Gaming the next rate rise at the Bank

Whoo hoo - 2 year anniversary of 'easy money'

happy birthday to you...happy birthday to you...happy birthday dear 'lost decade' - happy birthday to you.

...and they said there were no consequences....well the seepeoples are going to see the consequences at the pumps and in the shopping aisles soon.

The poor old city capitalists - before they controlled the market - now they have to seond guess the BoE. How frustrating for them.

Never mind, so long as the paper gets passed around we can all pretend we're in 'recovery'

...just one last question....how do they sleep at night?

https://www.youtube.com/watch?v=VbcACpriZ9s

Surprisingly very well!

When interest rate are raised it'll be 0.5% or even 0.25%. Will it matter to any of us.

There's no relationship between rates the banks charge and the BoE rate anymore.

The only relationship is to what the banks pay and the BoE rate.

We've yet to see if they'll continue paying peanuts. In which case will we ever care about the BoE rate again?

I believe many/all of your questions will be answered starting around mid-2011. I'm sure those who watch markets closely are quite aware of what is going on.

Like the recent statement by the governor, be prepared for more political game playing.

Personally I do not think it matters much if the somewhat discredited Governor of the Bank of England is on the right or wrong side of a vote. The Monetary Policy Committee are mandated to try to hit an inflation target of 2%. Not only have they missed the target for some time now CPI inflation is at 4% which is double the target.
I saw a good blog post earlier by the economist Shaun Richards who wrote.
"I could put it another way, does anybody actually believe that the current policy of inflation denial is going well?"
https://t.co/qUmgwSd
Well do they? With oil prices rising we are on a dangerous course in my opinion.

I wonder if all Steph's musings would be insignificant if the Base Rate was 2% ?

I think a rate of 0.5% for 2 years indicates that the system is broken, so much so that "Normal thinking" doesn't apply.

If the MPC had one target then rates would have risen by now. Clearly the MPC also considers growth. It's remit includes supporting the Government - I think that's a mistake. The MPC should have one target - and only one target. Managing the economy is the Government's job. Otherwise the BoE Governor should stand for election.

What a non-article Stephanie. Must do better 1/10.

Prediction; rates will rise starting in May or June and creep up every month or three until they hit 1.5% to 2%. Will it matter, well only to those poor soles whose mortgages are linked to "base rate"? But not a jot to most others particularly the banks who have filled their boots already.

By the way do other bloggers find the news that the world has 200 or so billionaires just a little sickening particularly as quite a few are from third world countries where there populations are on the bread line and the countries are desperatley in need of a decent infrastructure e.g. fresh water, sewerage systems, medical care et al. And I am not refering to the USA or UK ok!

Maybe the BBC would do a survey of billionaires and how much tax they pay? Would be of much more interest dont you think?

In historical terms the last two years have been sheer lunacy and that is exactly what they have been. Never in a three millennia (three thousand years) has money been so debased, not even in the Weimar Republic.

The longer we wait for a rate rise the better. In any case, there should not be more than a 0.5 - 0.75% increase in the base rate over the remainder of the year. Hopefully, this won't be critical in most cases for people with variable rate mortgages.

On a side note, we finally have a government that is willing to get to grips with the public sector pensions liability. It will shatter the illusion of a lot of public sectors workers who do not understand the true value of their current pension arrangements. Labour let 13 years pass by and barely touched the issue.

There is also strong evidence as reported today that the wage increases (particularly in the public sector) are generally ignoring the high level of inflation, which may mean that the MPC may be able to justify delaying the inevitable rise a bit longer.

Politics comes into the question of timing.

The budget prevented action today or next month. May is the first real opportunity. (It must be taken!) We will then need fifteen to twenty 0.25% increases to restore sanity and the price of money. If this is not done then the depression will last the thirty years we are all expecting! The reality is that we need 5% and getting there is 0.25% jumps will not work at some time 0.5% and 1% jumps will be necessary.

If we get to 5% PDQ the Depression will be over in five years as real growth will be able to begin again based on radically lower asset prices. If getting rates up take a long time the Depression will last a long time. (This is all about the necessity and effects of debt-deflation to get things going after a crash. I'll not yet again give a long list of references.)

#6. ObserverinMonmouth wrote:

"By the way do other bloggers find the news that the world has 200 or so billionaires just a little sickening"

Not 'sickening' just indicative of the debasement of money and its destruction!

Why oh why are we still focused on raising rates. Wage inflation (which is the real killer) has just been shown to be at its lowest level in years. The inflation currently afflicting the Uk derives not from demand in the UK, but in China, India and the other rapidly emerging economies. Look at retail sales, down again in February - this inflation is NOT domestic, so raising domestic interest rates is a "futile gesture" to quote the Governor. We can raise and raise interest rates and it will have no impact - only when china and India and the rest succeed in choking off demand in those economies will global oil, food and other commodity prices stabilise and then inflation will fall. Why is that so difficult for people to grasp?

#12. Tim wrote:

"Why oh why are we still focused on raising rates"

Because unless and until money gets back to being properly priced as it has been in the last millennia all bets are off! Everyone knows this, dare not discuss it fro fear of frightening the horses, but it must happen before we can actually recover - we absolutely cannot afford to become Japanese! Everything in economics is mediated though money and with money worthless no policy works.

# 6. At 6:37pm on 10 Mar 2011, ObserverinMonmouth wrote:
What a non-article Stephanie. Must do better 1/10.

"do other bloggers find the news that the world has 200 or so billionaires just a little sickening particularly as quite a few are from third world countries where there populations are on the bread line and the countries are desperatley in need of a decent infrastructure e.g. fresh water, sewerage systems, medical care et al. And I am not refering to the USA or UK ok!

Maybe the BBC would do a survey of billionaires and how much tax they pay? Would be of much more interest dont you think?"

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Couldn't agree more........In addition Stephanie's constant fixation with interest rates, as when they will rise, together with others on this forum who constantly suggest they should & soon, shows a serious detachment from the real world economic problems many in this country are already or are soon to be facing!

#12. At 6:50pm on 10 Mar 2011, Tim wrote:
Why oh why are we still focused on raising rates. Wage inflation (which is the real killer) has just been shown to be at its lowest level in years. The inflation currently afflicting the Uk derives not from demand in the UK, but in China, India and the other rapidly emerging economies. Look at retail sales, down again in February - this inflation is NOT domestic, so raising domestic interest rates is a "futile gesture" to quote the Governor. We can raise and raise interest rates and it will have no impact - only when china and India and the rest succeed in choking off demand in those economies will global oil, food and other commodity prices stabilise and then inflation will fall. Why is that so difficult for people to grasp?

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Well said.

If they raise Interest Rates........
We will see a rise in Personal Bankruptcies and repossessions;
Another fall in Retail Sales;
Another fall in the Service sector.

In fact we will seeyet another Recession or just a worsening of the Depression we are in.

#13. John wrote:

"Because unless and until money gets back to being properly priced as it has been in the last millennia all bets are off!"

I couldn't agree more, but sadly we live in a globalised world and the UK is too small (60 million consumers versus 2.2 billion in India and China) to "go-it-alone". If we raise rates rapidly to 5% as you suggest (see #10) all capital investment will cease and the currency will appreciate dramatically (at least 20% possibly 30% above current exchange rates). This will kill exporters - the very people we are so hoping to help rebalance the economy. No, the UK can do nothing until Europe and the US move, but even if we do raise rates, until demand for commodities stabilises in the emerging World (which requires a big drop in demand there or a massive rise in production capacity - neither likely in the near to medium term) inflation will be an issue.

13

`Everything in economics is mediated though money and with money worthless no policy works.'

Simple; but all so very true.

Stephanie, your blog has done us a service in demonstrating the farce AKA the MPC. It is a soap opera but not very entertaining but also not very relevant. The MPC should be abolished and the government take responsibility for the management of the economy instead of pretending a group of money nerds can actually be productive and effective.

The Royal Reserve was established to convert all of the mineral wealth in to a hard currency. How and by what means it is collected can only be a figure for common speculation and conjecture. That is the basis of how we and a few elite others are defined under a term of Imperial Capitalists from the west. The common exchange in your pocket has no value what so ever from a Bank of England perspective and your analysis of the economy is flawed by sympathetic comparison.

15. At 7:18pm on 10 Mar 2011, History Repeats wrote:
#12. At 6:50pm on 10 Mar 2011, Tim wrote:
"Why oh why are we still focused on raising rates. Wage inflation (which is the real killer) has just been shown to be at its lowest level in years. The inflation currently afflicting the Uk derives not from demand in the UK, but in China, India and the other rapidly emerging economies. Look at retail sales, down again in February - this inflation is NOT domestic, so raising domestic interest rates is a "futile gesture" to quote the Governor. We can raise and raise interest rates and it will have no impact - only when china and India and the rest succeed in choking off demand in those economies will global oil, food and other commodity prices stabilise and then inflation will fall. Why is that so difficult for people to grasp?"

That a great deal of inflation is imported is incontrovertible.However,only a part is due to increased international demand.Domestic economic policy plays a large part.

Low interest rates depress the value of the pound, which means we sell our exports in a devalued currency and buy imports in a deflated one.This contributes to inflation.We give more for less,standards of living fall.

In addition,quantative easing has had more impact on prices than growth because banks have hoarded money rather than lent it.

Finally VAT has added to the rise in prices.

We must then ask why does Mervyn King tolerate this level of inflation? It serves many purposes:-Exports increase and imports decline as we saw last month.The terms of trade move in our favour, but only marginally.
Because we give more for less the standard of living falls.

The real value of wages and salaries fall,the benefit accrues to capital who adjust their prices and are able to invest,serving the government`s ambition to move the engine of growth decisively to the private sector.Finally it reduces the real value of government debt, so debt and deficit are easier to repay.

In short,the inflation policy serves capital not consumers.Their fall in living standards is partly transferred to the government by cheapening debt,and partly to private companies by depressing earnings more than prices.



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Raising interest rates will prove a disastrous policy, and the wrath of the peasants in society will be unleashed.

Mr Cameron and his plastic Liberal Democrats (a.k.a Tories in disguise), put the vat up and increased the fuel duty escalator. This is the true reason for inflation, they are economically literate and for this, they will pay the ultimate price - This year!

Its time to change the target inflation rate, and inflate the debt away - or else!

19. At 7:38pm on 10 Mar 2011, watriler wrote:
Stephanie, your blog has done us a service in demonstrating the farce AKA the MPC. It is a soap opera but not very entertaining but also not very relevant. The MPC should be abolished and the government take responsibility for the management of the economy instead of pretending a group of money nerds can actually be productive and effective.

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Obsolutely spot on but, would the government do any better?

Dr Doom

"On a side note, we finally have a government that is willing to get to grips with the public sector pensions liability. It will shatter the illusion of a lot of public sectors workers who do not understand the true value of their current pension arrangements. Labour let 13 years pass by and barely touched the issue."

The better pension arrangements enjoyed by public sector worker partly reflect their stronger unionization at around 40% of employees compared with 15% of private sector workers.

This trend begun in the eighties, has been exarcerbated by mergers,acquisitions and takeovers where the pension pot was treated as an asset to be grabbed to pay down the costs of acquisition before the firm was quickly sold on before there was regulatory scrutiny.

One might argue there was a case for bringing private pensions up to public pension standards rather than trying to debase the latter.

A final point of detail.If public sector pensions are calculated as average earnings over the course of a lifetime rather than final salary,will this average be adjuszted for inflation? If it isn`t the exercise will be a nonsense and leave people in poverty.

#21. At 8:12pm on 10 Mar 2011, bryhers wrote:
#12. At 6:50pm on 10 Mar 2011, Tim wrote:
"Why oh why are we still focused on raising rates. Wage inflation (which is the real killer) has just been shown to be at its lowest level in years. The inflation currently afflicting the Uk derives not from demand in the UK, but in China, India and the other rapidly emerging economies. Look at retail sales, down again in February - this inflation is NOT domestic, so raising domestic interest rates is a "futile gesture" to quote the Governor. We can raise and raise interest rates and it will have no impact - only when china and India and the rest succeed in choking off demand in those economies will global oil, food and other commodity prices stabilise and then inflation will fall. Why is that so difficult for people to grasp?"
-----------------------------------------------------------------------'That a great deal of inflation is imported is incontrovertible.'
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You should have stopped there, because in this instance, by far the larger cause of the current inflationary pressure is that type!

BofE base rate hikes will not control it, the MPC know that.

In fact, at present, it will only serve to fuel inflation. Even the internal pressures are caused by government policy, such as increased VAT & fuel taxes and the large corporations, ripping them off with domestic fuel prices, whilst simultaneously making massive profits.

Most, already hard pressed, British citizen's already suffering with all this, plus in many cases, with the threat of not too distant unemployment, could do without the added problems of rising interest rates completely killing off even the miniscule hope of a fledgling economic recovery!

#7. John_from_Hendon wrote:

Never in a three millennia (three thousand years) has money been so debased, not even in the Weimar Republic.

I presume this is mere hyperbole - or do you really believe that?

As mere voters we cannot do anything about the continued failure for the BoE/MPC to hit the performance objective. As the graph Ms Flanders flagged a month or so ago showed (or just look at the ONS), pretty much since 2003 the inflation rate has gone upwards. It took a couple of a years to get above 2%, but there it has stayed. So perhaps the real question will be whether anything like hitting the performance measure before 2013 will be achieved, and will the helmsman stay in place?

[The horizon is closer, it doesn't look like the game is infinitely played, perhaps the players are choosing strategies more related to their own payoffs ... once the helmsman takes his payoff and goes. Come on the deputies!]

-----------------------------------------------------------------------'That a great deal of inflation is imported is incontrovertible.'
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"You should have stopped there, because in this instance, by far the larger cause of the current inflationary pressure is that type!"

Are you familiar with Isiah Berlin`s essay on the fox and the hedgehog? The fox knows lots of little things,the hedgehog one big thing.

You are the hedgehog in this debate.Inflation has a multiplicity of causes of which a devalued pound is one.

A small rise in interest rates will have little effect on domestic rates.With inflation rates at 4% and BOE rate at 0.5%,rates are negative which means that mortgages would not be sensitive to a small rise except for trackers.

It would however affect the value of the pound internationally.The recent anticipated rise led to a temporary surge in the pound against the dollar in the expectation of further rises.This would have effects throughout the economy with a tendency to reduce inflation.

However,the government and bank have other imperatives.Inflation suits them.

Do we really want to repeat Japan's mistakes and not realise we are in a deflation trend (until it is too late.
If we discount the increase in VAT which is temporary CPI is at 1.7% against a back drop of Oil price increase of 40% . This surely tells us that in the non oil economy there is significant deflation (even food wars exist e.g. Tesco Asda etc).
Other factors for deflation
- Ageing population (old people save dont spend)
- Repayment of debt.
Contrary to some comments the value of money i.e. its purchasing power is actually increasing and once the commodity spike is over i fear we will actually have a very damaging deflation .
Please note Inflation moves money from the old to the young
Deflation moves money from the young to the old

Trevor cert PFS Cert CII (MP)

We seem to be obsessed with spending time and column inches about whether or not a very small rate increase here is a good idea, even if it hasn't yet happened.

Meanwhile the rate that Portugal, Greece and Spain have to pay for lending is according to most commentators already unsustainable and increasing literally by the week. Today alone Spanish debt was downrated again today and it was announced that a significant number of its banks need recapitalising. Ireland thinks the rate it agreed only weeks ago should come down too because its unsustainable. Italy too is beginning to worry as its financial arrangements with Libya may become a little stressed and as unemployment rates south of Pisa reach towards 20%, almost as bad as Spain.

Surely this is of slightly greater potential significance?

As far as I can see inflation is already going ballistic. Price of both house and car insurance has gone up 40% from last year, petrol up a similar amount, similarly some prices at the supermarket. Electricity and gas up, and increases in phone and Internet prices which are no doubt well higher than the supposed official inflation figure, even if not quite as high as some of the other increases.

The whole MPC thing is a joke, if ever interest rates should be raised because of high inflation it's now! People making the argument about factors being external to the UK seem oblivious to the argument that higher interest rates should mean a higher value of the pound and thus cheaper commodities. 0.5% is a joke, even 2.5% would be low when even the official inflation figure is 5%. It's not like raising the interest rate by a percent or two would even be abandoning the policy of very low interest rates, it would just be reducing the amount of insanity.

# 24

"One might argue there was a case for bringing private pensions up to public pension standards rather than trying to debase the latter."

Actually they probably were until a certain Gordon Brown saw this large pot of money and decided to help himself to a slice of it, thus bringing about the rapid collapse of defined benefits systems in the private sector. Before this it was arguably the best funded pension system in the western world.

Typical of governments, they can't but see a pile of money without thinking of a way to lay their hands on it and to hell with the rights of those who worked to build it, the promises that were made to them and the longer term consequnces. We now have the obscenity of taxpayers shelling out money to buy pensions for those in the public sector whilst they can no longer afford decent pensions for themselves.

If you want to blame someone try writing and asking GB why he did it, he created this inequitable mess.

Obviously a great fan of bubbles, our Mr King.

bryhers wrote:

'That a great deal of inflation is imported is incontrovertible.'
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History Repeats wrote:
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"You should have stopped there, because in this instance, by far the larger cause of the current inflationary pressure is that type!"
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#28. At 8:56pm on 10 Mar 2011, bryhers wrote:

Are you familiar with Isiah Berlin`s essay on the fox and the hedgehog? The fox knows lots of little things,the hedgehog one big thing.

You are the hedgehog in this debate.Inflation has a multiplicity of causes of which a devalued pound is one.

A small rise in interest rates will have little effect on domestic rates.With inflation rates at 4% and BOE rate at 0.5%,rates are negative which means that mortgages would not be sensitive to a small rise except for trackers.

It would however affect the value of the pound internationally.The recent anticipated rise led to a temporary surge in the pound against the dollar in the expectation of further rises.This would have effects throughout the economy with a tendency to reduce inflation.

However,the government and bank have other imperatives.Inflation suits them.

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I'm aware of the work & you make an interesting, though flawed, analogy.

I'm guessing you consider yourself a fox, because of the lot's of little things you 'think' you know?

You are being disingenuous, as you do not know me.

However, I'm very much aware of the effects of a rate rise on such things as tracker mortgages, but also the knock-on effect of applying interest rates to new fixed rates, small business loans etc. & the knock on effect of increases in export prices & the pressure on companies margins in an already, to say the least, fragile economy.

Anyway, you know full well, that the increase you talk of would have to be the first of many to have any discernable effect on the value of the pound, particularly in relation to commodity prices.

Anyway, who says being a hedgehog is such a bad thing? As Jim Collins wrote - "that Hedgehogs are the ones who build great, lasting companies. As entrepreneurs, they are the rarest of breeds - those who can start something anew, make it work, stick with it, and build something special, and ultimately, inspire others along the way, with their determination, dedication and commitment".

yew tree 24

"Actually they probably were until a certain Gordon Brown saw this large pot of money and decided to help himself to a slice of it, thus bringing about the rapid collapse of defined benefits systems in the private sector. Before this it was arguably the best funded pension system in the western world."

You will find the private pension pot was under sttack by private companies long before Mr.Brown was chancellor.

As for Mr.Brown`s tax raid,you have been reading too many right wing newspapers.

Here`s an abstract of what the IFS had to say in 2000.Read the article for a more objective view.

Abstract
The UK government is planning to introduce stakeholder pensions from April 2001 as an
alternative to existing personal pensions for people on moderate earnings. But stakeholder pensions
are only one way to save for retirement; the new tax-free Individual Savings Account (ISA) is
another. This note compares the tax treatments of pensions and ISAs and assesses the conditions
under which the tax treatment of private pensions is more generous than that of an ISA to a basicrate
taxpayer — the typical target for stakeholder pensions. The abolition of dividend tax credits
paid to pension funds in July 1997 reduced the relatively tax-favoured position of pensions, but the
tax-free lump sum means that private pensions continue to be a tax-favoured form of saving at most
reasonable rates of return. We show that employer contributions to private pensions are particularly tax favoured.

IFS Emerson,Tanner,2000

Yew Lodge 30:

The high interest rates in the fringe economies is a consequence of their economic situation, not their cause.

Creditor nations fear they won`t be able to pay their debts,partly a residue of the banking collapse,partly the stringent conditions imposed by the ECB as a a condition for a loan.

Our negative interest rates at 0.5% shows the claim we have to reduce debt and deficit in four years to be politically motivated nonsense.

~ 35

Thats what they said in 2000 but thats not how it turned out is it? Brown did take a large tax slice, the value of private pensions has decreased enormously to the point where politicians have the cheek to say we aren't saving enough for our retirements. Well since they plundered our savings via this and further increased tax in other ways to provide much better pensions for civil servants than we can afford for ourselves we haven't been left with any money for us to save. The state took it all!

#26. rbs_temp wrote:

"#7. John_from_Hendon wrote:

Never in a three millennia (three thousand years) has money been so debased, not even in the Weimar Republic.

I presume this is mere hyperbole - or do you really believe that?"

Well, as money started apparently in some parts of Asia over two thousand seven hundred years ago and later with the Phoenicians all being well before Time Immemorial (The Conquest) I shall limit myself to that time. So far as I can see interest rates have always been far higher throughout the last thousand years. Never has money been so worthless. So although it sounds like hyperbole I strongly suspect that the assertion has a high probability of being true.

It is not a question of 'belief' it is one that has a high probability of being a fact. At least I know with almost 100% certainty that the previous lowest rate as managed by the Bank of England in its over 300 year life was some five times higher that today's rate. Remember what the price on money says about money is that it is valuable so when the price is nugatory then so is the value of money, making money and working towards making money. The present rate blows away entirely the incentive of making money - that is the true idiocy of the Bank of England and it Governor.

Raising interest rates to increase the value of sterling to curb inflation will not work. Large companies have currency traders who will manipulate currencies through exchanges to finance deals, i.e. sterling to euro to dollar to renminbi and back again depending on exchange rates and the source of the trade. The direct value of sterling to the source trading currency has little impact especially while other currencies are so volatile. There would need to be a marked increase in sterling aligned to big interest rate rises to lower inflation but that will kill the UK economy. JFH's assertions about money and value are correct but you can't adopt a policy with the sole plan of devaluing and economy through bankruptcy of the electorate, you need support like tax concession that we can ill afford so japanese style depression and low rates it is.

Also with money piling out of dollars do we really want to increase the value of sterling, do we really want a sterling currency bubble ripe to burst.

@29. "Trevor Redpath wrote:

i fear we will actually have a very damaging deflation .
Please note Inflation moves money from the old to the young"

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On the point of moving money, is this (a) some kind of discounting argument of future cashflows, (b) assumption that all those who have consumed less than income are old and those who have consumed more than income are young? Would you clarify, please? Also if inflation moves money, and it is not transparent to people then I guess that there are some then that gain property through deception. I appreciate this equivalence of inflation and theft, but I am not sure that makes inflation defendable.

On the ofen repeated "very damaging deflation" point, I thought that demand functions were typically negatively sloping... errr hence the obvious result...

Once upon a time in a empire far far away, lived an evil prince who wanted to conquer a bit of the other, as advised by another, and set forth and went to war. Halfway through the slow campaign when troop morale was running low because a fair maiden failed to show. A trusted aid devised a cunning plan. My Lord is dead and all is lost spread word and make all hither, for now is the time to break the bank and run across the river. Wise words indeed were said that day as bows no longer did quiver, as one good turn deserves another and on gold we shall sup upon our dinner. And the evil prince of calculation did not fight to wage upon a war, but took an oath of many riches to steal from the poor. The poor did pay and pay again in support of this noble cause, when all along this merry song the money reigned in and poured.

It doesn't matter: the MPC can't control inflation. They can have an influence on domestic inflation--but when the real inflation comes, it won't start here. The supply-side shock will hit, and weaker economies than ours will be the first to buckle.

Buy commodities, is my advice.

I've got a sneaking suspicion that this has always been the plan, in the corridors of power: wait for the stagflation to start somewhere overseas, then watch the contagion. When it reaches us, they'll stand around wringing their hands going "it's not my fault!" while the national debt gets inflated away to nothing. And so do our assets.

Summary of yet another wordy pro-inflation piece of City propaganda: Britain must borrow, borrow and borrow. It must never pay any interests for all the money borrowed and who dares to be prudent must be destroyed by inflation. In your world robbery probably counts as an economic achievement and productive work is a waste of time...

It would be interesting to see how the comittee votes. The last time Mervyn King was ousted in the votes was in 2005, most of the members are sheeps who follow King blindly.

The argument we face today is the inflation & interest rate paradox. i.e Would the cost of keeping interest rates low increase consumption or decrease consumption through rising inflation???
Increasing int rates will decrease inflation, as it reduces domestic inflation, even if there is imported inflation.
My personal view is that the MPC shouldn't succumb to the pressures because of the fragile growth. If they do, a double dip can't be far away...

Perhaps a good starting point would be to review the relevance of the 2% inflation target and how it came about.
I seem to remember this goes back to 2003/2004 (?) when the ECB changed their Europe wide target to 2%, and was part of Gordon Brown's convergence target to be achieved before joining the European Single Currency. This leads to a 2 part question, 1) was 2% realistic then? and more importantly 2) given where we are now, is it still realistic?
Answer 1) I think is yes, although by the end of 2004 the economy was starting to warm up (not quite overheating yet) and inflation was on the rise. Answer 2) I suspect is that 2% is not remotely achievable post-crash and should be replaced with a fresh target. Inflation has been on a relentless rise for 6 1/2 years, less a handful of months in the midst of the financial crisis, so perhaps a more immediate target would be to halt the rise in inflation, then to aim for 3%, before finally getting back on track for 2% in years to come.
Changing a target just because it doesn't suit is bad enough, but blindly following an unrealistic one is even worse.
Once the level of the inflation target is tackled then we can turn our attention toward the real task of identifying which economic levers can be utilized to hit the target, and who has the responsibility to do so. Turning this on it's head raises the more relevant question, is the role of the MPC solely to achieve the inflation target regardless of the consequences, or do they have an additional responsibility to support the wider economy? This in turn will give a better clue to the timing of any future rate rises.

Beats me how raising the bank rate is supposed to reduce inflation when it will quite obviously increase it.

Sometimes you know when you have reached a Eureka moment.
And it is coming soon.
When Base Rates started to fall over 2008-9, several of my lenders on standard variable rates decided not to drop theirs.
When the credit crunch happened it was not possible to remortgage or switch to a different lender.
We were locked in........
Powerless to complain, unable to sell at a low price ,with future customers unable to buy as no loans were available at viable terms and conditions,unable to develop,with assets seized as banks grabbed bigger and bigger slices of security and put a freeze on the completion of existing projects.
And the Banks ........by threatening to sue surveyors, who needed bank business to survive, who needed to get on or stay on the approved panel of Bank Surveyors , combined with the idiotic Homebuyers Report which ensured conformity and downward assessments,( whereas, in the recent past, price rises were possible because one surveyor thought the house on the market was worth more than the other surveyors thought).......( (the Banks) effectively forced through a series of downward valuations in order to increase the hold they had on lenders other assets, and whilst appearing to reduce risk, actually triggered a collapse.
The flight to safety is the biggest risk factor in a crunch.Too big too fail banks are actually crushed by this implosion of confidence.The very opposite tactic is needed to ensure safety.
Basel Two is a further contraction of confidence, imposed in the name of Safety, but effectively kyboshing real recovery in confidence in a neo-Gold Standard act of idiocy.
Anyway ,the banks decided not to follow Base BoE ..... and they got away with it,on the argument that base rates had gone too low for them to make money.And they argued that the contract did not lock them into a track with BoE Base Rates though there is arguably an understanding that it would.
And by and large, millions of borrowers let their lenders get away with that one.
This was a crucial step in the de-linking of Standard Variables to Boe Base rates.
The Banks themselves were QEd money at Base Rates and able to lend it out at much higher rates,and the bulk of savers were themselves offered low rates while the banks recycled their money at huge rates in the creditcard and storecard markets.
Northern Rock, HBos,RBS and Bradford and Bingley collapsed not becuse of bad debts, but because of savers lemmingly withdrawing billions in queues spurred on by reporters known to us all , but could this mass panic be turned into a mass recovery of the power of the indebted and the savers, rather than the power of the manipulators and middlemen.
Now the decision against Halifax ,making them pay back £500,000,000 to borrowers for effectively de-tracking their interest rates without prior agreement that they could do so , has largely gone ignored in the press.
But make no mistake, just about every other lender who de-tracked is also in a vulnerable state.
And if or when the Bank of England does decide to raise base rates, the stickiness of the de-tracked variable base rate banks to BoE is not altogether certain.
I for one would take them to court as they have no right to raise a variable rate when they didn't vary it when it didn't go in their favour.
The Eureka moment is the realisation that as one lender in one financial contract I am nothing and at the mercy of my lender, rather like in the Merchant of Venice.
Mind you I always felt a bit sorry for Shylock, he didn't deserve to be treated so badly did he? And there was an anti-Semitic angle I didn't like about that play.An odious sentiment still lurking in the sewer minds of the Neo-Conspiracist Wizard of Oz Followers.
I know that my lender needs me and millions of others to pay up.
But if there was a union of borrowers who got together and said, "No we are not paying you one penny if you do this, and you can attempt to repossess every single one of us millions and see what that does to your share price and creditratings".......... that would be the Eureka moment .
Just like millions manged to stand up to Mubharak, or Gaddaafi, millions and millions of us do not need to take the nonsense bailed out to us by a bunch of greysuits thinking only of themselves.
And I suggedt that millions of others should do likewise.
Now the BoE has committee members representing various interests, but really who on earth are they to decide what rate of interest I pay when my lender has chosen to ignore them on numerous occasions.
That the peasants might revolt against this undemocratic yoke is one of the main reasons for not raising the rates.
It is time us suckers stood up for ourselves.
Now the interesting question is whether the 21st century agents of mass free speech, like Facebook, the Beeb, Google , My Space , Twitter etc, would allow such a massive challenge to the capitalistic order to take place.
The real Tyranny now is Money , rather than the tyrants themselves.
Addictive,Vital , Seductive, Attractive, Demanding, Cruel, Selfish, Deadly Money.
Can't live with it or without it.
But do we work for money ,or should money work for us?

But then i think, hang on, what if my tenants and my employeees and my wife and kids revolted, where would I be then?
Problem is, revolting is a virus and it is pretty revolting.

@ 45 Hi Jack!

The primary role of the MPC is to achieve price stability - subject to that, the MPC must also have regard for growth and employment.

The inflation target is announced in the Government's annual budget. The Chancellor may change the target.

It's all well documented. Take a look at -
https://www.bankofengland.co.uk/monetarypolicy/framework.htm

The real question is: How well is the system working? In my view, given that this whole mess is rooted in the financial/banking crisis, the answer is: Not very well!

The recession, record low interest rates - sorry, record low base rate; interest on my credit card is still 19% - was not caused by a drop in consumption; it was not a bust following a boom; not caused by oil reaching $150/barrel. No previous recession was caused by similar circumstances. It was caused by an enormous growth in un-repayable debt, both in the USA and here. That's why the base rate has been at .5% for 2 years. The men in grey suits are helping each other out of a mess of their own making. The base rate won't rise until the country can't afford to help them any more.
Savers have already contributed £60bn., for example.

It used to be said, "It's the economy, stupid."
Not any more- "It's the banks, stupid."

It's not capitalism, it's debtism.

#36
I didn't say that high interest rates were a cause of the problem! They are though part of an issue which is of significantly greater import than 0.25% interest rise here, which hasn't even happened.

The cause is at least threefold

The banking crisis, essentially private and corporate debt, which in Spain is also linked to government encouragement to lend on building which caused an even bigger property boom than here.

Government itself ( and in Portugal state monopolies such as the railways and electricity companies) for years before the banking crisis issued bonds to cover cover their massive overbudget expenditure. Suddenly the lenders have stopped trusting this sovreign debt paper as the interest is now bigger than the ability to pay.

But the most pernicious is the dramatic and continuing shift in unit labour costs (the basic measure of productive efficiency of an economy) vs Germany and north Europe generally ( + 40% in a decade or so) which has made their economies fundamentally uncompetitive. So uncompetitive that 20% of Spain and Southern Italy have no work or prospect of any and no-one seems to know what to do about it. Can you imagine what it would be like here if 40% of our under 25 year olds had no prospect of work as they are currently in Spain?

Even if the European stability fund could put a sticking plaster over the first two it only serves to delay the problem. Technically its lending, ie more debt. It does nothing to improve the prospects of getting people back to work and having a productive economy that can earn and pay its way out of debt.

Put together and there is a growing pile of debt, both private and sovreign, with an insufficient national productive earning capacity to pay the interest let alone repay the capital. Uk plc was on the same route with two differnces. We have a government that has decided to try and stop spending money the economy hasn't earned and we were able to devalue, currently roughly 20% versus the Euro and $ compared to just over two years ago. Yes this has caused some of the inflation but as the statistics are also beginning to show, industry is at last getting moving again.

I often wonder if we'd "joined" the Euro at the outset would we be in the mess we're in now.

I suspect not.

39. At 10:43pm on 10 Mar 2011, NorthSeaHalibut wrote:
"Raising interest rates to increase the value of sterling to curb inflation will not work. Large companies have currency traders who will manipulate currencies through exchanges "

Not so,the recent anticipation of a rise in UK interest rates led to an improvement in the Euro and dollar- pound exchange rate.

Because of the importance of London as a financial centre,the pound is widely traded internationally and sensitive to interest rates.No trading company has the muscle to affect exchange rates on its own.

50. At 07:11am on 11 Mar 2011, yewlodge wrote:
#36
"I didn't say that high interest rates were a cause of the problem! They are though part of an issue which is of significantly greater import than 0.25% interest rise here, which hasn't even happened.

The cause is at least threefold"

Structural problems in the fringe economies undoubtedly contributed to their current malaise.

The 2008 collapse in private capital exposed their weaknesses as it did Germany`s,(weak domestic consumption,dependence on exports),the UK with its vulnerable financial sector and so on.

But whereas Germany,the UK,and the USA have begun to recover,(Although GDP is still either below or just around its 2008-2009 level),the crisis in the fringe economies has deepened.

Stringent deflation imposed by the ECB ,and an inability to devalue because of the Euro, have put these economies in a strait jacket they are unable to escape.

This is the argument against the speed and scale of government cuts here.Ireland,Greece and Portugal are not where they are because they failed to deflate, but because they deflated too hard.

High interest rates on debt in the fringe economies merely increases their deflationary pressures making it harder for them to grow their way out of recession.This is also a problem for us which Mr.Osborne will try to address in the coming budget.

46. At 01:10am on 11 Mar 2011, Ricky wrote:
"Beats me how raising the bank rate is supposed to reduce inflation when it will quite obviously increase it."

Because with bank rate at 0.5% and inflation at 4.0%,every time the central bank provides money to the market it loses 3.5% annually.In other words 0.5% is a negative rate of interest,

Consumers,companies and mortgagees don`t of course borrow at 0.5% or anything like it.The market is not particularly sensitive to bank rate at this level except for tracker mortgages.

The value of the pound internationally is sensitive to interest rate changes,real or anticipated.Because import-export is a major element in the economy,the fall in the value of the pound by 25% in two years has been inflationary.We pay a lot more for imports,receive a lot less for exports.We give more for less,the standard of living falls.

.A rise in interest rates would have greater effect on import-export prices by increasing the value of the pound than it would the price of money in the domestic market.

The problem with bailing out the banks is it broke the fundamental principle of capitalism. The BoE no longer have the option of raising interest rates to control inflation so we are now at the mercy of market forces, which are no longer free markets due to bank speculation.

We can now expect even further rises in food and oil costs due to the earthquake and Tsunami in the pacific. The problem is, these larger earthquakes are on the increase, so too is volcanic activity and freak weather. Expect another 5 or 6 major disasters this year due to mother nature and the knock on effect on lost GDP in which ever country is hit.

The next two years will be the toughest test of economics and capitalism in our lifetimes and sadly the people in charge in 2008 are still there.

#51

I often wonder if we'd "joined" the Euro at the outset would we be in the mess we're in now.

I suspect not.
------------------
Your right, my guess is we would be pretty much in the same position as Ireland. Were currently trying to inflate our way out of the mire. Ireland didn't have that option.

I am sure there are plenty of "nods and winks" going on between the Governor and the Chancellor. The recent replacement of a "hawk" on the MPC by a moderate must have had the approval of the Treasury.

The truth is that negative real interest rates are the ultimate stealth tax. They are far more likely to reduce the real value of the accumulated public deficit than the Chancellor's cuts, and they will keep the external value of the pound down and help to reduce the external trade deficit, which is more important than the public debt.

The real role of the cuts is to keep unemployment levels high to make it easier to resist wage demands to compensate for inflation, which would tend to cancel the effect of the low pound.

It is all to become irrelevent, the talks on a new EU bailout fund are set to fail.
The Irish and Greek govt's will seek to renegotiate their current terms.
This will futher undermine any agreement.
New stress tests for banks will be seen as totally inadequte.
Germany will refuse to underwite the losses.
End of game.

Greece Ireland Portugal and Spain will fall like dominoes.
The to big to fail banks, will fail.

Move your funds to a small financial provider. When the wind blows only the small will be left standing!

Paul Krugman blog Feb 9 2011: "The key thing in the British case is that there’s no sign that anything like that is happening. Headline inflation is up because of food, energy, depreciation of the pound, and increases in VAT; but sticky-price leapfrogging isn’t evident at all...Think of it this way: to raise rates in the UK now would be to demand that wage growth, already far below recent norms, slow further. That’s not a sensible policy in response to a one-time bulge in headline prices."

But the BBC continues to give support to the Mad VATters' Tea Party: putting up VAT in a liquidity trap while believing that the public sector in the UK caused the 2007-8 economic crisis in the US and that now the UK public sector is crowding out UK private sector investment! You can see this bias in the BBC's economic tracker, which has put 'historic low' on the graph of UK interest rates 1694-present, as though the 2% during the 1930s is not a liquidity trap and the Bank of England had traction. Bias, bias, bias. How then did the economy recover to full employment 1939-1970s? Inflation is literally the least of our problems.

So when does old Mervyn 'looter' King plan to stop robbing savers ?

The MPC was set up as an abdication of responsibility by the then Chancellor and still is exactly just that. Do the MPC fiasco members all get paid for their rubbish?

Having just one policy tool to control UK inflation is like trying to weed one's garden with a JCB.

VAT is the only policy main tool that can effectively control general price inflation in the UK (as opposed to e.g. wage inflation) ... in the SHORT TERM and deliver accuracy and flxibility in its application. Although using VAT reductions effectively can also tackle wage UK inflation.

The argument for the MPC increasing UK base rate is to restore some balance for those on fixed incomes and all kinds of savers as, currently there is no incentive to save money in teh UK which is very damaging to the economy.

The key point which is missed over and over again is that interest rate increases must co-incide with VAT reductions and the effect of the VAT reduction should marginally outweigh the effect of interest rate increases while inflation is being taken lower.

VAT is now a fat and juicy 20% and the Chancellor must swallow his pride and slash VAT otherwise the economy will spiral out of control with political and economic problems ... we need a low inflation, sensible level interest rate environment for the UK to do better. The Chancellor has used short term VAT hike to good effect and realise that there is no economic mantra that stipulates that VAT shoudl eb at 20% or vene exist at all ... it is an sick extra tax that weighs down the UK economy just as by the proverbial millstone.

Slashing VAT would not only reduces inflation ... it also increases the real net disposable incomes of the have nots ... and will incerases sales and activity in all areas of the UK economy.

The MPC need to stop talking about interest rates and inflation ... their job is to look at the need for higher interest rates in the banking sector and the interests of savers, as controlling UK inflation is a central strategy role for the Chancellor.

Arguably this current MPC role in meddling with interest rates should be transferred to the new FPC as relating to banking and not the general economy ... but really all interest rate decsions should be made and signed off by the Chancellor as jointly heading the FPC with the Governor of the BOE.

The sickening economic ineptitude of successive govts, BOE, MPC regarding inflation, interest rates needs to replaced with some real economic wisdom and appropraite action here ... as the UK is reaching another critical period.

Recent improvements in manufacturing and UK exports will be a soon to be forgotten blip if the cretinous MPC are let loose again using the wrong policy tool by raising interest rates to control inflation ... and which is not even effective in the short term.

The MPC is itself a 'futile gesture' and a symbol of cretinous and damaging macro-economic management and needs to be wound down immediately.

What the UK economy needs now is low inflation and about £50-£75 billion in revenue neutral indirect tax redistribution and rebalancing from a combination of pulling the right policy tool levers of:

VAT
Fuel Duty
Car tax duties on gas guzzlers
Trade Tax Harmonisation (TTH) - import tariffs on Britsih makeable and growable products and against those countries who aggressively target the UK with their own negative trade taxes and other protectionist subsidies and unfair trade.

There is no such thing as 'free' or 'fair' trade ... these are myths and politicised economic propaganda.

There is a golden opportunity here to set the right economic environment for the UK so that the entire UK and all of its citizens can do better ... if this opportunity is missed or messed up again ... Britain is in big trouble here as idiotic, uncoordinated policy tool operations will further stall the UK economy.

Sorry, Stephanie, but what you are saying about symbolic rate settings in this instance makes little sense.

A single change of rate (increase or decrease) can only be, in all practical sense, symbolic (i.e. of token force) due to the lag of effect and the fact the BoE rates are benchmarks and largely de-coupled from the rates banks charge on the ground. But is it also "symbolic", in the sense of sending a signal?

Well, due to the afore mentioned reasons (lag, de-coupling), banks and other financial players expect, once a break in the rate-setting trend appears, that more of the same will follow, i.e. a sequence with the same direction of change. For a single rate-change to be seen as "symbolic", it has to be followed by another one that reverses change (i.e. return to the previously established turn). I.e. it is dependent on the next member of the sequence. But then, this sets the meaning of that next member (the reversal of the reversal) in suspension: is this now truly a return to the established turn, or is it "symbolic" in its own turn and not meant to undermine the previous reversal? One cannot know till the next rate is set, and so on.

This, of course, is rather a logical exercise, rather than a real-life scenario, but shows, I believe, the futility of single, "symbolic", rate-setting reversals: they can only cause confusion. I believe there is a good logical reason why markets expect reversals of rate curves to indicate sustained change of trend (i.e. single local minima/maxima).

Is this such a real problem, raising the bank rate by next to nothing?.

Of course it is not, what is the problem is the potential for coordinated cynical actions of the city slickers in their attempts to pump up their importance in the nations affairs at the taxpayers expense.

Just another little local exploitation opportunity as our economic fate is well outside domestic influence or control in this global mess.

An analysis about what the new UK government promised about financial controls of the city slickers, and what they have achieved after almost one year, would be more interesting than this endless BoE irrelevant speculation.

Maybe the next budget will give us some hope, I would settle for, 'if you are just an ordinary hard working UK taxpaying family, you have a future that will be respected by the government more than the city slickers'.

All this crap about sending signals with interest rate meddling ... we can all send signals .. How about ... 'all those incompetent MPC goons be scaked/resign now'?

#53
"Ireland,Greece and Portugal are not where they are because they failed to deflate, but because they deflated too hard."

Put simply no they didn't!

For years they borrowed (both sovreign and private) far more than their economies earnt. This also led to an inflationary unit labour cost increase relative to the rest of Europe(and most of the rest of the world) which made the cost of their goods and services uncompetitive. That is the root cause of the deflation. They priced themselves out of the market, which has been exacerbated by the fact that their customers are short of cash too. Recent government actions to cut costs only add to the problem but were never the initiating issue.

Now they are trapped in a situation where they can't borrow more to fund expenditure they haven't earned, can't afford the interest and have made their economies uncompetitive so they can't earn their way out of it either. All this and tying themselves to the Euro so the old(and UK)route of devaluing to increase competitiveness or just printing more money (the US route)isn't open to them either.

This is the crux of the Euro vs the Debt meetings that are going on today in Brussels and probably throughout the year. They have kicked the can down the road until it has grown to kicking an oildrum and will be soon trying to kick a supertanker. Everyone knows it has to be turned round but no-one knows how without wrecking the Euro.

Mumbling vague 'Mumbo Jumbo King' is not worried about inflation on his big fat BOE pension is he?

He took care of the 'inflation' on that one didn't he?

63. At 10:31am on 11 Mar 2011, Geoff Berry wrote:
Just another little local exploitation opportunity as our economic fate is well outside domestic influence or control in this global mess.
------------------------------------------------------------

In the age of Empire the City's British capitalists could exploit the colonies and others that we traded with as a result of that empire. Native Brits lived partly at the expense of others.

As a country we still need to admit that as this has all changed over the decades to global finance we are now just cattle to be milked.

We are not human as far as global finance is concerned.

Still no evidence that our economy is in overall growth. Still no evidence that financial markets in NY & London are ready to take on risk: bond rates remain very low. Which means there's still no evidence that it's appropriate to raise the BoE's rate.

Euro-zone stress test results might be the next milestone. Could be a positive sign from money supply data? Or, maybe the first quarter growth numbers from ONS? We're "waiting for Godot" on this one.

Like the Bank, we're waiting for a sign that the policy-induced stagnation has passed before anyone will have the confidence to accept a rate rise.

According to Legal & General Investment Management, A massive 90% of borrowers are on a variable rate mortgage, leaving them completely exposed to a hike in interest rates.

This is a higher figure than the 68% figure recently published by the Financial Services Authority.

The higher figure is suggested to take into account the enormous number of borrowers who have now reverted to a variable rate at the end of their fixed rate deal.

If these figures are correct, a Base Rate increase will affect nearly all mortgage borrowers in the UK.

Shelter has warned that as many as 2.8 million homeowners could be completely unprepared for the costs of rising interest rates. Apparently the number of homeowners struggling to pay their mortgage, already, has increased by 78% in the last 12 months.

A spiral of debt, repossession and possible homelessness will do nothing to cure the country's economic woes, particularly with the resultant increase to the welfare bill.

Economists are beginning to suggest that the next rise could come when the MPC meets in May, to wait for the dust to settle after Osborne's forthcoming budget & the next quarterly figures.

What's for sure, in the light of public and private sector jobs cuts and the high fuel & utility costs squeezing family budgets, is that an increase in the Base Rate will see a subsequent rise in mortgage arrears and repossessions with many British homeowners struggling to hold onto the roof over their head.

67. At 10:45am on 11 Mar 2011, Kit Green wrote:

63. At 10:31am on 11 Mar 2011, Geoff Berry wrote:
Just another little local exploitation opportunity as our economic fate is well outside domestic influence or control in this global mess.
------------------------------------------------------------

In the age of Empire the City's British capitalists could exploit the colonies and others that we traded with as a result of that empire. Native Brits lived partly at the expense of others.

As a country we still need to admit that as this has all changed over the decades to global finance we are now just cattle to be milked.

We are not human as far as global finance is concerned.

..............

Its worse than that .. when the establishment/capitalists didn't have an empire to milk and the socialists destroyed the fabric of the UK ... the establishment moved its capital out of the UK ... and the banks took over with the UK 'exploitation'.

The innocent people in all of this are the so called British working and middle classes as exploited and still abused in this, by all and sundry...including all British political parties.

The govt now has the power to start re-dressing this abuse and over-privilege and it can start in the March 23rd budget and set the UK economy on the right track!

The first rise in the bank rate will be symbolic for one of two reasons.
It will either say that the MPC caught a glimpse of the end of the circumstances that resulted in the rates dropping so low 2+ years ago, I.e. the balance sheets at the banks are more sustainable, or it will tell us that there is something even worse just around the corner. Personally I think we will be fleeced for a bit longer yet regardless of the rational for a rate rise because it's easy money for the banks.
As for symbolic messages to the banks from the public, how about everyone taking all of our savings out of one of the major banks unless/until they give us a decent return on the savings.

#52 Bryhers

I think you misinterpreted my post, or maybe I just wasn't particularly clear on a complex issue. Corporate appointed dealers don't affect exchange rates they manipulate their volitility. One route through the exchange sequence may be a different route an hour later to secure cheaper source goods. They deal in such volume very small fluctuations are significant and they don't hold single currencies either allowing more options. I know of a couple of companies who deal in £, $ or € depending on exchange rates and supply sources, they may deal through combinations of all three it's just a matter of pressing buttons. The problem is when homeland currencies become expensive the small businesses don't have this power and either die or get swallowed by the corporations giving them yet more accumulative clout. This is why I think small rate rises won't curb inflation just kill small business exporters, if we truly want to deal with inflation it has to be John_From_Hendon's way and hike rates up to at least 4% fast and furious. Personally as a net borrower I don't want to see this as my svr is 4.5% so I'll suffer if those margins remain but I don't envisage any alternative unless someone discovers the silver bullet.

Kit Green @67

Yes, yes, you and I can see it , we are on the expoited side of the game, well certainly I am and that is not a complaint.

The city slickers are generally smart enough to see their 'games' effect on the nations wellbeing and for that wilful ignorance, cynicism and personal greed I hold them more accountable than our useless politicians, who are supposed to hold a balance of democratic power structured to protect those who are unable to protect themselves.

The past recent UK economic and financial history, the mess, 'sucked in' many UK trusting ordinary people who never in 'a month of Sundays' believed that the UK and global money markets was full of crooks and chancers and useless politicians that would fail to protect the potentially vulnerable.

I dont quite see the analogy with the Empire, like the curates egg, over 250 years there was some good done, only in parts of course.

I suspect that Cameron, Osborne and Clegg have invented the first six-legged pantomime donkey, I hope the next budget proves me wrong.

Would someone please explain why ANYONE thinks that increasing the base lending rate would have any direct effect whatsoever on UK inflation, when the source of the price rises lies in two factors that are completely independent of domestic economic factors - i.e. the world commodity prices of oil & food, plus the world exchange rate of Sterling on the money markets?

And in a globalised world where banks, companies and individuals can move money around the planet at the speed of light, with the UK being only a small fraction of the world's economy, why does anyone think raising our base rate by a few basis points would have any practical effect on the UK economy?

The MPC is impotent - so making it independent of government and claiming the committee can in some mysterious way "target" inflation is a complete delusion.

So the only purpose of the MPC is to use the crystal-ball gazing capabilities of its members to pronounce on what the THINK is going to happen - then send a guesture to the markets by the interest rate they set.

As we have the Chancellor, the Treasury, the Office for Budgetary Responsibility, the Bank of England AND the MPC, IMHO the role of the MPC in setting rates should be a government function - there is no point or benefit in this supposed "independence" and it should be scrapped - its existence is part of the libertarian delusion that government should be emasculated and that self-regulation is the answer to everything - as we've seen with the banking crisis, it doesn't work.

It wasn't Monty Python, it was Beyond the Fringe.

Why is it that no one in British govt can seemingly get some of the vital economic 'macro-economic' basics right.

Economics is about delivering priorities identified by the political systems.

If the/ a main priority is tackling inflation then:

1) delaying dealing with general price inflation causes wage and other inflation
2) any delay in tackling inflation ldeads to more resources neeing to be applied in tcakling that inflation
3) tackling inflation diverts valuable resources from other areas of the economy
4) purely bank internal measures of tackling general price inflation i.e. inflation rate increases causes higher inflation which lengthens the period to control inflation and stagnates the economy for years and years
5) commodity and import and other specific kinds of inflation need to be tackled separately by e.g. changing consumer behaviour and appetite for e.g. foreign made luxury goods by using specific policy measures like Trade Tax Harmonisation (TTH)

At no time does anyone identify the different kind of inflationery effects or have a coherent strategy for dealing with these issues.

Someone get a grip or the UK is in for perilous economic and political turmoil ...

Priorities
Issues and magnitude and time
Identify policy tools
Strategy
Implementation and adjustment

Impact
Momentum
Multiplier effects and ripples ... not just money
Redistribute and rebalance
Keep British capital in Britain

Stay 'Revenue neutral' ... increase real net disposable incomes for the 'have nots' ... reduce CPI and RPI inflation ... avoid wage inflation ... use higher VAT if necessary on problems imports ... or better still apply direct targeted import tariffs.

£50-£75 billion redistributed this year .. subject to choice of TTH and policy tools.

No govt has ever done this yet ...

75.

The Pythons had a suitable sketch though....

Man goes into shop pushing a barrow full of dead economists..

Excuse me, my good man, but you sold me this monetary policy committee?

Yes, it's lovely committee with such varied views!

Well, it's dead. I thought they were just having a rest, but they've done nothing for two whole years!

no, no, it's just sleeping - they do a lot of that, economists

I'm telling you, it's dead my lad - it's a stiff, breadth of life, it has gone to meet its maker, it is no more, it has run up the curtain and joined the choir invisible, if you hadn't nailed their feet to the floor they'd have fallen over, this is a late monetary policy committee!

OK ok - I'll replace it - here I've got a lovely new Office for Budgetary Responsibility - you can have that instead.

What's that? Another load of economists? Are they as useless as the committee was?

No, no, they are much more sensible - you see their job isn't to delude themselves, it's to fool everyone else into believing their nonsense.

Oh, right, well I'll take them then.

Man leaves with barrow full of fresh economists.

Shop keeper to his mate: I can't unerstand what people see in economists, can you?

have asked all I wanted to,
ranted with the rest of you,
now find ennui setting in,
it's that base topic, again...

For a wider perspective... see https://www.housepricecrash.co.uk/base-rates.php

If the mods block the url, google "base rates around the world"

(A dull day in the city, unless you live in Tokyo.)

A fascinating analysis, Stephanie, but it does seem to be predicated on the assumption that a one-off rate rise has some kind of point to it other than the flagging up of a change of mind by the bank.

But what could this point be? Does anyone really believe that 'fine-tuning' (to re-use that rightly-abandoned phrase from years ago) the economy can really be achieved by single rate rise of (let us assume) 0.25%, or even 0.5%? And at a time when the economic levers don't seem to be working properly anyway?

Surely the main argument is bewtween two polar opposites: Either one believes that inflation is such an evil that rates must rise to stop it, or one considers that recession, deflation, or staglation are far more important worries and inflation must be permitted to continue until these worries can be put aside (the policy that dare not speak its name).

In the first case, a rate rise of several per cent would arguably be needed, and in the second, none at all. Most kibitzers presumably understand this too, which is why they will interpret a rate rise as a harbinger of a change in policy rather than either a 'futile gesture' or a genuine (but misguided) attempt to find a middle ground.

When one is straddling a chasm, attempting to find the middle ground is not a terribly good idea. One is generally better off choosing one side or the other and preparing for a big jump across when it becomes necessary.

How to put £50billion into the Uk economy and tackle inflation by being revenue neutral in the budget

- Slash UK VAT revenue by £15billion overall(and increase VAT in some areas)

- make up the loss in revenue with partly higher VAT on problem imports

- make up the remaining loss of revenue from Tax Trade Harmonisation (TTH) and tax receipts from the results of those spending the additional net disposable revenue as received from reducing UK VAT

- super tax the supermarkets for over-importing foreign food

- super tax the gas guzzling vehicles, private jets etc

- super tax the banks for not investing in Britain

- + the piddling stuff the Chancellor was going to do anyway in the March 23rd budget

- higher investment from British business and UK homeowners

Result ... £50 - £75 billion input to the UK economy and inflation controlled by reducing UK VAT revenue by about £15 billion (but still revenue neutral overall)... and more business opportunities for British business as foreign subsidised exports to the UK (UK imports) i.e. on problem imports become more expensive.

This is larger than the amount taken out of the economy by the 'defict management cuts' and most people will both be and feel ... 'better off'.

This comment was removed because the moderators found it broke the house rules. Explain.

Another aspect worth considering is not just the timing of a rate rise but the amplitude. It is arguable that it is the bank's habit of persuing the 'staircase' method of rate setting that creates the impression that a rate rise is generally going to be the start of a process rather than a single change.

If, as I have argued, a single rise of 0.25% or 0.5% is not really credible as anything other than the start of a staircase, why not consider a bigger increase? Say 1% or 1.5%, accompanied by a statement that this is estimated to be the correct rate for the next n months and the following rate change could be up OR down.

11. At 6:49pm on 10 Mar 2011, John_from_Hendon wrote:

#6. ObserverinMonmouth wrote:

"Not 'sickening' just indicative of the debasement of money and its destruction!"

Never fear Rodders - with QE this time next year we'll all be BIWIONAIRRES!

Now where's uncle Albert - we need some war stories...

65. At 10:37am on 11 Mar 2011, yewlodge wrote:
#53
"Ireland,Greece and Portugal are not where they are because they failed to deflate, but because they deflated too hard."

Put simply no they didn't!

I know there are structural problems in the fringe economies as you keeo repeating.

The question I have raised is how do they deal with low productivity and other issues while trapped in a massive deflation imposed by the ECB as a condition of propping up their banks?

They cannot devalue by 25% and export their way of of recession like us because they are in the Euro.They need to grow,the capital to do it is going on interest payments rather than investment.

This graph may be of interest to fellow pundits

Australian commodity prices...
https://www.rba.gov.au/statistics/frequency/commodity-prices/2011/icp-0211.html

And there are a similar set of graphs from the BoE in the powerpoint at the end of this link
https://www.bankofengland.co.uk/publications/inflationreport/ir11feb4

There is a fascinating (to this mushroom) similarity to all these graphs...in that oil, steel, food etc. prices collapsed around 2008, and have been recovering ever since.

What happened in 2008? And why would it affect comoddity prices if they are supply/demand driven? Perhaps this is clear evidence that commodity prices are speculator driven, rather than demand driven?

Mushroom suspects that the national bank base rates will only revert to "sensible levels" once the speculators have regained their "business as usual" upward trend.

A few days ago, I suggested that we had a blog on "Crisis, what crisis?"

If we are in a period of enforced austerity, where are the capital flow controls, where are the price controls, where are the import/export tariffs and quotas? All tried and trusted methods of equitable sharing of scarce resources during a crisis.

Answer...we haven't got them because it was never a national crisis, but an international banking one?

In which case, all current policy pursued by the national puppet governments is designed to fix the banks, not the country.

Or not?

74. At 11:48am on 11 Mar 2011, richard bunning wrote:
"Would someone please explain why ANYONE thinks that increasing the base lending rate would have any direct effect whatsoever on UK inflation, when the source of the price rises lies in two factors that are completely independent of domestic economic factors - i.e. the world commodity prices of oil & food, plus the world exchange rate of Sterling on the money markets?"

Only part of the rise in UK import prices is due to increasing cost of raw materials.The pound has lost around 25% of its value against other currencies, partly as a result of negative interest rates.

Despite the recent rise in exports and fall in imports the terms of trade are still strongly against us. The export recovery won`t significantly increase the value of the pound.

A rise in interest rates would make the UK more attractive for foreign government`s and companies to invest funds. This would increase the pound`s value.

A rise in interest rates would not have a deflationary effect here.With inflation at 4%,the present bank rate of 0.5% is strongly negative.In effect borrowers are being paid 3.5% by the bank.The effect of a small rise would have no effect on the price of money, except perhaps for tracker mortgages.

Swan like? - is that like a black swan?

Dunno whether anyone's interested but this is a simple place to keep tabs on so-called base rates (sometimes OCRs, sometimes repo - you need to check):

https://www.cbrates.com/

Mostly irrelevant, but it gives you something to do as the water level rises.......

re Steffie's Blog and post #1 and #87 and possibly some in between ...

I have been cautioning about " ... events, dear boy, events ... " for some time and now have the advantage of posting after news of the earthquake in Japan. In addition, I have heard the spokesman for Mitsubishi Bank (I think) hinting that rates may rise as the Japanese Government borrows to finance the rebuilding and recovery in the north-east of the country.

The MPC may have the decision taken out of their hands, in effect, by the global economy. The recent debate about a quarter or half of one per cent rise may be obliterated by talk of one whole per cent or even a bit more than that.

The tremors from that particular earthquake could go round the world and rattle windows in London and New York.

re #85 My little Mushroom,
Not.
I think.

But you are correct in part, in that with the benefit of some distance we can see that the banking crisis - as part of the whole, including sub-prime, CDO and other paper trading, inflation, over-taxation, short-selling, food & oil & commodity increases, financial terrorism, etc., - was an international one. At least in part, although even then it was somewhat limited to UK and US banks/financial institutions. Hence the quick recovery by the BRICS and elsewhere. So we are well into the economists' "Well, on the other hand ... " "But if you look at it this way ... " .....

You may have a point about base rates although please see my post above for the wake from the 'quake.

My other reason for posting in reference to you is that I haven't forgotten your request for a bit more prognosis on top of some diagnosis. I find myself musing on possible answers to your request from time to time and am afraid it may come in dribs and drabs ...

Here is one: I am starting to feel that we should forget the '80's as the decade of greed. It will be far, far eclipsed by the 'eleventies' GREED unless events occur to change things.

Will the Japan earthquake, especially when linked to '2007/09' be of sufficient magnitude to wake us all up?

90. At 2:58pm on 11 Mar 2011, Up2snuff wrote:

re #85 My little Mushroom,
Not.
I think.


My other reason for posting in reference to you is that I haven't forgotten your request for a bit more prognosis on top of some diagnosis. I find myself musing on possible answers to your request from time to time and am afraid it may come in dribs and drabs ...

Here is one: I am starting to feel that we should forget the '80's as the decade of greed. It will be far, far eclipsed by the 'eleventies' GREED unless events occur to change things.
=================
Thanks for that...your ability to keep a question in view over time far outstrips mine.

In general, (wanting sustainability) I am not very enthusiastic about reducing fuel duty...but I can see how it would make a huge difference to domestic trade. But as I wrote yesterday, I would prefer a bit of joined-up-thinking regarding personal taxation versus corporation tax. But am not holding out much hope.

Anyway...not sure what "GREED" you mean - except I cannot see any efforts being made to rein in the polarisation between the haves and the have-nots.

Do you see the "eleventies" maybe not so much as the "because I'm worth it" generation, but as the "personal survival" generation instead?

I worry a bit about the UK polarising into those who manage to keep their jobs/assets/lifestyles and those who don't.

WOTW doesn't agree, but my belief is that 'government' exists to restrict the profit motive inherent in the individual and provide "fairness" in the social group. (Whether that be defence, law and order, trading standards, or any other area.)

I cannot see how "fairness" can ever be a motive for the private sector.
Therefore it has to be the motive of the makers and enforcers of law.

But I don't see a lot of "fairness" in the way wealth is being distributed.

But, hey, there's a budget coming up...maybe...perhaps...the cunning plan will be revealed?

you be careful too!

84. At 1:59pm on 11 Mar 2011, bryhers wrote:

"They cannot devalue by 25% and export their way of of recession like us"

Oh THAT'S what we're doing....here's me thinking we're trying to win an ugly contest where first prize is a smack in the mouth!

We're not exporting our way out of anything - mainly because other exporters (who are better than we) are doing the same. We can't all export our way out of recovery - someone has to import!

Although it does seem that the Tory party and their wet liberals are trying to compete with Chinese slave labour by reversing the working rights of people back to the early 1800's!

With that - you realise how bad it all is - I'm just twiddling my thumbs waiting for the next banking crisis - we all know it's coming, we just don't know which month.

If the Euro PIIGS go down - bye bye German banks
If the US doesn't go for QE3 - bye bye US banks
If the BoE raises interest rates - bye bye UK banks
Middle east erupts and Saudi's lose control - bye bye all banks

It's a properly tight race - anyone can be the biggest loser - who will take the title of 'first to go down'?

I hope you're all prepared - hold tight pleeease - hands inside the carriage...

90. At 2:58pm on 11 Mar 2011, Up2snuff wrote:
But as I wrote yesterday, I would prefer a bit of joined-up-thinking regarding personal taxation versus corporation tax. But am not holding out much hope.
----------------------------------------------------------------------
Amen, Baby! Gotta agree there.

I would like to see wholesale tax reform, carried out slowly (J_f_H please note), steadily, flexibly and thoroughly. And I probably also do not hold out too much hope although GO may yet surprise us all, and favourably too.

[Am a bit behind on postings of mid-week and yesterday. Been busy. Will try and catch up.]

Do you really think raising interest rates will curb inflation? Tell us why we have high inflation exactly, anything to do with domestic issues? Tell us what core inflation is please, 1.what did i hear you say%? I'm fed up of hearing the bbc's journalists writing about the 'pressure' to increase rates. The only pressure comes from you lot speculating. Andrew Sentance has gone, the government cuts haven't yet had full impact, we've just come out of another fall in GDP and yet you still carry on. The only argument for increasing rates is that you say it will become self perpetuating or some nonsense. I say keep an on core inflation, report on that...

86.

I do not believe that there is a linear relationship between the base rate and inward investment. Take the interest rate on gilts for example: it's more complex than that and as our base rate is 0.5% and our gilt rate is around 4-5%, I don't accept that a marginally higher base rate would cause a significant inflow of investment.

Indeed, I'd say a multinational looking to invest might well find a higher local interest rate to be a disincentive, as it will increase their cost of doing business here.

Driving up the cost of financing for business and making mortgages more expensive is undoubtedly damaging to the economy and living standards - the only people who benefit from higher interest rates are rich people with loads of cash in the bank who want a bigger return.

All that the UK base rate actually does is determine the price of short term borrowing from the BoE by the commercial banks - and they can borrow money from just about anywhere in the world if they want to.

Jacking up VAT is another source of UK inflation - so we end up with monetary policy being used to control inflation, which itself is being partially caused by the Chancellor's fiscal policy, as well as the external factors of currency rates and commodity prices, which won't be affected at all by raising our interest rate.

Us ordinary mortals are not responsible for the UK's inflation and we are being squeezed very hard already with significant falls in real living standards - clobber us even more by raising interest rates and we will crash into recession, tax take will fall and welfare costs will rise, the government will go further into debt and a downward spiral will begin that it will be virtually impossible to get out of on our own, just as it did in Eire.

Real wages are falling whilst the cost of living is rising - how can it make sense to increase the cost of living even more by driving up mortgage and borrowing costs?

~ 84
Well we agree on that, using up Euro loans just to pay debt and provide short term cash flow is a waste of time for all concerned.

The total structural and fiscal problems with the periphery states may well be even bigger than that faced by Germany absorbing East Germany. Much bigger, and I doubt anyone has contemplated what will be needed to fully recapitalise these economies with efficient industries enabling them to compete in the European and world markets. The immediate sovereign government debt and banking issues are but the tip of the iceberg. At the present time I doubt if Europe has the will or the money to do it within 20 years.

The only other way out is the answer no-one in Brussels is willing to hear which is for many of them to leave the Euro and devalue. They may still not be the most efficient industries but at least what they already have may be quickly price competitive and may get some of the huge number of unemployed back in some useful productive work. On top of this they will still need major Euro grants over the next decade or two to establish major new industries eg solar power in Spain perhaps. The latter type of scheme though will take too long. An almost immediate kick start provided by devaluation is what is needed for the current generation to get an opportunity and sense of worth. Currently for many of them this is being sacrificed to keep the Euro dream going.

92. At 4:03pm on 11 Mar 2011, writingsonthewall wrote:

If the BoE raises interest rates - bye bye UK banks
------------------------------------------------------
Why?

97. At 5:07pm on 11 Mar 2011, Up2snuff wrote:

"Why?"

The vampire squid cannot survive without easy money (blood) - their impairment rates on loans will rocket, house prices will decline and the already declining demand for mortgages will decline even further. The banks can only make money through speculation and lending - speculation can be seen in the commodity market - but lending is their life blood. Higher rates will mean less lending and reduced margins.

Why do you think the BoE is not raising rates when they are sitting on inflation reports screaming INFLATION BEWARE!

Why do you think Merv is saying this:
"High street banks are bracing themselves for share sell-offs and more public criticism tomorrow after the Bank of England Governor launched an astonishing attack, warning of another banking crisis if the sector is not reformed."

https://www.independent.co.uk/news/business/news/mervyn-king-banks-exploit-gullible-customers-2233663.html

He knows he has to raise rates soon - and he's sending out warning shots. He knows the banks aren't ready for it - I mean Barclays and a host of other banks have failed the 'capital test' for Spain's requirements - they're all playing a huge bluff.

@98. At 5:30pm on 11 Mar 2011, writingsonthewall wrote:

"He knows he has to raise rates soon - and he's sending out warning shots. He knows the banks aren't ready for it - I mean Barclays and a host of other banks have failed the 'capital test' for Spain's requirements - they're all playing a huge bluff."


And he seems like such a nice old chap too. Gold's gone up. And the water's a bit closer. Just shifting my deckchair again......

95. At 4:42pm on 11 Mar 2011, richard bunning wrote:
Jacking up VAT is another source of UK inflation - so we end up with monetary policy being used to control inflation, which itself is being partially caused by the Chancellor's fiscal policy, as well as the external factors of currency rates and commodity prices, which won't be affected at all by raising our interest rate.
------------------------------------------------------------------------
For stillpuzzled and nautonier as well as richard b:
I agree VAT is inflationary but it only affects a business in this way if it only has inputs and no outputs and/or never buys fixed or current assets. The problem with VAT is that it top slices other inflation - the underlying transaction. A return to fixed purchase taxes might be a good idea. But for someone earning £24K the effect of an increase of 14% in the tax when it falls on discretionary income is relatively small. The previous increase was 16%. Prior to that, I seem to recall the increase was 40%, was it not? There wasn't quite so much excitement about it back then.

Fuel duty, of course, affects the cost of the underlying good or service. And, as I have pointed out several times before this week, it affects other taxes. Something that VAT does not do.

Small business - turnover under certain levels - is not necessarily VATable, anyway. All business gets hit by fuel duties - some are able to cope better than others. My experience of quoting for work for a potential client is to never have someone say "Oh, too much. Can you do it for cash without the VAT?" but several times have people say "We'd like to use you but cannot afford the travel costs. Would you reduce your fees or pay them yourself?"

More importantly, business is hit by fuel duties when it comes to selling and, even more importantly, selling abroad. VAT is not a problem there. We have to have VAT for economic reasons and as part of our membership of the EU, although I hold the latter requirement somewhat lightly. We can do away with FD & the FDE.

If we are really serious about defeating the 'enemies of enterprise', getting rid of Fuel Duty and the Fuel Duty Escalator must be top of the list. Poor transport infrastructure must also be high on the list but I would put that after NI, especially Employers National Insurance.