Are interest rates rising too quickly?

EvotingMachine0197

Well-known member
Joined
Feb 17, 2006
Messages
8,552
Somewhat like the beachball on the sealions nose, I see the economy as being inherently unstable. Too much movement too quickly and the ball is dropped.

Like any mechanical or electronic system, the economy has a given response time to any stimulus, in this case interest rate hikes. If this stimulus is over applied, the economy will not necessarily react any faster, but will eventually catch up and overshoot the point of balance. One effect of this overshooting, I suspect, will be an over-suppression
of consumer spending - not good either.

A 50% increase in one year just seems too fast to me. As an engineer, not an economist, I cannot back this up with anything - it's just an opinion and there's a good chance it's rubbish.
 


hiding behind a poster

Well-known member
Joined
Mar 8, 2005
Messages
48,122
You're probably right. Interest rate rises normally take 6-9 months to feed through to consumption and investment decisions. So in an Irish context, the recent slowing in house price growth may be in part down to the start of the rate rises late last year. In a European context, they've now increased rates 4 times, with very little time to assess the effect of the early rises. And if oil stabilises after September, even if at a price of $70-75, then a large part of the energy component of EU-wide inflation will be stripped out, as it first hit $70 in September last year. So EU growth could slow right down, leading to rate falls from about the middle of next year.
 

Ponzi

Member
Joined
Apr 15, 2006
Messages
58
3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.


 

qtman

Active member
Joined
Jan 24, 2005
Messages
280
EvotingMachine0197 said:
A 50% increase in one year just seems too fast to me. As an engineer, not an economist, I cannot back this up with anything - it's just an opinion and there's a good chance it's rubbish.
Interest rates and mechanics aren't really comparable. You have to remember that the ECB rate is set in anticipation of economic activity rather than in reaction to it. The ECB is of the view that economic activity will increase in 2007, so the rate hikes are a pre-emptive strike in anticipation of inflationary pressure. They have not been raised with reference to current economic activity.
 

factual

Well-known member
Joined
Feb 5, 2005
Messages
8,723
Ponzi said:
3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.
Ireland's households have a historically high level of debt however, so interest rate increases will take a lot of spending out of the household sector. Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit :(
 

Ponzi

Member
Joined
Apr 15, 2006
Messages
58
factual said:
Ponzi said:
3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.
Ireland's households have a historically high level of debt however, so interest rate increases will take a lot of spending out of the household sector. Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit :(
I would expect a contraction in spending and private sector credit growth (running at 30% at present). Debt must be repaid at some stage, form future income. :?


It looks like Tony Blair is having a particulary bad week,
http://news.bbc.co.uk/1/hi/business/5244202.stm
 

kerrynorth

Well-known member
Joined
Oct 5, 2005
Messages
1,525
Any significant increase in interest rates are going to disproportionately impact upon the grossly imbalanced Irish economy. A rise from 2 to probably 3.5% in a year and to probably 4%+ next year will along with the inflationalary pressures in the energy sector will have a twin effect on the economy. In the short term these effects will be ameliorated by the SSIA affect, however, come the latter half of next year I can see consumer spending coming severe pressure. Also, I will guarantee you that there will be a raft of job losses in the already under pressure manufacturing sector, particularly in the endogenous sector, although FDI in both the manufacturing and services sector may also see siginifcant losses if there is added substantial drop in the US $. I would also see the construction sector starting to slow down sharply next year. I would anticipate an unemployment rate of 5.5 to 6% by the end of 2007 compared to 4.4% at present.
 

morryah

Active member
Joined
Sep 26, 2005
Messages
113
factual said:
Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit :(
On the plus side though, rich people will be ok.
 

EvotingMachine0197

Well-known member
Joined
Feb 17, 2006
Messages
8,552
kerrynorth said:
Any significant increase in interest rates are going to disproportionately impact upon the grossly imbalanced Irish economy. A rise from 2 to probably 3.5% in a year and to probably 4%+ next year will along with the inflationalary pressures in the energy sector will have a twin effect on the economy. In the short term these effects will be ameliorated by the SSIA affect, however, come the latter half of next year I can see consumer spending coming severe pressure. Also, I will guarantee you that there will be a raft of job losses in the already under pressure manufacturing sector, particularly in the endogenous sector, although FDI in both the manufacturing and services sector may also see siginifcant losses if there is added substantial drop in the US $. I would also see the construction sector starting to slow down sharply next year. I would anticipate an unemployment rate of 5.5 to 6% by the end of 2007 compared to 4.4% at present.
Couldn't agree more. The SSIAs coupled with Titanic-esque confidence are providing an anaesthetic to the pain of these rises. This will wear off. Then trouble. As well as job losses, speculative properties will begin to get dumped.

Ponzi, do you know what caused the German dip and French peak in graph above. Just curious.
 

newFF

Member
Joined
May 28, 2004
Messages
23
factual said:
Ponzi said:
3% interest rates are low by historic standards. The money markets aren't don't seem to be anticipating a reduction in Euro rates anytime soon. Money supply and inflation are still well above target and the ECB may be targeting the tightening policy at the ClubMed nations which have lost the run of themselves entirely.
Ireland's households have a historically high level of debt however, so interest rate increases will take a lot of spending out of the household sector. Possibly no bad thing as it will slow down the economy, although as usual the poor will be worst hit :(
If the "poor" have debt they will be hit hard. Many in this category are already paying exhorbitant rates to the hire purchase sector. - Typically interest rates from these institutions are of the order of 23%.
 
Joined
Apr 22, 2006
Messages
6
INTEREST RATES

A good indicator of the "state" of our finances is to review the number of people and value of loans being refinanced.
I know from our local credit union , this number has grown by nearly 300% in the past year according to our annual report. Main reasons given was debt consolidation and to pay off credit cards.
It wasn't so long ago I got into a bit of financial trouble myself managing to go from very well paid job with benefits and having lots of financial committments right down to ill health and creditors putting on the squeeze.
Thankfully I came out OK, but it took time, and that was when intrest rates were a lot lower than now, banks were more "borrower friendly" and more sympathetic, methinks!
For anyone in financial trouble now, a rise in interest rate will be problematic. A rise in inflation will also hurt. Factor in fixed costs every month - childcare, mortgage, car, utilities, groceries and inflate them all accordingly - suddenly the wages packet doesn't extend that far and people are catapulted into refinancing, borrowing short term or defulting.
Leaving aside SSIAs, things are alreday getting more expensive in Ireland without SSIA money further fuelling the inflation fires. Fuel is on the up too which will have a recurring knock on to prices and if there are any further "hidden" taxes in this years budget, an increasing % of people could find themselves in bother.
Methinks we could have created an economic timebomb with our Celtic Tiger. We don't control interest rates, fuel prices, our property markets are at the behest of investors from ireland and beyond and we are too reliant on inward investment - foreign jobs - again something we can't control.
I've my own back covered because I've learned from my mistakes. Lots of people out there yet to ....
 

Ponzi

Member
Joined
Apr 15, 2006
Messages
58
EvotingMachine0197 said:
kerrynorth said:
Any significant increase in interest rates are going to disproportionately impact upon the grossly imbalanced Irish economy. A rise from 2 to probably 3.5% in a year and to probably 4%+ next year will along with the inflationalary pressures in the energy sector will have a twin effect on the economy. In the short term these effects will be ameliorated by the SSIA affect, however, come the latter half of next year I can see consumer spending coming severe pressure. Also, I will guarantee you that there will be a raft of job losses in the already under pressure manufacturing sector, particularly in the endogenous sector, although FDI in both the manufacturing and services sector may also see siginifcant losses if there is added substantial drop in the US $. I would also see the construction sector starting to slow down sharply next year. I would anticipate an unemployment rate of 5.5 to 6% by the end of 2007 compared to 4.4% at present.

Couldn't agree more. The SSIAs coupled with Titanic-esque confidence are providing an anaesthetic to the pain of these rises. This will wear off. Then trouble. As well as job losses, speculative properties will begin to get dumped.

Ponzi, do you know what caused the German dip and French peak in graph above. Just curious.
Kerrynorth, I agree the US slowdown, rising interest rates, rising fuel costs coupled with an inevitable slow down in private sector credit growth will hit first. Once the rose tinted's are removed well God knows. :?

EM0197

Those peaks represent (I think) tomfoolary by The Wiemar Republic in the 20's and the Oil Shock of the 70's. :wink:
 

kerrynorth

Well-known member
Joined
Oct 5, 2005
Messages
1,525
Ponzi said:
EvotingMachine0197 said:
kerrynorth said:
Any significant increase in interest rates are going to disproportionately impact upon the grossly imbalanced Irish economy. A rise from 2 to probably 3.5% in a year and to probably 4%+ next year will along with the inflationalary pressures in the energy sector will have a twin effect on the economy. In the short term these effects will be ameliorated by the SSIA affect, however, come the latter half of next year I can see consumer spending coming severe pressure. Also, I will guarantee you that there will be a raft of job losses in the already under pressure manufacturing sector, particularly in the endogenous sector, although FDI in both the manufacturing and services sector may also see siginifcant losses if there is added substantial drop in the US $. I would also see the construction sector starting to slow down sharply next year. I would anticipate an unemployment rate of 5.5 to 6% by the end of 2007 compared to 4.4% at present.

Couldn't agree more. The SSIAs coupled with Titanic-esque confidence are providing an anaesthetic to the pain of these rises. This will wear off. Then trouble. As well as job losses, speculative properties will begin to get dumped.

Ponzi, do you know what caused the German dip and French peak in graph above. Just curious.
Kerrynorth, I agree the US slowdown, rising interest rates, rising fuel costs coupled with an inevitable slow down in private sector credit growth will hit first. Once the rose tinted's are removed well God knows. :?

EM0197

Those peaks represent (I think) tomfoolary by The Wiemar Republic in the 20's and the Oil Shock of the 70's. :wink:
A confluence of factors may come into play by the end of the year. A slowing US economy which some believe could enter negative territory by the end of the year; a 10-15% collapse in the value of the $; rising energy costs; rising interest rates; and, high the cost base of the economy.

The US economy and $ situation could give rise to an employment shock such as maybe Intel cutting back in Leixlip. It is not the job cuts themselves that are the problem but the signal it would send to the rest of the economy, you also have to question whether the likes of the low-tech Dell facilityin Limerick is viable in the medium-term with the price pressures that sector is under (note: Dell alone acoounts for c.2% of GDP!). An employment shock such as the above would trigger a wider economic shock, particularly in the housing sector, and the Irish economy is not set up to withstand any economic shocks. It would not be an exaggeration to say that it is property values that are the mainstay of the Irish economy, the productive sector is going nowhere with our rising cost base, if their were any downturn in property values Ireland could enter a recessionary spiral just at a time interest rates are heading in the opposite direction. THE LAST PERSON OUT PLEASE TURN OFF THE LIGHTS!
 

Ponzi

Member
Joined
Apr 15, 2006
Messages
58
All that mortgage equity withdrawal money would dry up quickly, if the American experience from the 90's is any guide.


 

kerrynorth

Well-known member
Joined
Oct 5, 2005
Messages
1,525
EvotingMachine0197 said:
Ponzi, I dont get that graph. How can mortgage equity withdrawal be negative?
Debt is being paid back rather than being extended further. Consumers stop spending and pay off debt instead.
 

He3

Moderator
Joined
Oct 1, 2008
Messages
17,077
Couldn't agree more. The SSIAs coupled with Titanic-esque confidence are providing an anaesthetic to the pain of these rises. This will wear off. Then trouble. As well as job losses, speculative properties will begin to get dumped.

Ponzi, do you know what caused the German dip and French peak in graph above. Just curious.
Posted presciently in August 2006. Followed soon by this - http://www.politics.ie/forum/economy/8199-ireland-warned-property-slump-looming.html
 

Ren84

Well-known member
Joined
Jan 14, 2011
Messages
49,046
Some pretty spot on predictions from 5 years ago. If people on a public forum were able to see the impending crash, why didn't the government not do the same?
 

He3

Moderator
Joined
Oct 1, 2008
Messages
17,077
Some pretty spot on predictions from 5 years ago. If people on a public forum were able to see the impending crash, why didn't the government not do the same?
They were busy.
 


New Threads

Popular Threads

Most Replies

Top