Finance Matters

Posts Tagged ‘Interest Rates’

The Bank of England’s latest inflation attitudes survey suggests that fewer people believe inflation is being controlled effectively with interest rates.

In August, when the survey was last carried out, the proportion satisfied that the Bank was doing its job to set interest rates to control inflation, versus those dissatisfied, was 16 per cent, but this figure fell to just 9 per cent in the November survey.

The represents the lowest level of satisfaction since the survey started in November 1999.

Consumers who participated in the November survey said they expected prices to rise by 4.1 per cent over the next year.

They expect an inflation rate of 4.1 per cent over the same period, a slight fall from expectations of 4.2 per cent inflation recorded in the August survey.

Those surveyed said they expected inflation to be a median of 3.4 per cent in 2013, increasing slightly to 3.5 per cent in five years’ time.

The proportion of those surveyed who expect interest rates to fall over the next year fell to six per cent in the November survey, compared with 7 per cent in August, while 39 per cent said they expected interest rates to increase, compared with 38 per cent in August.

Although inflation fell to 4.8 per cent last month, the survey showed that people perceive it to be 5 per cent.

The results are based on a survey carried out by GfK NOP on behalf of the Bank of England, of 1,853 people in the UK aged 16 and over between November 3 and 8.

Meanwhile, in the eurozone inflation reached 3 per cent in November, the third consecutive month it has hit this level.

The eurozone economy is expected to have contracted by 0.6 per cent in the final three months of 2011.

High levels of interest on payday loans are helping to create ‘Zombie’ debtors – people who can only afford to pay the interest on their debts each month and not the debts themselves.

Based on a study of 2,000 adults, insolvency trade body R3 suggests that around 45 per cent of the population struggle to make their income last until payday and around 3.5 million adults are thinking about taking out a payday loan over the next six months.

Payday loans are short-term unsecured loans, averaging around £300 in value.

According to R3, sixty per cent those who take out a payday loan regret the decision and nearly half believe the loan made their financial situation worse.

The survey also found that young people were most likely to be attracted by a payday loan, with people between the ages of 16 and 24 using this form of credit.

R3 also announced its latest Personal Debt Snapshot, which revealed an increase in the number of people without savings from 19 per cent last quarter to 27 per cent this quarter.

Consumer charity Citizens Advice recently warned of a four-fold increase in the number of people running into debt after taking out a payday loan, between May and July this year, compared with the same period in 2009.

The charity is calling on the government to introduce tighter regulations to protect consumers from payday loan companies who may charge interest rates of more than 4,000 per cent.

While these loans are reasonable if they are paid off as soon as the payment is due, debts quickly escalate if the loan is rolled over.

There are also often associated fees which can sometimes exceed the loan amount.

However Consumer Minister Ed Davey has expressed concern that tighter regulation could lead to people having to turn to illegal loan sharks.

The opinions of the ratings agencies can cause huge shifts in the value of government and company debt – and the interest rates they pay – but what exactly are they?

As the European crisis gets worse, banks are getting more cautious about lending to one another.

The “TED Spread,” which is the difference between Treasury yields and LIBOR (the London Interbank Offered Rate), is thought to be a good indicator of the direction of credit availability in the economy. When the TED Spread is rising, as it is now, banks are demanding higher interest rates for lending to one another and credit is tightening. When the TED Spread dropping, credit is becoming looser.

The TED Spread has been rising all year.

From Bloomberg, here’s the TED Spread over the past month:

And here’s the past year:

As the longer term chart below shows, we’re nowhere near the extreme levels we hit in the 2008 crisis, but we’ve now hit the upper bound of normal. And as the longer term chart also shows, we can go from “concern” to “crisis” literally overnight.

Here’s the past 5 years:

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See Also:

• Kiss Your Dreams Of An ECB Bailout For Europe Goodbye
• 20 European Banks That Are Desperate For A Solution to The Euro Crisis
• Europe Closes: Early Rally Flops, And Italian Yields Shoot Above 7.1%

Campaign group Save our Savers today revealed the cost to savers of the Bank of England’s decision to hold the base rate at 0.5% for the 33rd successive month.

The group estimates that the low interest rate combined with a retail price index at 5.6 per cent, its highest level for 20 years, and a consumer prices index rate of 5.2% will cost savers £43 billion over the next year.

Save our Savers believes that the Bank of England’s strategy has caused the value of sterling to fall by 25 per cent since 2007.

According to Moneyfacts.co.uk the average new instant access account offers 0.93% interest, compared with 4.21 per cent in November 2007.

These low interest rates, together with a high level of inflation mean that it is impossible for savers to protect the value of their savings.

Save our Savers has accused the Bank of England of “failing in its statutory duty” and it wants the government to intervene.

It believes that the Monetary Policy Committee may have acted illegally in letting inflation exceed its stated target of 2 per cent.

According to analysts, an increase in the base rate is unlikely until mid-2013 in the face of the weak UK economy and the ongoing crisis in the eurozone.

In addition to maintaining a low base rate, the Bank of England pumped another £75 billion into the economy last month through its quantitative easing programme.

New figures from the ONS revealing that producer price inflation fell to 5.7% on October, compared with 6.3% in September.

The reduction in producer price inflation, which reflects the price of goods at the factory gate, together with poor September trade figures, is likely to be seen by the Bank of England as an indication that the quantitative easing programme should continue despite high consumer price inflation.