Interest rates and inflation and what might happen.

Post Reply New Topic

Speaking from a British perspective, in the past interest rates were horrific but prices of anything that required a loan to purchase reflected this. My parents first house was just 30k in the late 80s. Some often went as low as 15k. Because of these interest rates banks refused to lend more than 3X annual income.

It sounds bad, but interest rates and prices often went hand in hand back then and complemented each other.

Fast forward to today and 15 years of cheap borrowing with very low interest rates have rocketed house prices. Loads of people including some friends have taken out large loans on houses a lot more than 3X their income. Now the war in Ukraine and what seems like pent up money from the pandemic have suddenly unleashed crippling inflation and the bank of England have responded with equally crippling and sudden rises in interest rates. (No idea why they think it'll help as nobodies money is going very far anymore anyway)

Being fond of speculating, where do you think this is all going to end in the next five years from a strictly financial sense for the average person?

I'm thinking repossessions, cars taken off people, a surge in minimum wage leading to tensions in skilled jobs and drop and possible riots.

All for the sake of borrowing being much more expensive....and possible inflation too.

All very true - I bought my current house for £19,000 in 1988 when interest rates were in double digits, and it would now sell for around £150,000. Even more astonishingly, I bought a small flat in London for £35,000 in 1998, which would now go for £250,000 (I sold it 15 years ago for £95,000). In theory, if interest rates rise much further, house prices should collapse to some degree to compensate, but I wonder.....

You imply that the interest rate rises are all for nothing, but bear in mind that savers have been taken to the cleaners for well over a decade, with rates of around 1%, which has represented a massive subsidy to mortgage holders. I think savers are entitled to some belated return, but even so, they're now only getting maybe 2.5% when inflation is 10%, so are still being screwed!

Hmmm....yes, but if GDP shrinks dramatically over the next few months and we go into recession, will the Bank of England bottle it and return to near-zero interest rates and a resumption of QE? On past form, that's very possible or even likely. What price decent saving rates then?

My evening meals will be a lot smaller, that's for sure.