Any guesses as to how high interest rates can go?
I really feel like the UK is under an anxiety cloud. If it's not one thing it's another.
This is literally the million, billion, trillion dollar question.
the BOE are not as transparent as the fed, so lets go with their dot plot on fed funds rate to get read over. That shows as of September 2022 they push to 4-4.5% by the end of 2022, it moves to 4.75-5 in early 2023, remains there for all of 2023 and then is cut 75 basis points in each of the next 3 years to 2.5-3% over the longer run, 2026 and beyond. I suspect the UK would have a similar outlook. We get a slightly different read over into mortgages, this likely means a 6-7% mortgage rate as the norm for the UK, banks are just being very naughty at the moment in front running the predicted rate hikes to protect their balance sheets.
Now the big caveat, we have never beaten inflation until we have interest rates above the inflation number (and todays inflation number is a total underestimation). No one is arguing any western central bank will push interest rates beyond 8% to do that, so the market isn't arguing that the central banks won't HAVE to pivot and cut rates, they are just not sure when. Central banks almost always capitulate on rate rises or currency printing when something breaks in the system. So many have the belief an interest rate much beyond 4% for over a year breaks the system. So the simple point I'm making is don't be surprised if we get to mid 2023 and get a complete reverse in policy because institutions are starting to go bankrupt.
People are entirely missing the point when they comment on interest rates from the 1980s, yes they were a lot higher, but you have to look at the debt burden now vs then, we've had a decade of cheap money and asset bubbles because people have loaded up on debt, the read over to interest rates back in the 1980s to now, id say you have to at least double todays rate and then compare backwards, so todays 6% mortgage rate is equivalent to 12% if you want to compare backwards.
But my real point, as people may have read, is even when central banks pivot, that is worse news. The second we lower interest rates or turn back to the money printing, inflation soars, So either higher interest rates make you poorer, or on the flip side inflation will erode your wealth, there are no good options from here.
My personal view, we probably get a little beyond 4% interest rate for a relatively short period, things start to break, we'll have a major investment bank or institution go bankrupt, the equity market will capitulate, i.e. a stock market further crash from this point and at that point central banks will step in, in a war between them letting the financial system risk major contagion and getting the blame and them thinking sod it lets lose the fight to inflation and let it erode peoples wealth over years and we can blames external factors, they will choose the later. At that point inflation soars and money devalues, we probably then head towards a central bank digital currency as the "saviour" of the system.
Regardless of trying to make predictions, I think the basic take away here, the era of ultra low interest rates and cheap debt is over for a generation.
