise again in May (2 month gap).
> 
> Where does the '3-month cycle as they normally do' come from? There's no sequence there as far as I can see.


 
Between early 2000 and late 2001 when the rate went from 3.25% to 4.75% and back down to 3.25% the initial rate hikes and subsequent drops were almost every 2 months and the upside and downside of the rate changes almost mirrored each other. 

When the rates were dropped further in early 2003 they were done in 3-month cycles. Now that they are raising them again I would guess they'll do it at a fairly steady pace (every 3 months). Just my 2-cents based on their track record of raising and dropping rates. Even at this moderate pace rates are still likely to go higher than most people expect. Anything faster might set some alarm bells ringing.


----------

