The unrepentant governor

Why isn't this Mervyn King held accountable?

Why isn't Osborne criticising or threatening the guy's job?

It's Mervyn King's job to keep inflation below the target limit no matter what the causes are. Why isn't he doing that?

He's been wrong with his inflation targets, he knows the recovery is going to be weak (because it's a global matter, not a national one) and there is no reason to keep the base rate on the floor. He could raise it to 1% with negligable affect on anything except savings.

This is another example of government bureaucracy that is utterly useless: Mervyn King writes to Osborne each month and Osborne says "Well, ok, then, can't be helped." Why doesn't Osborne instead say "Get that inflation down to target or we'll be looking for a new governor?"

I've done my sums (I'm a Cardiff Uni professor in the field), and I personally don't see how we won't be in another mini recession within the next year.

Osborne has fallen into the trap of the majority of tory chancellors of the past.

He's got himself stuck in the inflation trap.

What I'm saying is, he can't keep interest rates at basically 0% for ever, as the markets simply won't let him. They won't even go another 6 months without a demand for a hike.

And the market demands for interest rate hikes, to ease inflation, will almost certainly demolish growth.

What Osborne underestimated, in my opinion, is the amount of business, and growth that is based on debt, and loans.

He may be trying to set good foundations, but he didn't realize that cutting won't achieve it. As the entire economy is built on a house of sand.

What I'm saying is, the UK economy, in truth, is reliant on debt. People borrowing money they can't afford.

Growth at the minute is fictional, as it's allowing these people and these businesses to rebuild with more debt.

The problem Osborne has is this is not sustainable. And sooner or later, he's going to have to ask this recovery, which is superficial, to start paying interest on their debt, and assets.

What I'm saying is, he has a bit of a Catch 22 situation.

He won't be allowed to keep interest at 0% for much longer, as the markets, corporations, and those with wealth, are being stifled, and are not being allowed to grow.

But the minute he raises interest rates, to appease the markets, he's probably going to bankrupt small business, entrepreneurs, and middle England.

Definite recession forumulae.

This is not good. The reality is that every prediction Mervyn King has made over the past 2 years has proved to be wrong. Inflation was supposed to be at 1% - it's actually at 4%. Growth predictions have been constantly 'revised' when shown to be wide of the mark. The Governor's credibility is at serious risk.

Meanwhile back in the real world - I've had no pay rise for 2 years and probably won't get one this year either. We've laid off a number of staff with others still in consultation. Unemployment (and 'under-employment') is continuing to rise with no sign of the private sector able to pick up the slack from public/voluntary sector lay offs. There is a real risk of a perfect storm brewing here - we can't raise interest rates because it will kill off the fragile recovery, but we can't let inflation continue to rise because it will put huge pressure of pay settlements. Whatever happens to interest rates it seems to make things worse. Unless I have missed something, I can't see a way round this.

I agree that the BoE needs to convince the markets it is serious about managing the UK economy's inflation prospects in the medium termWhether this materialises as a 50 or 75 basis point movement before the end of 2011 is a moot point , however the MPC and those who seek to drive a solely hawkish view on interest rates need to spend time out of London and "get on their bikes" to seek signs of economic activity in the rest of the UK and away from the multi national super enterprises that saturate the metropolis and it's M4 golden corridor. The situation even 100 miles outside of London is very different.
I would caution the MPC to consider this , "Would they put their lives in the hands of a surgeon with just ONE instrument?" I think not. Whilst inflation , interest rates , money supply occupy the airwaves and the news forums we are avoiding the bigger , more difficult problem, "How do we create an economic environment where our "in ICU" economy can recover?" We are giving the patient the chemo we know will work to cure the indebtedness cancer, but the BoE and the Government need to provide an environment that will allow and encourage the patient to recover having regard for their diminished immune system.
I am no socialist or marxist but I fear a nation where 20-25% of it's young people have no prospect of employment, and who's parents will become increasingly unemployed unable to provide for them in their years of need. We are in danger of creating a disaffected generation born of the Blair years.

What I'm saying is, Osborne has probably over-estimated the number of cash rich businesses in this country.

Most of the recovery, is based on people taking on more debt. Either that, or by stopping paying back existing debt.

0% IR appeased this, and allowed growth.

The problem is, 0% interest rates, also stifles growth, from cash rich companies. And the markets won't allow it to continue.

I fear, the only way to appease corporations, will be to demolish the countries small business infrastucture

"But the governor said that nearly all of the overshoot could be explained by unexpected shocks - which had surprised the financial markets as well"

Unexpected Shocks? Surprised the Markets?

This was not an overshoot it was a complete stab in the dark just like all the other attempts to second guess collaptilism.

As commodities are the last bastion of wealth protection then logically it will only get worse - and still Merv states it will fall back

Said it a million times people.

Don't look at growth of business as a whole.

Look at growth of stable, cash rich, business.

Business growth is good. The problem is that a lot of them owe a lot of money, to a lot of people.

And the "lot of people", are only going to offer interest free loans for so long

All that says is that inflation might be higher. The implication that rates might go up is not there at all. That does not say endogenous causes are at play.

Mervyn King is correct.

Why isn't this Mervyn King held accountable?

Why isn't Osborne criticising or threatening the guy's job?

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Inflation is bad for people, bad for business, but great for governments and banks.

There's no greater way to pay off debt, than a combo of low interest, and high inflation.

Steph,

You should read the responses to your blogs more often.

There is no shock -there is no suprise, why does it take someone outside of modern economics to see this.

Merv was warned zero interest rates and QE would not lead to growth -only inflation. You warned him yourself it could lead to bubbles- which it has. (Speculators have once again pushed up the price of commodities, looking for a return on their punt.)

Can we please stop using the phrase 'unexpected shocks'

The plan was always to inflate away the debt. Merv has no intention of tagetting 2% CPI. This is the only reason he is still in his job.

He really has to go!

sorry to be the bearer of bad news (well actually it's not me, you can find it on bloomberg.com today)

"Part-time work accounted for all of the increase in employment over the past year."

now that is worrying.
so much for the much talked about recovery.

I'll say it yet again Stagflation.

..and coalition to be gone by June (ok I predicted that by last Christmas too, but what the heck!).

"All that says is that inflation might be higher. The implication that rates might go up is not there at all. That does not say endogenous causes are at play.

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That's not really the problem.

Debt is owned by people. Banks, corporations, even states.

These groups of people rely on interest repayments, to grow themselves.

0% interest or 0.5% interest, is not a long term tactic.

It's a case of "choose your poison".

The fundamental issue, people need to comprehend is:

Business debt, is owned by Business.

Big companies, lend money to small companies, to finance their own growth.

Interest free debt is not sustainable.

Do you think Ms Fladers that Mr King is responsible for falling living standards ?

Perhaps its the BoE, FSA, and Treasury lack of supervision of the monetary system to blame ? As the Governor inadvertently implied. Not just the banks.

Do you think you are Queen Canute, Madam ?

Or that the Governor is King Canute ? Sitting on his throne with the sea lapping around ?

The UK borrowed too much right through our economic system from households to Gov't : living standards were artificially higher in that they were in part unearned.

And now a period of adjustment follows.

PS The question you put at the conference this morning about domestic inflation eroding the advantage of devaluation had me, and I'm sure some others, bemused. [I mean that kindly.]

Post No. 1.

"Why isn't Osborne criticising or threatening the guy's job?

It's Mervyn King's job to keep inflation below the target limit no matter what the causes are. Why isn't he doing that?"

Well, King has the credibility of any other Banker. i.e. zero. But its to the governments advantage to burn off some of our debt by allowing inflation to rise. And this time next year there will be another set of one-off circumstances to blame. But King's hubris as a banker won't allow him to admit any error, so stepped rate rises I think beginning August, ending the year at a dizzy 1%. Too bad if your local banker is adding a couple of percent over base to your churned debt...

If one discounted the view of the non-UK economist on the MPC, in which direction would the MPC have leaned?

[If MK can ignore some of the prices then I can ignore some of the committee]

Why doesn't he just let the pound drift up a little? That would decrease the cost of our imports and hence reduce inflation. Would it reduce our exports? Well Australia with an incredibly strong AUS dollar don't seem to have problems with exporting

SF: 'A year ago, the Monetary Policy Committee was expecting the target measure of inflation would now be around 1%. Instead it is 4%.

But the governor said that nearly all of the overshoot could be explained by unexpected shocks - which had surprised the financial markets as well. If the Bank had raised rates to keep inflation on target - households would simply have been hurt by a shrinking economy instead.'
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We all know what is not included in 'nearly all' and we knew about it nearly a year ago in AD's last Budget. In addition, the expectation was that VAT would go up to 19% but that was denied until there was a leak from the Treasury.

So why did the MPC get it so wrong?

Mervyn King knows exactly what he’s doing, and exactly why he’s doing it.

Commercial banks can raise funds from the BOE @ 0.5%.
And
Commercial banks can lend that money out @ whatever they damn well please.

Profits at commercial banks should therefore rise substantially, or if saddled with large piles of worthless promises to pay, be able to slowly write them off.

But for everything there’s a price:
Retail price index (all items) RP02:
Jan 2009 210.1
Jan 2011 229.0
Price inflation = + 9%

Someone has to pay the price, and that someone, is the likes of you and me.

So if you haven’t had a wage rise in the last couple of years and you didn’t know the price, now you do……… currently it’s 9% of everything you earn.

18 - the answer is - To the left, to the right.

Would it matter if we all stopped for an hour, a day and all spent that time thinking. Thinking of what we could do to make the world a better place.

Mike wrote "I've done my sums (I'm a Cardiff Uni professor in the field), and I personally don't see how we won't be in another mini recession within the next year."

=========================

It is very tempting to quote the old adage (with minor amendments) that if you laid all economics professors end to end they still would not reach a conclusion.

There are a lot of companies out there who are zombie companies, they exist because at the low rates of interest they can service the debt but have no chance of repaying it, or at least not paying back at any meaningful rate.

Let us assume that interest rates rise by 1% - will that make a massive difference to the zombie comanies? For some yes but for the vast majority I have seen no it will not, the banks will not tip them over because they will not get any meaningful return.

In addition a lot of the problem companies now borrow on invoice discounting and factoring - in fact banks encourage this. A 1% rise in interest rates is not that threatening, whereas a slowdown in the rate at which invoices are paid is.

If we were talking about a rise of 3% in interest rates then I would agree with you but no one (except may be John from Hendon) is advocating that.

Of course the other thing you do not mention is govts cannot keep borrowing eventually they have to start paying interest and repaying debt too

"The implication is that bank rate will need to go up sooner than the MPC previously thought, and without such a strong economic recovery."

I don't draw the same conclusion. I think the media need to be careful not to state a strong view either way. My view is that a year ago the recession was expected to dampen demand inflation, but that supply inflation coming from imported commodities fed by the booming developing countries as not forseen a year ago. This has caused inflation to be higher but there's a common view that core inflation (excluding the effects of things we can't control?) is running moderate. I think the view is that with unemployment only now beginning to present itself and cuts generally there's plenty of deflationary material in the economy. Mr Kings comments, which I think were a bit naughty as they kick the market one way or another, were illusory in that they mean what you want them to mean. I think he did it to calm the markets, but appearing to appease their view, but the statement was in terms of the hypothetical and not necessarily the fact. I have self-interest in the base rate being low, but I also think inflation would erode alot of people's debt, including the Govt's and we're really on the cusp perhaps of stagflation. There will be much more of this talk in the year to come, but I hope the media won't put pressure on the MPC to act one way or another, but pretty much give them a more relaxed coverage as they shouldn't be influenced by politics or the media.

I must say, there seem to be an awful lot of potholes and unexpected sharp bends in this road to economic recovery. Time to get the maps out and plan a new route I think.

Re 19 Fiz...
Australia has many of the vital raw materials that China and India need to fuel their rampant economies, (particularily in mining).
That is what is fuelling Australias relative export success at the moment.
Lucky for us that the worlds biggest miner (BHP Billiton) is British, and is heavily involved in Australia.
BHPs success could well feed through into the value of your pension.
China and India are also playing a role in UK inflation, as they are now consuming far more of the Worlds food, oil and commodities than in the past, making it all the more expensive for us.
That's life.
But Mervyn King has to play this one really carefully....recession, job losses, business collapses and those dreaded reposessions we don't need.
I think I prefer inflation.

after reading most of the comments posted and listening to bbc radio 4
banging on about raising interest rates.I now firmley believe nobody including stephany flanders understands basic ecomonics, Can anybody tell me why increasing interest rates will suppress this inflationary bubble, when it is perfectly clear the circumstances for this bubble are nothing to do with the strength of sterling. People seem to be repeating exactly
what they hear in the media, for once Mervin King has it bang on the button
if interest rates are increased the ecomomy wil drop through the floor!!!
Bob.

doctor bob @ 1 "Why isn't Osborne criticising or threatening the guy's job?"

On the surface he mustn't interfere to retain credibility of independence, but the reality is he is quite happy with all the inflation. This inflation answers another weird connundrum: Why do the government put out a message of austerity and cuts when every single month since the Coalition was formed, borrowing and expenditure have been up. Total spending during the first seven months of this government was £23.3 billion higher than during the equivalent period in 2009. https://www.johnredwoodsdiary.com/2011/01/17/deficir-reduction-and-cuts/

The answer must be that they are trying to fool the public sector into not demanding pay rises triggered by this huge inflation by making them feel threatened by cuts.

"The Bank of England's quarterly inflation report has predicted the UK will see inflation of 5 per cent before it falls back to 2 per cent in 2012."
https://www.mindfulmoney.co.uk/3314/investing-strategy/inflation-will-hit-537-before-dropping-back-warns-bank-chief.html
If thats what they are predicting that i am sure that it not be the case!

Some good points about corporations from Mike, but their financing of smaller companies, for their own growth, isn't hindered by low interest rates: I can't see how it hinders growth at all to have 0% interest rates, the only downside is where cash rich companies and individuals don't get much return on their money, but that's surely the failure of them to invest in the right thing. I agree that it is the right course to inflate away the debt and also to have low interest rates to stimulate growth as the major consideration in the medium term should be to grow the economy, esp. outside the City, not kill it off. The education, state subsidisation and it's removal will provide huge problems for the UK downstream, so don't kill it off and allow a little inflation. I'm ignorant of the contradictions there might be between 0% interest rates and inflation and currency but there are so many structural problems with our economy I'm quite bleak about the prospects of growth, hence my dovish approach to interest rates.

Well, all this about MK should do this or that or the other is a waste of breath. At the end of the day we have got what we have got because of one thing only....... the last x number of years of LABOUR spend, spend, spend and spend again policies linked with the policy of borrow more and more and more to pay for it.

The country has got what it deserves for putting them in power in the first place, now it's so easy to blame the doctor who prescribes the medicine for the side effects the cure produces!!!

Unlike the Fed's ill-defined role, BoE MPC mandate is clear - keep inflation between 1% and 3%; hence the worries about UK economy should only be relevant in as much as they impact inflation expectations. With all the media coverage, these expectations are now running at a record high, and as we know are a self-fulfilling prophecy. So we will be seeing hikes soon, irrespective of what Mr Osborne may have wished for (after all, this is why BoE was given independence in the first place). The government should up the bond issuance while the yields are still relatively low!

Stephanie.
mushroom is a little bored now...we keep hearing about the MPC and the base rate, and yet...

Nobody has yet been able to tell me how raising the base rate is supposed to control inflation. (I read elsewhere about a thing called a liquidity trap...is that relevant?)

Nobody has yet attempted to refute the distinction I tried to draw between devaluation and inflation.

"Inflation is driven by changing supply/demand at a constant currency value, whereas devaluation is driven by increasing money supply at a constant demand/supply point."

The BoE themselves say that inflation is influenced by factors outside their control, so the fiat monetarist mechanism appears to be broken.

Nor does the base rate appear to be related to commercial lending rates and the old spectre of FRB money supply.

So as far as this mushroom can see, the BoE base rate can only be either:-

1. totally irrelevant to the domestic economy of GB, or else
2. good for things that are not understood by this mushroom.

Perhaps you would be so kind as to try to shine some light on why we are supposed to think the BoE base rate is important?

Otherwise...irrelevant = not interesting.

Thanks

Oh yea and before anyone starts shouting about stagnation of wages, I have had a 10% actual salary cut and no rise for 3 years so I know first hand what it's like but what has to be done has to be done we all have to put in our bit, apart probably from the unions who still expect the status quoe to remain and workers to receive increases and better hours etc.etc.etc.

Inflation by any measure up, unemployment up, but the former will allow the country to deflate the debt away. Meanwhile the banks and speculators will cash in.

Has anyone repeated the old mantra "This is a price worth paying" yet?

I predict a riot (or a brain drain)

There's been for some time now in the UK a disproportionate gap between the tiny interest rates offered to depositors, and the much larger rates charged to borrowers. The difference is the arguably excessive margin taken by the banks, which increases the pain/damage that borrowing businesses will suffer when (if?) interest rates rise.
It looks as if what the country really needs is a new generation of local credit unions or something similar, organized on a basis that leaves them free to pay realistic rates to depositors and offer loans to smaller businesses without taking penal margins. That means some basis of organization that stays free of the bloat of the banks.

I am an expert. You should listen to me.

Who appoints experts? Even the clever people can be wrong.

I am sorry for Mervyn and the MPC. They are between the devil and the deep blue sea. Either they kill off any remaining chance of continuing recovery or they let inflation rip.

They have been put into this position by Osbourne and to a lesser extent by Darling. Both chancellors made the classic mistake of assuming that the recovery was far enough advanced that they could safely cut back the extra public expenditure that was lifting the economy back out of recession. In order to reduce the deficit they should have used windfall taxes designed to acquire the unspent funds, which were inflating various asset bubbles.

What a pity Brown did not sack Darling when he talked about cut backs worse than those made by Thatcher. Balls would probably have been more sensible.

Economic reality has a way of forcing the hand of Finance Ministers who believe that they can force the economy to behave as they desire, as Norman Lamont discovered in September 1992.

The high levels of debt, that were allowed to build up, reflect the very wide gap between poor debtors and wealthy creditors. As the rich accumulate even more wealth, they prevent the circulation of money. Before the crunch, the banks kept things going by generating more and more credit.

Successive Chancellors failed to reduce the gap by effectively taxing the wealthy, now it is likely that the job will be done by inflation.

The shocking thing is that if Mr King was in charge of a plc he would have been sacked a long time ago for gross incompetence. His forcasts have been consistently incorrect and I am surprised that anyone pays any attention to him when he speaks. Shame on you BBC for giving this windbag and space on your website.
The Governor is attempting to simulate the Bernanke Put, and shows calous disregard for 'moral hazard.' To be frank, he is either fast asleep at the helm or is charting a course down the road of reckless negligence.
Mr King, with all due respect, the Bank of England is soley responsible for monitoring and controlling inflation, not underwriting the LSE with a Put option. Do your job, as setout in your mandate, and let politicians interfere (or not) with economic growth. Otherwise bow out with grace and allow someone else who has a keen handle on sound monetary policy a chance to get inflation under control.

Why not have a referendum to decide interest rates? Vote "Yes" for an increase in rates, reduced inflation, higher mortgages and greater job insecurity or "No" to maintain the status quo, fingers crossed, hope for the best and let the economy recover to pull us out of the brown and sticky.

Big Society - TM Dave C - in action!

Also, the MPC have a target of 2% - who set this? Is this the right level, i.e. why not 3%? If it was 3%, we would only be 33% above target rather than 100%.

Debt, taxes, unemployment, etc.,created by banks and bailing out of banks are the cause and inflation is a banking derived initiative to increase profits. Empty compassion when the people would like to see the efforts made to save the wealth of the wealthy be initiated on their behalf with the same urgency that was given to saving the banks.

#24. Justin150 wrote:

"If we were talking about a rise of 3% in interest rates then I would agree with you but no one (except may be John from Hendon) is advocating that."

A neutral (to inflation) interest rate is 5% - so even at 3% there is a couple of percent boost to the economy!

The market will force us back to neutral interest rates (ten times current levels) - it always does. Those who maintain that interest rates can never rise are totally ignoring a thousand years of history. You can thrust you head ever deeper into the sand but history is on my side. Mervyn King is creating ever more problematic economic conditions by attempting to fly in the face of the market and all common sense - he is creating a disaster far far worse than the one he pretends to be trying to avoid.

The other real problem is that the Bank of England has already lost all credibility in setting or even modifying market interest rates - the spread of rates today is astonishing in historic terms. Only banks get money anywhere near base rate. so in fact all that rising rates will do is modify the balance sheets of the big banks until it reaches (my guess) 3.5%. I choose 3.5% as this is the 'real base rate' today - being some mid point between what savers are getting and borrowers have to pay.

After Mervyn King is dismissed for gross incompetence and dereliction of duty his successor will have to preside over the raising of interest rates later this year. The longer that we delay - the higher the interest rate will have to rise and the worse it will be for the country and the longer the depression will be.

Pray tell me, what could he have done?????

Lets look at FACTS not stupid ideas...
a) WORLD food prices have shot up, this is a WORLD issue, not a UK issue. These prices have shot up because of three things - more demand, less supply and hording by some very rich funds.

b) WORLD energy prices have shot up, again a WORLD issue, again the same reasons.

Given the relative sizes of the UK economy and the WORLD economy we have really quite a small impact.

Using interest rates to dampen demand is at best a little dubious at worst a failure. Hiking interest rates reduces the cash available to the lower paid and those struggling with various debts - mortgages, credit cards etc. who are already paying excessive interest rates. Hiking the rate gives that cash to either the bankers or those with savings. Thus we transfer cash from the poor to the wealthy, hoping that the wealthy have got more than enough Rolex watches and Rolls Royces so horde the money instead of spending it - unfortunately they don't, they invest it in funds who buy futures on commodoties.

The ONLY help that a raise in interest rates MIGHT have is that it might raise the value of the pound. This will make imports cheaper, whether that feeds to end user prices or fatter importer profits, or a combination is never certain. In any case, the pound HASN'T fallen significantly this year, and even if it does go up a little this will only be a short term rise as the basic state of our economy could be summed up with a word rhyming with rucked and as a result the pound has been in steady decline since the mid '70's.

Worse than all of this is that raising interest rates - or even threatening to - will harm any prospect of recovery. In order to recover business needs to invest. If interest rates go up or it is threatened they will then business will NOT invest (it is obviously already not investing much). This will prevent growth in the short term. Long term lack of investment (such as we have seen)means lack of product improvement, new product and ultimately the closure of the business. If - and this is by no means certain - the value of the pound bounces a little on an interest rate rise then UK business will find it harder to compete with imports, will find exports harder, will shrik further, increase unemployment, decrease tax revenue, increase benefits costs, increase taxation, deficit etc. decrease the pound again.....


Please he is not 'unrepentant' he has been using his brain. If the interest rates go up he will have bowed to media pressure and we will be in for a serious problem.

Actually the ONLY course of action that would lead to a recovery is for the government to tell our two banks (the ones we own) to lend to business at an interst rate of 1%APR.

#32 midlandsjack

"At the end of the day we have got what we have got because of one thing only....... the last x number of years of LABOUR spend, spend, spend and spend again policies linked with the policy of borrow more and more and more to pay for it.

The country has got what it deserves for putting them in power in the first place, now it's so easy to blame the doctor who prescribes the medicine for the side effects the cure produces!!!"

So why aren't they reducing it? (See #29 ontheotherhand)

Having lived through the seventies, 4% doesn't seemlike any big deal.
During that crazy decade, salaries, house prices and everything you could buy QUADRUPLED.
And how's this for inflation....
When I got married (1970), my council tax, including water, was £32 a year.
Now its close to £1500.....50 times as much.
During the same period salaries have increased by 12 times.

@17. At 2:44pm on 16 Feb 2011, MegaBobinski wrote:

So if Mervin raised interest rates tp say 987654321% to stop inflarion what would that do?

Demand in the rest of the world for fuel and oil would stop causing our inflation to fall? For heavens sake try thinking, it doesnt hurt you know (well I guess you do'n, but it doesn't hurt!)

What this blogger knows about economics can be put into a thimble but it does seem to this layman that the BoE's remit in this area is too narrow and should be extended to include an employment target.

Which I believe the Fed is mandated to take into account.

PS. Feel a bit sorry for Mervyn King in that we read that the VAT increase accounts for most of the monthly inflation figure this time around.

#35. midlandsjack wrote:

"Oh yea and before anyone starts shouting about stagnation of wages, I have had a 10% actual salary cut and no rise for 3 years"

Yes... but the bankers got a 20% increase this year alone.

Unfortunately you have (probably for no fault of your own) found yourself on the wrong end of a social experiment aimed at dramatically increasing the difference between rich and poor. At the next election we should all remember who did what, and not what they say they will do! Judge David Cameron by the reduction in inequality he achieves - the classic escape for rabid Tories is to start a small war.

@28. At 3:43pm on 16 Feb 2011, bob wrote:
after reading most of the comments posted and listening to bbc radio 4
banging on about raising interest rates.I now firmley believe nobody including stephany flanders understands basic ecomonics,


You are right Bob, it is clear that none of these 'commentators' has the vaguest clue. It is OBVIOUS that no amount of interest rate rises here will have ANY effect on global prices, what it WILL do is kill any slim chance on any recovery in UK business. It will have a short term effect of boosting the pound, whether that drops prices of imported goods or lines the pockets of the importer is far from clear.

No, these commentators don't think - ever. Worse they spout off without even listening to the voices out there that correct them (they did manage to find an intelligent guy for yesterdays PM who said pretty much exactly what you and I are saying).

@19. At 2:48pm on 16 Feb 2011, Fiz wrote:
Why doesn't he just let the pound drift up a little? That would decrease the cost of our imports and hence reduce inflation. Would it reduce our exports? Well Australia with an incredibly strong AUS dollar don't seem to have problems with exporting


Several things:
You can't let the pound drift up. The only way to push it up is to hike interest rates.
The reduction in cost of imports is NOT the same as a reduction in shop prices - there is a very very good chance that the importer will just take a larger cut.
Raising interest rates not only makes exports more difficult but also prevents investment by business (and the current high commercial rates are already stifling growth and need to be sorted - but that would require the government to instruct the two banks we own to lend at 1% APR to business, something they won't do).
Australia is largely exporting raw material, commodoties by another name, these are going up in price massively because of demand, the strong AUS$ will not matter for those countries like China that NEED coal, iron ore and similar in massive quantities. If Thatcher hadn't decimated our mining industry we could be taking advantage of the current situation but instead we have millions of tons of commodoties left underground with no way of grabbing a slice of the bonanza. We can't 'invest' in opening the mines because the cost of capital from the banks is currently massively too high. So we are doomed to sit here watching our economy shrink, prices rocket, while knowing we could be employing people to dig coal/iron/etc from the earth and exporting it making the country very rich.

The answer is actually simple, control the two banks we own and lower - yes lower - interest rates, making them a permanently low figure.

This was all predictable and continues on the same theme. Usually Mervyn tries to add something new into the mix to distract from the fact that there are now several repeating themes which I highlighted on my blog today.These are
"Each time the Governor has to say that inflation will be higher than last time. It was maybe 4% last time and it is now 4 to 5%.

It is always as a result of “temporary” factors no matter how permanent they now look!

Inflation is always forecast to be on or around target in 2 years time although the Governor has slipped in a 2 to 3 years time hoping we wont notice."

Whilst a rise in interest-rates?
"Whilst it is possible that Mervyn King and others on the MPC have had a “Road to Damascus” type conversion I suspect in reality assuming market interest-rates predictions is the only was he could get his figures and charts to work today when he presents his forecasts. Otherwise he would have to forecast inflation above target and in Mervyn King’s world that would never do! This is different from it being above target in practice which seems to bother him very little if at all" https://t.co/ry3RcLQ

Roll on the next one when he can say the same again.

It's not just demand from the BRIC group that pushes up prices, but all the QE from the USA, Europe and Britain.It's obvious to all that increasing the money without increasing the goods causes inflation and the first to move are the speculators who buy up commodities to avoid the devaluation of their capital. People must eat, therefore invest in food futures, feeding directly into the costs that people are unable to avoid. The results of these inflammatory actions are now being seen, first in the Middle East, where western supported tyrannies are being overthrown because they can no longer feed their populations. Only a new international monetary system which can control speculation can begin to address the problem. In the meantime our savings are eroded and the stagnant economy destroys the futures of the young. It is they who are the first to erupt.

Mike, various posts

Yup, zero IR is an attempt to try and keep debt in the system when most people are intent on taking it out. Facing the tide doesnt work. The fuel is debt and the economy continues to misfire. No easy way out.

@3. At 1:58pm on 16 Feb 2011, TheReverendJim wrote:

Yes you have missed several things...

a) We need to allow investment by UK business in the future, to do this we have to have REAL interest rates at a level they can afford. This means the government needs to INSTRUCT the two banks we OWN to lend to business as 1% APR.

b) IF we believe that any action we make on the demand side can help inflation we need to control demand with taxes rather than interest rates. This will allow business to plan for future and long term investments while taking demand from ALL people in the UK not just the unfortunates with mortgages.

c) We need to SUPPLY in order to cut inflation - that means having a permanently LOW interst rate so that companies can invest in reopening coal and iron ore mines (etc.) car plants, lorry manufacturing, ship building, farmers can invest in better grain, ploughing more field, more cows.... to SUPPLY more from the UK so that we aren't dependent on imports, we CAN live with a low pound, we have something to export, we employ more Britons, pay less benefits gain more tax, cut our deficit and grow.

To me the main thing Mervin is doing wrong is he is not saying to the world that UK interest rates will NOT go up for at least the next 10 years. If he did that we would be on to a winner.

Mervyn is like King Canute - he can't influence the tide one jot. The US is gaily printing dollars and stoking up a worldwide commodity boom and inflationary world environment. Our economy is between a rock and a hard place. Government cut backs will drain our growth and, raising interest rates will only further exacerbate the situation. Don't blame the umpire. Blame the previous clowns who disregarded prudence and left us in a mess after splurging money around. We need to tiptoe carefully into raising interest rates but we do need to reduce our debt which will cost us some £21,000 between now and 2015.

25 Piglet3

Depends on sector but some are overhung with debt and a static or contracting customer base and hanging on for the upturn which keeps being promised. Big business has more flexibility. Many are vulnerable to the bank pulling, many are being gradually squeezed back on ODs as the banks seek to get cash back slowly rather than push them over the edge and lose the lot.

28. At 3:43pm on 16 Feb 2011, bob wrote:
People seem to be repeating exactly
what they hear in the media, for once Mervin King has it bang on the button
if interest rates are increased the ecomomy wil drop through the floor!!!
Bob.

=========================================================================

Bob - you nailed it there.

Most peolpe do have a tendancy to consider what they are fed by the media to be their own opinions.

Whilst Mervyn King has go most of his predictions wrong for some time, it is fair to say that inflation is better from a macro economic perspective than deflation even though it may be painful for people (me included).

Raising interest rate will ahev little effect on inflation as the root cuase is largely due to global demand for the commodities we have long taken for granted (and it will just give the banks an excuse to squeeze mnortgage holders a bot more).

Inflation willl stay high as long as demand for commodities remains high. The only real solution is to take a holistic view into how we can better satisfy demand globally for these itmes in demand such as start brining the vast tracts of fertile but uncropped land in Eastern Europe and Africa into production and put some effort into weaning ourselves off of fossil fuels and onto something a little more readily available ( no idea what that would be though). This is not a solution that is likely to come form the oil companies who still have vast quantities of oil that they would like us to keep buyin in its various guises

48. At 4:29pm on 16 Feb 2011, JohnConstable wrote:
What this blogger knows about economics can be put into a thimble but it does seem to this layman that the BoE's remit in this area is too narrow and should be extended to include an employment target


You know more about economics that most of the idiots that get paid to spout their nonsense at us.
Fiscal and Monetary policy should indeed be combined.

Where the speed of transaction and the overall propensity to save, spend and consume is reasonably constant, then:

Overall price level of all items = (Total amount of money) / (Supply of all available items to purchase)

We have inflation because we have an increase in the amount of money.
And despite households only increasing their indebtedness at 0.7% per annum*, we have the UK Government increasing the money supply like fury by borrowing their way into oblivion. (*source: creditaction)


*With 12 month gilts @ 0.83%; And base rates @ 0.5%
(*source: yieldcurve.com)

You don’t have to be a mathematical genius to see that you can make 0.33% by borrowing from the BOE and lending it to the Government.

It is said that much would be gained by cutting out the middleman:
www.onegoodcut.org.

King is right when he says that the calls for an interest rate rise now would be a futile guesture that would be a pointless sacrifice of growth, jobs and businesses.

At least zombie companies employ people for now - at least those with large debts and falling incomes are benefitting from lower interest rates and not going bust, even if they only have a dog's chance of paying it off.

The prospect of a perfect storm of rising inflation, interest rates, unemployment and business failures looms large.

We've another lost generation of youth unemployed @ a million out of work, plus the spending cuts are about to bite, particularly in construction.

King knows the interest rate lever doesn't work - he knows with Osborne's £110 Bn of fiscal deflation translating into a £1 Tn cut in aggregate demand about to kick in, raising interest rates as well is suicidal and pointless.

50. At 4:35pm on 16 Feb 2011, anotherfakename wrote:

"@28. At 3:43pm on 16 Feb 2011, bob wrote:
after reading most of the comments posted and listening to bbc radio 4
banging on about raising interest rates.I now firmley believe nobody including stephany flanders understands basic ecomonics, "

Sorry to disagree, but raising interest rates will encourage capital to flow back into the country (simple return for your money) - this will strengthen the pound and will REDUCE the COST of imports (of which a big one it oil) - and thereby reduce the inflation rise. The idea that inflation is caused by increased Global demand is simply a ruse put out by the media for the simpletons - so they can blame "johnny foreigner" - nice and simple for them.

The level of effect this has is of course up for debate (i.e. they're guessing) - but raising rates should reduce inflation.

The downside of course (apart from Growth) is that raising rates will KILL consumption - and in an economy heavily reliant on consumption - this is not a good thing.
In addition, raising rates will destroy the 'pipe dream' the Tories have of an 'export led recovery' - which basically means "keep the money loose until the pound is devalued so far our exports are the cheapest in the world"

...sadly the Tories are operating in a fictional environment where we had 'exports' - but today we're a net importer - making this 'solution' unworkable.

....but it's not going to stop them trying!

Did I mention we're Governed by morons?

16. At 2:35pm on 16 Feb 2011, you wrote:
This comment has been referred for further consideration. Explain

I hardly think my entry at 16 was beyond House Rules. Please either let me know why you are still deliberating or publish my comment please.

I'm no economist, so there's something here I don't really grasp. As I understand it, increasing the interest rate would, supposedly, reduce inflation by removing money from the economy thereby reducing demand. As I also understand it, though, the main drivers of inflation at the moment are global food and fuel prices along with Government tax policy.

These, though, are things that people HAVE to buy. People HAVE to eat. They HAVE to keep warm and travel to their work. They HAVE to pay VAT. Raising interest rates would, therefore, have little effect on demand in the parts of the economy where inflation is high. Instead demand would be reduced more markedly in the service sector and in the manufacturing sector, where margins are already tight.

Are we confident, then, that raising interest rates would actually work?

What are people's views on a 25 point increase to 0.75%. Just would be interesting to hear...

60. At 5:07pm on 16 Feb 2011, Dempster

The money supply has been shrinking for the past 4 months.
That is not a sign of a runaway economy. It is a sign that people are, quite sensibly, continuing to repay private debt.

It is very hard not to write vitriol to describe in the incompetence of M.King and the MPC. Today he says that since the November report... in just the last 3 months... there has been all these "unexpected shocks".

Now I am a hobby economist. He is paid a very large amount to do this job all the time. Now, please tell me, what has happened in the last 3 months that even amateurs could not see? China is booming and demanding more commodities...er, it has been for years.

The input deflation by importing from China is over. You get a "one off" benefit of switching manufacturing to the cheap labour countries. Once your products have changed to the new lower prices, that is it. From then on, any increases in costs then start to inflate prices again. Wow, rocket science.

2. At 1:57pm on 16 Feb 2011, Mike wrote:
I've done my sums (I'm a Cardiff Uni professor in the field), and I personally don't see how we won't be in another mini recession within the next year.


===========================
The problem is that the vast majority of us are NOT benefitting from the 0% interest rates - our debts are all about 4 or 5% points above that at best, some even more, it is our savings that are 'benefitting' from the 0% - oh and the Banks I imagine.

They should have cut taxes not raised them.

@62. At 5:16pm on 16 Feb 2011, writingsonthewall wrote:
50. At 4:35pm on 16 Feb 2011, anotherfakename wrote:

"@28. At 3:43pm on 16 Feb 2011, bob wrote:
after reading most of the comments posted and listening to bbc radio 4
banging on about raising interest rates.I now firmley believe nobody including stephany flanders understands basic ecomonics, "

"Sorry to disagree, but raising interest rates will encourage capital to flow back into the country (simple return for your money) - this will strengthen the pound and will REDUCE the COST of imports (of which a big one it oil) - and thereby reduce the inflation rise. The idea that inflation is caused by increased Global demand is simply a ruse put out by the media for the simpletons - so they can blame "johnny foreigner" - nice and simple for them."

--------------------------------------------------------

The only caveat there is that you’re competing for foreign capital inflows with places like India, China, Australia, Brazil where OCRs are already around 5% and rising. These are production-driven economies and so more difficult for a consumption-based economy to compete with. Might need to raise base rates quite some way to have a measurable effect......

-----------------------------------------------------------

“The level of effect this has is of course up for debate (i.e. they're guessing) - but raising rates should reduce inflation.”

-----------------------------------------------------------

That’s the hope but given the current situation here (negative GDP Q4 2010, negative consumer sentiment, and constricting demand and spending) I’m no longer certain that would be the real outcome.

-------------------------------------------------------------

“The downside of course (apart from Growth) is that raising rates will KILL consumption - and in an economy heavily reliant on consumption - this is not a good thing.
In addition, raising rates will destroy the 'pipe dream' the Tories have of an 'export led recovery' - which basically means "keep the money loose until the pound is devalued so far our exports are the cheapest in the world"

...sadly the Tories are operating in a fictional environment where we had 'exports' - but today we're a net importer - making this 'solution' unworkable.

....but it's not going to stop them trying!

Did I mention we're Governed by morons?”

---------------------------------------------------

Sometimes I feel angry and unhappy but mostly I feel a lot worse........

@60.Dempster wrote:

"Where the speed of transaction and the overall propensity to save, spend and consume is reasonably constant, then:

Overall price level of all items = (Total amount of money) / (Supply of all available items to purchase)

We have inflation because we have an increase in the amount of money."

As a non-economist I still do not get the above. I thought, M.V. = P.Y., was an identity (otherwise known as a tautology) not an unrefuted conjecture. Thus it adjusts to be true - e.g. V is not constant but any number that is required for the identity to hold. [Conjectuting V as constant would be something to be tested].

(Also isn't CPI based on aggregating price changes rather than changes in an aggregate price level)

Afternoon Stephanie,
I would make a couple of comments for Mr King to consider.
First of all, if inflation increases (and this cannot now be stopped and is seen as a good thing in the USA) then lenders of money to the UK will demand a higher interest rate for their risk (circular argument).
So Deficit and Debt for UK will increase even more.
Secondly, what does BOE rate mean?
If interbank rate is around 1.52% (12 month) then that is the rate at which banks can borrow money from each other and is the real money rate at the moment. The BOE rate of 0.5% is simply window dressing to the outside world. The BOE could increase base rate to the current interbank rate and it wouldn't make any difference at all because nobody (apart from banks) can make use of this artificial rate.
Mr King is supposed to be independent of Government but in fact we all know that he has to take his instructions from the Treasury via the Chancellor.
So many half-truths peddled by this and the previous Governments concerning recovery. It's a myth.
Large companies are making extra-ordinary profits however and this money is just sitting on the balance sheet and is not being reinvested. Reinvestment of this money is the problem that our Government needs to solve! Then we may have some sort of recovery.

Just listened to Mervyn King clip BBC R4 news. He has to be careful what he says and how he says it but I can't help feeling he has lost the plot, though.

49. At 4:30pm on 16 Feb 2011, John_from_Hendon wrote:
#35. midlandsjack wrote:

"Oh yea and before anyone starts shouting about stagnation of wages, I have had a 10% actual salary cut and no rise for 3 years"

Yes... but the bankers got a 20% increase this year alone.

Unfortunately you have (probably for no fault of your own) found yourself on the wrong end of a social experiment aimed at dramatically increasing the difference between rich and poor. At the next election we should all remember who did what, and not what they say they will do! Judge David Cameron by the reduction in inequality he achieves - the classic escape for rabid Tories is to start a small war.

====================

So is it the BNP or UKIP we have to vote for, as the Lib-Lab-Cons have now all contributed to the looming disaster.

It looks to me that the Bank is in an insidious position. I suspect there was a hope that the trillions given to the banksters in bailouts and QE would "trickle down" to the real economy. Another example of how trickle down never works in practice.

Of course the greedy spivs immediately did what they always do - look after themselves and bugger the rest of us. Unsurpisingly, the taxpayer money has flown out of the Country to tax havens in Asian and to be speculated on commodites driving up the price of oil and food and fueling domestic inflation.

This is why Gideon has been pleading with the banksters to guarantee to lend billions of pounds to the real economy in the UK.

The real economy is falling off a cliff and you couldnt find a clearer example of gross inequity in outcome. Banksters cause the crisis but barely have to break step and its 20-40% salary hikes, 6 figure salaries and millions in bonuses.

Our reward for trying to save the banksters, and limit the devastation they've caused, is inflation, real term drops in living standards, huge levels of personal and public debt and an excuse for the Tories to slash and burn the public sector.

Moving the base rate lever up (it cant go any further down) wont cure the ills we've got. Weve had base rates at 0% for two years and for our pains have got a contracting economy. Raise base rates and the banks will raise interest rates, guaranteeing we spiral into an asset deprecating recession.

The whole system needs rewriting with everything riding on how we put the financial system back in its proper place as subservient to the needs of the real economy where 99% of the population have to live.

It's now 18:25, last moderated post 15:57.

Have the clocks gone forward? mind you if we moved them forward (say) six months then Merv's perdiction could be correct!

A small amendment it's not 15:57 but 17:57, Oranges and Apples it seems.

Dear Stephanie, you wrote and I quote “If the Bank had raised rates to keep inflation on target - households would simply have been hurt by a shrinking economy instead” I consider it a statement lacking judgement. In the current circumstances the usual medicine does not work. This is not credit dependent inflation. Making credit more expensive is pointless. By the credit, where is it? You know banks are not lending, so the statistics show. The Governor is not guilty of the excessive deficit run by Government or the tax increases we are all suffering and he cannot order the oil Sheiks to lower the oil price. A rate hike will not matter for inflation, at least in the present circumstances. A rate hike might matter for unemployment and help it grow higher and stay there longer. A rate hike these days would as well informed as the medieval medicine practice of depleting the patient’s blood to get rid of the disease… Sorry Stephanie, I find it shocking that you and others believe that a rate hike would curb inflation. Not in the present circumstances!

Even if Mervyn was right - and I'm not suggesting he is for one moment - he still doesn't explain why the Base rate isn't somewhere near 2%.

But of course he can't tell us that the BoE's hidden agenda is to help the Banks; and keep helping them for as long as possible.

History has shown with inflation that a stitch in time saves nine.

Mervyn King (who has never got a prediction right in all his time as governor) reckons inflation is going to drop like a stone.

A bank manager said that they are warned about business forecasts showing a "j"curve and Mervyns prediction is like an upside down "j"curve and in my opinion likely.

The next stage in the inflationery process is for employees seeking wage demands based on inflation of 5%, this will lead from cost push infltion to demand pull inflation and inflation will start to spiral.

Once inflation starts spiralling it will be very difficult to regain control and it is likely that interest rates will have to be raised to a very high rate to bring inflation back down. My guess would be 7.5% which will do enormous damage to the economy.

28. At 3:43pm on 16 Feb 2011, bob wrote:
after reading most of the comments posted and listening to bbc radio 4
banging on about raising interest rates.I now firmley believe nobody including stephany flanders understands basic ecomonics, Can anybody tell me why increasing interest rates will suppress this inflationary bubble, when it is perfectly clear the circumstances for this bubble are nothing to do with the strength of sterling. People seem to be repeating exactly
what they hear in the media, for once Mervin King has it bang on the button
if interest rates are increased the ecomomy wil drop through the floor!!!
Bob.
-------------------------------------------------------------------------
You are right to imply that increasing interest rates will not reduce inflation. Mostly because there is a large tax component in inflation. It has been there for four Chancellors' periods in office, since 1993/94. It is down to them as well.

You may be wrong to say that higher rates will make the economy drop through the floor. It may not if the economy is warned in advance and hears the message. Business doesn't like uncertainty. It doesn't like big jumps in rates in any direction. It needs to be able to plan and make provision. Wise businesses who can generate cash will have been conserving it and also will benefit from higher interest rates. Or, if they are offered expensive debt, will finance new activity themselves a derive the benefit of increased earnings themselves.

But there are some other problems that are all interlinked. The housing market is too high, due in part to low rates. Debt is too high, particularly debt that is going into multiple property purchases and unsecured debt for personal consumption or survival.

But equally important for the current Chancellor is keeping the State spend on benefits as low as possible. (It was important for his predecessors but that story should not be tackled now!) Low interest rates mean that self-supporting pensioners are using up their capital and becoming less self-supporting. In other words, they will need benefit support.

George Osborne cannot afford to be mean to pensioners.
1. They are a growing group within the population,
2. They tend to vote more than any other age-group, they have increasing electoral clout,
3. If they get locked up for not paying their CT bills, even after low income relief, or freeze to death because they are scared of big utility bills, the unfavourable news headlines land at Dave & GO & Cos' feet, and
4. If their capital is eaten up (and exported overseas) then there is less for IHT, realtives, charities,. etc.

But King and GO cannot collapse the house market either. And a big rise in interest rates might make the UK stock market collapse. That would have a longer-term effect on future pensions.

But there are increasing numbers of non-home owning people in Britain; that is another future source of present troubles. High rates might benefit savers and solve that problem and might make houses more affordable for new buyers. And buying a house is a svaing for the future. But higher rates may/will push up the value of the pound. That will make imports cheaper and push inflation down but our exporters will be complaining as they find their exports become more expensive to buyers overseas.

Add needed tax reform into the mix and a really delicate balancing act needs to be performed by the Chancellor, The Treasury, the Bank of England and the MPC in unison.

And they should have started three to four years ago.

re #64
The demand led part of our current inflation is relatively small. It is mostly import (and currency) and taxation led at present.

And the wage element is tiny to non-existent. If GO sticks to his 2010 Budget provision no State employee earning over a certain ampint will get a pay-rise in 2011/2012. That accounts for a significant number of approximately one in five wage earners in the UK. Overall, pay is currently falling, on average, in the private sector.

Nasri4Gunners-Save 606 - I would like to see something along those lines. A 0.25% rise in March and provided the world didn't come to an end another rise in June (three months later), then September and so on until a more "normal" rate is reached. I have always lived within my means and have modest sterling savings (no doubt currently being set aside to pay a banksters bonus) which are being merrily inflated away by Merv at this time.

Those with debts (companies and individuals) have had TWO YEARS to make inroads into them and if they have not then either (a) they are foolish with their income or (b) were far too over-indebted to recover anyway. How much more time are we going to give them to get their house in order?

Interest rate policy is currently redundant. I hate to say it but Merv is actually right on this one. I reckon CPI and RPI will be 2% lower by the end of the year.
Who says I don't stick my neck out?

I am not qualified in the world of economics and so may be talking a load of b*ll**ks (oh, I have just realised that talking a load of b*ll**ks makes me very well qualified in fact).
Anyway, it seems to me that we (the ordinary people)are living well beyond our means, in a world of relative wealth which no longer exists for us. So we need to deflate our expectations and relative wealth .... we do this with inflation. We will find that we have to pay more for goods but our wages and savings will not keep pace ..... so we become relatively poorer. Hence a nation of wealthy people becomes a nation of poor people (i.e. third world) and we have then found our place in the world.
In the meantime, those who ruined it all for us are okay .... inflation does not really hurt those on six million pounds a year .... it just means they save a little less, but they wouldn't have spent it all anyway in their lifetime.

Reducing interst rates to 0.5% was a panic measure. Its high time that mistake was rectified, so we can get the fundamentals of our financial system back to some sort of normality.

The fundamentals being;

1. If you save/invest money, you get a decent return on it

2. Borrowing money has real cost/risk implcations: borrowing decisions should never be taken lightly and if it does go wrong you pay the penalty.

p.s. I've noticed a little more mention of the impact of low-interest rates on savers in various BBC reports over the last few days. That's better...!

17. At 2:44pm on 16 Feb 2011, MegaBobinski wrote:
Post No. 1.

"Why isn't Osborne criticising or threatening the guy's job?

It's Mervyn King's job to keep inflation below the target limit no matter what the causes are. Why isn't he doing that?"

Well, King has the credibility of any other Banker. i.e. zero. But its to the governments advantage to burn off some of our debt by allowing inflation to rise. And this time next year there will be another set of one-off circumstances to blame. But King's hubris as a banker won't allow him to admit any error, so stepped rate rises I think beginning August, ending the year at a dizzy 1%. Too bad if your local banker is adding a couple of percent over base to your churned debt...


The trouble with this is the UK loses credibility. Interest on debt, particularly gilts (or should it be guilt) will rise and debt will cost more. So with the UK indebted as it is, to some extent, the benefits of inflating out of debt will be countered by more expensive debt.

Investors see the UK as a low-inflation country. There's no sense in telling the world we have a 2% inflation target if, for years on end, the actual is nearer 5%.

49. At 4:30pm on 16 Feb 2011, John_from_Hendon wrote:
...the classic escape for rabid Tories is to start a small war.

Not just Tories, go back through history and the last act of a failing empire is to go to war. However, the next war I doubt will be small.

The unrest in the Middle East which is spreading is making a nuclear armed Israel (sshhh don't tell anyone, they aren't meant to have any) very nervous. Also, the possibility of a heavily indebted US defaulting on its debts will not impress its foreign investors, specifically China.

These two issues, along with the potential currency wars, trade wars, protectionism, food riots and peak oil on top of the continuing global economic crisis does not add up to a small war. No western country can afford another small war so I fear the next war is the big one..what better way to reduce inflation then wipe out half the demand.

As we know, inflating away the debt is the plan. Every few months it's a different explanation for not acting on interest rates from Mervyn. This time it's budget deficit reduction will have the same impact as a rise in interest rates. And for the banks he throws in a side comment about their own weakness to warn them off having a pop at gilts.
The conservative plan is to lower wages to stimulate private sector growth. But this analysis is wrong. Our workers' living standards and our business taxes have been lower than our european competitors for decades and it hasn't worked. The main problem is the town and country planning act 1947 which has rocketed land prices and denied manufacturing cost effective locations for plant.
To think the traders and hedgies of the world don't know this, and see the failure to resolve it as another big pay day on the horizon, is plain stupid.
The days of business' acting against their own self interest and govts pursuing policies that are not in the nations interest are over. The banking crisis and Egypt demonstrate this only too well.

@83. At 6:53pm on 16 Feb 2011, EconomicsStudent wrote:
Interest rate policy is currently redundant. I hate to say it but Merv is actually right on this one. I reckon CPI and RPI will be 2% lower by the end of the year.
Who says I don't stick my neck out?

-----------------------------------------------

Your guess is as good as anyone's. The position should be clearer around mid-2011, between say April-July. I would mention though, that production-driven economies are at the beginning of a period of rising costs e.g. wages, production inputs, and also price inflation e.g. food, energy, and also restriction and/or increasing costs of credit and borrowing. That will feed through to the UK economy to some extent. However, there is a also concomitant squeeze in demand, consumer spending, govt revenues and expenditure and retail margins in and outside UK. What the net effect will be on official figures (CPI, RPI) is difficult to predict accurately, but whatever happens I can't see the cost of living getting any cheaper.

The planned growth has been hammered by the restricted money supply , investment and new money have not flowed into the UK, they have gone to the emerging countries. The Government are preaching that the recovery will be led by SME exports, at a time when the banks are closing "unprofitable" foreign export departments, or charging so much that there is no money in the deal for UK businesses.
The last 3 years of Recession have been relatively painless through low interest rates and public sector spending, both of these are under threat and unless something changes rapidly we will be well and truly in the mire.
Boy George has no strategy to fall back on, and loss of confidence from business will only lead to one outcome, Currency Crisis, Lack of UK Investment and 1980s style property slump.

For all the taxpaying hard working families this predicted period of higher than ordered inflation is a real bitch.

But for a government deep in international debt and many bankers in a similar mode it is a real bonus.

The BoE strategy under the Brown axis of incompetence was concerned for a number of years that the levels of personal and government debts had a high potential for the evils of deflation. Now we are paying the price of excessive government debts that bear no relationship to the declining government revenue streams that were ignored by a Brown government intent on creating the 4th elected term by the deception of 'you never had it so good' economics.

If ever a period in our history deserved the title 'live now pay later' it is surely the years 1997 to 2008.

I am not a professor of anything but I can see this is a case of the honest trusting people versus the incompetent government and the crooked opportunist bankers.

Whilst a lot is made of the impending BOE rate rise nothing is mentioned about the current rates banks actually charge.
Credit cards are around 18% a personal loan 16% overdraft 19% They didnot come down when base rate was lowered but undoubtedly will go up when it is raised.
Are the rates Banks charge for loans the same here as in China if so it will not be long before china runs into manufacturing problems.

What was it that brought you to this conclusion:

"But the forecasts show the Bank now expects growth to be slightly weaker than it did three months ago - and inflation to be higher. The implication is that bank rate will need to go up sooner than the MPC previously thought, and without such a strong economic recovery."

Was it the Governors statement:

"Some people are running ahead of themselves and saying that we are pre-announcing or laying the ground for a rate rise," Mr King said.

"That decision has not been taken and won't be taken until we get to the next meeting or the following meeting, or it may be many quarters."

@83. At 6:53pm on 16 Feb 2011, EconomicsStudent wrote:
I reckon CPI and RPI will be 2% lower by the end of the year.
Who says I don't stick my neck out?

-----------------------------------------------
@89. At 7:40pm on 16 Feb 2011, Duxtungstu wrote: The position should be clearer around mid-2011, between say April-July.

-----------------------------------------------



Hmmmm, if all the one off items, including currency devaluation, suddenly drop out then inflation will rapidly decrease.

a) There will be no need to increase interest rates and so currency markets won't price this in, the pound will again start to drift lower and around the the spiral we will go.

b) The deflation rhetoric wil begin again and with no place for rates to go there will be more QE, the pound will start to drift lower and around the the spiral we will go.

And for nice timing once the banks have returned the special liquidity doe, the already low saving rates will be able to go down again ...

c) so the pound goes down, and around the the spiral we will go.

So for weird predictions I'll go with oscillatory inflation and sliding pound...well unless interest rates start to move.

"#28. when it is perfectly clear the circumstances for this bubble are nothing to do with the strength of sterling"

Hmmm.. Surely it has EVERYTHING to do with the strength of sterling? Almost everything we consume is imported; energy, manufactured goods and raw materials. Thus as the currency gets weaker everything gets more expensive. Raising interest rates will have little direct effect but the demonstration that the BoE is not completely spineless will reassure the currency markets somewhat and cause the pound to strengthen.

The root of the UK's problem is that little is produced domestically and this is not easily rectified (and certainly not without extensive government spending). A "service based economy" is a little like a perpetual motion machine: you can maintain the illusion of success for a little while but long term it's not viable.

94. At 8:09pm on 16 Feb 2011, Mike3 wrote:

Hmmmm, if all the one off items, including currency devaluation, suddenly drop out then inflation will rapidly decrease.
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The inflation will still be in the economy. The ongoing rate, will drop, except for the tax element. To remove past inflation you need negative inflation.

The transport element will be going round and round in the economy putting non-import inflation up and putting extra pressure for wage rises and Council Tax and NI increases, in order to compensate.

re #94
Even if the £:$ rate improves in our favour, oil price rises - and other commodity price rises may go on.

If peaceful political change is made in north Africa and into the Middle East, all well and good. But if things come unstuck there or anywhere else where a major commodity is produced, we could be in big trouble. We don't yet know what effect the Queensland problems are really going to have on their mining outputs. Any posters know?

The big lesson from the 1970's and 1980's is that external events can tip you off course, even when things appear to be going well. Or, in the case of the Falklands, come along and save a PM in trouble, who was on course to be a one-term leader.

Sorry folks as some one who runs his own small business - with my partner - and survived the last recession, when the interest rates we had were up at 18% on our business loans - what is King talking about? We were not the only business to survive the last recession!
We had to submit accounts to the bank on a weekly basis. We were working 7 days a week with a new business and starting our family. It was a tough time - but with the help of single malt and a great partner we got through.
All these years on I see more regulation and blind dogma of a system that is driven by interested parties to control the individual. I believe in the free market but do not believe it really exists because of corporate and state expediency.
If you are a young person today wanting to do what my partner and I did you now have little or no opportunity.
What future is there when there is this persistent obsession with rationalism over empiricism, the lack of faith in the individual and the encouragement of the greater good by Government bureaucrats and corporate bodies over the inventiveness, individuality and creativity of the individual.
This experiment with fictional tender corporate trust and keeping the "actuality" shadowed from the citizen is likely to end in revolt. The hope from those in and controlling power is that the apathy of the masses will let them bumble on.
Yet we have seen how that can be proved wrong.
All political parties have raised peoples expectations - sadly they can not deliver. Heaven forbid true power is given back to the voters - and I am talking of the UK not Egypt or Tunisia or Iraq or Afghanistan.

Raising interest rates in the present or near future will have a far more damaging effect to the DOMESTIC economy than the current GLOBALLY driven inflation rate.

A base rate of 0.5% is plenty, for businesses & mortgage holders.

A novel idea would be to have banks that only offer mortgages & business loans at 0% interest, with the requisite indemnity/insurance (supplied by others) so that the lender always gets, at least, its money back plus a small share of any future profit.

That would do far more to stimulate growth & boost the economy.

The indemnity/insurance should be provided & sold by institutions purely involved in that type of risk speculation. Those that are prepared to take that risk to make high interest returns on their money, should invest with them.

Otherwise they should be prepared to accept the nominal return that a bank will provide, but with their savings guaranteed.

In other words the fundamentals of a new type of financial system that would separate the necessity of banking from the riskier parts of speculative finance:

The fundamentals being:

1. Allow those that wish to invest money to attempt to get a decent return on it. Investing money has real cost/risk implications. Savings should never be confused with investments.

2. Borrowing money for economic growth is an absolute necessity, as only the BofE can mint it. Therefore business & individuals have absolutely no choice but to make use of this facility both to exist & then to take part in the 'economy' & therefore should not be inadvertently penalised for this necessity.

A fairer & more balanced society would result, meaning those that took the risks, speculated to accumulate, ended up wealthier because of it.............Rather than sticking their money in a bank in the expectation that, purely by doing so, additional wealth would ensue with minimum risk.

I had to find this quote from William Graham Sumner
"If currency is multiplied, it is a delusion to suppose that capital is multiplied...If banks not only lend capital but also lend "coined credit," some time or other a liquidation must come, there must be an effort to touch the capital which the notes pretend to convey. Then it is found that they represent nothing; then "credit breaks down," and there must be a settlement, a liquidation, a dividend and a new start...The real amount of capital we posses is divided up, and we have to make up our minds that we posses only 50 to 75% of what we thought we possessed. We put smaller figures to everything, and reconcile ourselves to smaller hopes, but the experience is soon forgotten, and the old process of inflation and delusion begins again.
You may be surprised at the date that this was written. Perhaps Merv can answer William Sumner's comments.