Bank base rate now 4.5%

The message from john boyle contains these words:

His right what?

Well I don't owe any of this £1,000,000,000,000 in debt, but the fall out from it will still affect me.

And I can't afford to buy a house.

The same way as FTSE trackers?

"Jonathan Bryce" wrote

Eh? If the BoE isn't setting a base rate, then *the* base rate couldn't be tracked.

Obviously, if the different players in the market set their own "base rate" (totally independently of each other), then they could try to call that a "base rate tracker" - when in reality, it is nothing more than a SVR. 'Cos their so-called "base rate" would be a SVR ...

It wouldn't exist. Banks, etc would simply compete against each other at or around the natural rate of interest.

Roland.

Yes and no. The Bank of England limits the behaviour of commercial banks in the use of such things as reserves and the base rate. The banks can get round this by setting rates below the base rate but at the cost of consumer freedom via lock-ins and the use of risky derivatives to offset interest rate rises by the BoE.

The matter of inflation is more to do with fractional resevre banking than interest rate setting.

Before the BoE ever set the base rate - a long time ago.

Roland.

In message , Roland Watson writes

Lock ins are nowhere near as common as they used to be.

Eh? I know of no 'discount' or 'cashback' scheme that is backed by derivatives spoecifically but larger lenders use derivatives as part fo their day to day treasury management. Many Fixed Rates are backed by derivatives. In either case I know of none that are 'risky'.

I.E. Before there was a 'base rate'.

Yes, but the bank still has to compensate from somewhere to balance the risk of going in below the "official" rate. Probably a sign of a housing peak when such things happen ...

There won't be a direct link. The banks will be trading interest derivatives somewhere along the line to hedge their commitment to low interest rates at the consumer end.

They're not risky so long as interest rates don't spike or international event overtake them. Remember LTCM?

Which brings me back to my original point. No need for such an artficial construct of the government when the markets can set their own rates quite happily.

Roland.

In message , Roland Watson writes

They generally use the momentum of the 'back book' which is paying over the odds to subsidise the offers.

Not necessarily. I havent got the latest figures but a substantial number of new loans are remortgages.

Of course, but there balance sheet and structure wasnt comparable was it?

I agree with some of this, but the trouble is that the rate set by the market isnt the rate needed in order to control inflation.

This should not really be surprising, because if you plot the payment as a function of the rate, it is (of course) an increasing function (i.e. it has a positive first derivative), but also the rate of increase increases, that is to say that the graph is not a straight line but it curves upwards (i.e. it has a positive second derivative too).

Now, if it *were* a straight line, then if you superimposed the graph for payment(rate) and payment(rate+0.005), the vertical separation between the two payment graphs would be equal for all rate values. But as both graphs curve upwards, you must expect the vertical gap to increase with increasing rate.

It doesn't really get any simpler, I'm afraid.

One trick is to plug this formula into a plotting tool, keeping N as a constant (e.g. 25) and forgetting L (treat it as 1), so put in a function f(x) = x/(1-(1+x)^-25), and tell it to plot not only f(x) between (say) x = 0.04 and x = 0.15, but also to plot f(x+0.005), and, more to the point, f(x+0.005)-f(x). You'll find that this last expression increases asymptotically with increasing x to a ceiling of 0.005, because, well, it should be obvious: If the interest rate increases more and more, to silly rates, such that the capital repayment element of each payment is insignificant, then the difference in payments is exactly the difference in the interest rates (per unit of capital).

Of course, if you're feeling ambitious, you could try differentiating f(x) with respect to x, twice, looking at the answer, and reasoning why it must be positive.

If you plot on a log-linear graph, you will get a straight line.

I don't think so, since the linear-linear graph is already almost a straight line itself. Distorting it will at best make the relevant part *look* straighter, it won't actually *be* straight.