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Now we are six

Stephanie Flanders | 12:37 UK time, Wednesday, 23 February 2011

We thought the minutes of the February Monetary Policy Committee (MPC) meeting might be interesting, and they are. Instead of two votes for a rate rise, there were three, with the Bank's chief economist, Spencer Dale, changing sides to support a quarter point increase. There left six who wanted to rates to stay the same.

A further twist was that the rate-riser in chief, Andrew Sentance, voted this time for a half point rise. With Adam Posen wanting even more quantitative easing to support the economy, we now have nine members of the committee and four different votes.

"Now I am six, I'm as clever as clever, so I think I'll be six now for ever and ever." That's what AA Milne wrote, but it's not what the financial markets expect.

The implication of last week's Inflation Report was that rate rises were coming this year - probably before the summer. On the basis of these minutes, some in the City are now expecting a rate rise as soon as next month.

Is that likely? The answer is it is certainly possible. According to the minutes:

"Most members agreed that the balance of risks to inflation in the medium term relative to the target had moved upwards in recent months and the case for withdrawing some of the current exceptionally accommodative monetary policy had consequently been strengthened."
"Most", in this context, probably means everyone except Adam Posen.

Spencer Dale's move is not a big surprise. He's been voicing concern about the distorting effect of super-low rates for well over a year. The debate that matters now is the debate among the four Bank officials on the MPC who didn't vote for a change in policy - Mervyn King, Charlie Bean, Paul Tucker, and Paul Fisher - along with the other external member, David Miles.

According to the minutes, they have different views on whether the upside risks to inflation are likely to materialise.

Adam Posen is clearly one who thinks the risks are limited, "given that the change in the near-term outlook could clearly be explained by reference to recent increases in energy, other commodity and world export prices".

He argued yesterday, in a combative speech on the subject, that there was not much evidence that inflation expectations had risen a long way from their long-term average. And even if you expect inflation to rise, that doesn't necessarily mean you will be able to extract a larger wage rise from your employer to compensate.

But the language of the minutes here is very reminiscent of Mervyn King's comments on the subject. He is probably also in the sub-group that is relatively further from a rate rise.

On the basis of his recent speeches on the subject, I would guess that David Miles was in this category as well, but we might hear more from him on that subject in a speech later today.

That leaves Charlie Bean, Paul Tucker and Paul Fisher as, possibly, the members who did not vote for a rate rise but think "the case for an increase has nevertheless grown in strength".

My sense is that any or all of them could vote for a rate rise in the next few months - with Deputy Governor Bean perhaps the most likely to jump.

But there is a word of warning in here for those who now expect a rate rise next month. The minutes make clear that the members who did not vote for a change in February would like to wait "to see indicators of how the economy performed at the start of the year" to help assess whether the fall in the fourth quarter was a blip, or the start of something more serious.

Two weeks ago, they did not think we could say for sure whether the slowdown had continued in 2011. As the minutes suggest, the evidence before them was mixed.

True, there have been strong signs of life in the business sector, but household confidence has fallen sharply.

Will they have a much clearer sense of what's going on with the recovery in two weeks' time, when they gather around the table again? Some will say so. But, absent a major upward revision to that fourth quarter number for GDP on Friday, it's hard to see what could substantially strengthen the hawks' case between now and 9 March.

If we don't see a big change in that GDP number on Friday, my hunch is that most, if not all, of the MPC six will want to see data for the first three months of 2011 before making a move.

You might think they would leave the serious debate until May, when they will not only have the new Inflation Report forecasts in front of them, but the first estimate for growth in the first quarter as well.

Clearly, the chances of a rate rise before then have risen on the basis of these minutes. But remember, two members would need to change their minds. That is far from a done deal. "Clever as clever" they may be, and they could be six on the MPC for a few months' yet.

Comments

Page 1 of 3

  • Comment number 1.

    okay I'm obviously not 'as clever as clever' - what an earth are you talking about? Who or what is the 6? I have read the article three times and the answer to this simple question is still not apparent to me.

  • Comment number 2.

    okay - I've worked it out now - there are 9 and 3 want a rate rise so 6 don't.

    Confused by the fact that actually the numbers break out as

    1 wants a rate rise of 0.5%
    2 want a 0.25% rise
    5 want no change
    1 wants an increase in QE.

  • Comment number 3.

    The MPC are becoming like Celebrities:
    http://www.mindfulmoney.co.uk/3408/investing-strategy/rate-rise-not-over-till-the-last-mpc-member-sings.html

    You have to look at the facts and then decide if rates should increase or not. The members seem to be celebrities now. Andrew Sentence is on all TV channels and newspapers calling for a rate rise, to the point of obsession.
    These guys are sticking there necks out in order to make a name for themselves whilst knowing full well that the others will vote for the rates to stay the same.
    We had a 1.1% growth in GDP last year at this time and the MPC voted 9/0 in favour of rates to stay the same. We have just had 0.5% contraction and they want a rate rise.
    If they are worried about inflation and are not gonna take into consideration anything else. Why have the MPC, Why not have computer that tracks inflation, inflation rises then interest rates rise and vice-veraa.
    Not over till the last MPC member sings!

  • Comment number 4.

    Re 1:
    The 6 are the members of the MPC who voted to keep the Bank of England Bank Rate at 0.5% for another month, though I'm not sure if that makes them clever or not - only time will tell.

  • Comment number 5.

    Perception is 90% of the rule with interest rates and this debate will make people a lot more cautious on spending money...

    Businesses can reduce costs by closing divisions or sacking people . The guy in the street has got to eat and can't make his council tax redundant.

    I think consumer confidence will be very low for the coming months.

    The good news its at least the government is making progress on the deficit, BG poor fiscal management will be a case study for years ...

  • Comment number 6.

    Surely the closer it gets to 5-4 particularly if the 5 and the 4 are further split then the conclusion has to be that the MPC don't really know what to do/what they are doing?

    Perhaps at that point they should form a coalition with the Coalition?

  • Comment number 7.

    Time to end this farce of the monthly MPC show. It is would be more relevant for the economy to have a monthly X Factor style vote on interest rates. Why do we allow governments to distance themselves from decision making on monetary policy - the government does not do it on public expenditure. And why is policy confined to fiddling or rather dithering on interest rates as if they are the only thing that matters in the management of the economy.
    Raising rates by a few base points or so ignoring all the will-they-wont-they chattering is hardly going to affect inflation. Plus 3 or 4% may do it but by tanking the economy for sure. The MPC should go and the government should take and exercise responsibility for economic management.

  • Comment number 8.

    All this does is remind us how big a mess we are in and who got us there/made it worse.

    There is a quick and easy way to tackle inflation via transport taxes.

    The rich and high earners will howl but that is where they should place the burden of the replacement tax. They can console themselves with the thought that it will keep their mortgage rates low and the 20mpg motors they run will not cost them so much.

    Longer term we will have to go back to sensible interest rates for all sorts of reasons:
    1. Ending the age of funny money
    2. Dealing with the growing pensions crisis
    3. Suppressing the housing market until supply of new builds can be geared up to reduce prices in a gradual way
    4. Encouraging saving and building for the future
    5. Discouraging consumption via unsecured debt
    6. Protect the currency and prevent imported inflation

  • Comment number 9.

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

  • Comment number 10.

    If you believe that the way to cut inflation is to increase interest rates then only the 0.5% increase guy is being even vaguely realistic.

    Mortgage rates used to be closely linked to Libor (3 month mainly) - goodness knows what they are related to just now (or indeed what business loans are related to). As such there is a possibility that banks simply suck up the increase by increasing savings rates but not mortgage rates. Its not as if mortgage demand out there is booming and I envisage there is plenty of fat in their current margins (if not in their current capital positions).

    Therefore until the base rate gets back into the realms of normality (2%?) and starts to properly hit mortgage costs then not sure how much will feed through to inflation. That is unless its all about perception and confidence and then an increase in base rates may have the desired effect, but at what cost to the fragile state of the economy.

    And all Mervyn wants to do is get rid of his writers cramp....

  • Comment number 11.

    So 3 of the MPC are mindful of the original and primary role of the MPC - to control inflation at 2% - whilst the other six have seemingly decided to widen their remit to include all aspects of monetary and fiscal policy.

    A de facto economic policy making unit which is neither elected nor, judging by their arbitrary change to their original terms of reference, accountable.

    So who exactly is running our economy, the Treasury or the MPC?

  • Comment number 12.

    re #2
    Steffie was being a bit vague but it could also be reference to the fact there are nine on the MPC, three are BoE, six are independent advisors. They were an independent short recently but have added another bod to fill the chair.

  • Comment number 13.

    3. At 1:18pm on 23 Feb 2011, Marco82 wrote:

    Not over till the last MPC member sings
    ------------------------------------------
    Meanwhile quite a lot of people are squealing ...

  • Comment number 14.

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

  • Comment number 15.

    I do not understand how an interest rate rise will reduce/control the rate of inflation when it has been caused by increased duty on fuel, an increase in VAT imposed by the government, world commodity prices. Wages are already at a standstill or being reduced, and as many families are already finding it difficult to make ends meet and with the thousands that will face redundancy in the next twelve months, surely an interest rate rise will just cause the number of reposessions to increase, the economy to stagnate further pitching us into another recession. Putting up mortage and loan repayment rates will only benefit the financial institutions bottom line. I cannot see the link to the rate of inflation as an increase in loan rate will not affect fuel prices, the level of VAT, or the level of commodity prices. As distribution costs will be increased prices will rise causing an opposite affect as that intended for the rate of inflation. What situation am I missing ???

  • Comment number 16.

    Has anyone else noticed that there are also 6 sides to dice?

    I say let the octopus have a go - I realise he's dead, but even a dead octopus has a better chance of solving this impossible conundrum than the MPC.

    I can't say I'd volunteer for a job on the board at the moment - they're all dead men (and women) walking....I mean someone will have to take the blame eventually..

  • Comment number 17.

    In anticipation of the effect of the forthcoming government spending cuts starting to ripple through the economy (We ain't seen nothing yet!), it would be fool-hardy to think that even a 1% rise in interest rates would curb inflation. World events are having a far greater impact on the costs and supply of goods and energy. This rise would give our friends, the banks, reason to top up their ill-gotten gains further. I doubt if an increase in your monthly mortgage bill along with eroding house prices would go down well especially with those who have recently climbed onto the domestic property ladder. I also doubt how much benefit savers would actually enjoy as the banks are somewhat adverse to parting with any additional sources of income. Inflation increases will be triggered more by supply and demand than anything else and if we can keep our nerve and starve a little we might just end up with healthier waist-lines and pockets, in the long run.
    As regards using computers try to manage and control inflation, as suggested on this blog, we would end up becoming slaves to some economic whizz-kid's algorithm biased in the favour of the few. The tax-payers are already being caned enough by our adoption of technology driven by those wonderful idiots who think they know best.
    When they can role six sixes consistently is the time when the taxpayer should heed their call. I certainly, don't want us to join the Irish who have been totally shafted by all - Europe, the banking system, myopic governments, milk and honey, ... The Knave is impressed with all the short-termism that abounds.

  • Comment number 18.

    I think TheGingerF (post 10) has a good point worth exploring further, sometime soon please.
    What is actually linked to the Bank Rate, and what is not?
    What effect do each of these has economically and socially?
    Surely that would be a good starting point in a discussion about the relative merits of a rate increase. Then you could get down to the nitty gritty of balancing the risks of any change against the potential benefits.
    And just to put my stake in the sand - even though I financially benefit from a low rate (higher tracker mortgage than savings value) I think we are due a change, but probably won't get it until after the budget and the Q1 figures are out. My money's on +0.25% in May at the earliest.

  • Comment number 19.

    "Now we are six" is the title of Stephanie Flanders' blog.

    OMG - now the most recent financial news is that tax-payer owned bailed out banks may be purchased by the same foreign investors who lent the last government the money to bail out those same banks??!! aaargh!

  • Comment number 20.

    6. At 1:39pm on 23 Feb 2011, GRIMUPNORTH77 wrote:
    Surely the closer it gets to 5-4 particularly if the 5 and the 4 are further split then the conclusion has to be that the MPC don't really know what to do/what they are doing?


    3 out of 9 of them are complete Noddys

  • Comment number 21.

    The MPC are over.

    None of them (then in post) called the bubble - that they caused.

    None of them are fit for the posts that they hold.

    These men are guilty of conspiring with the Governor to wreck the Nation - fist they destroy the price of money and by so doing create a private debt bubble that will take thirty years to unwind - now they are determined to wreck the idea of prudential saving (and pensions).

    Let me remind everyone that the current interest rates is one fifth of the lowest previous rate EVER in recorded time - it has been in place for nearly two years and the ONLY beneficiaries have been investment bankers (where they all want 'retirement' jobs!)

    As soon as these dangerous men go the better.

  • Comment number 22.

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

  • Comment number 23.

    10. At 1:46pm on 23 Feb 2011, TheGingerF wrote:

    "Mortgage rates used to be closely linked to Libor (3 month mainly) - goodness knows what they are related to just now "

    Yes, that is another economic 'crime' at the door of the MPC. They have destroyed the monetary price control held by the Bank of England - now nobody takes much notice of them for borrowing rates - it is only the widow's mite that gets their zero savings rate.

  • Comment number 24.

    Inflation has several advantages for the government.It reduces the value of government debt and deficit,at the same time leads to a fall in wages and salaries to the advantage of employers in the public and private sectors.

    However inflation is a two edged sword.While there are short time gains from a loss of purchasing power by consumers and businesses,this soon impacts on aggregate demand and through that to investment.

    The government is leaning heavily on export led demand to compensate for the fall in public sector wages and investment.While exports have recovered strongly since the recession,they are purchased in a devalued currency which makes our imports more expensive adding to inflation.

    The overall effect of inflation is to transfer wealth and income from the public to the government.A devalued currency transfers wealth and income to our rivals and competitors making us poorer.

    A rise in interest rates would reverse the effects of a devalued currency. By increasing the international value of the pound it would make exports dearer,imports less expensive.

    The MPC must make a fine judgement.Take out too much purchasing power from the economy through inflation and government cuts,order books shrink,unemployment rises and government debt and deficit swells.Too little and the result would be similar unless the government has a clear strategy for growth which ar present they do not.

  • Comment number 25.

    PS See today's Steve Bell cartoon

    http://www.guardian.co.uk/commentisfree/cartoon/2011/feb/23/steve-bell-if-mervyn-king

    if the moderators allow it (maybe not!) - note Steve Bell's final cartoon frame "You're not the Governor of the Bank of England. You're Dave's fat pet!"

  • Comment number 26.

    ...somebody needs to raise something soon, I don't know if it's rates, our pants or the drawbridge - but they had better get a move on....

    http://www.bbc.co.uk/news/business/market_data/commodities/143908/intraday.stm

    Ouch.

    Goldman predicted an oil price of $110 a barrel - before this crisis hit (i.e. 'normal' price rises due to economic imbalances) - I'm guessing the "chief oil predictor" at Goldman has just taken the rest of the day off!

  • Comment number 27.

    #8. At 1:41pm on 23 Feb 2011, Up2snuff wrote:

    "There is a quick and easy way to tackle inflation via transport taxes."

    I've always rather liked transport taxes not for themselves but as a way of reducing congestion. If employers were taxed on the distance their staff commuted then there would be a real incentive to ensure that staff lived near their place of employment and hence work to minimise congestion. It is a simple tax to implement - employers already have to know the post code of each employee and of course they know their own this gives a distances travelled and hence away to compute the tax. with no new forms or returns required.

    Some of you may be old enough to remember being forced to relocate near ones job and having to live within thirty minutes commuting distance.

  • Comment number 28.

    "Now we are six".

    Let's all now be clear about the new committee - therefore the new nature of the Bank of England under this current government.

    The BoE is no longer independent. Andrew Sentence, and chums are the new Tory tzars.

    Just admit it guys - the BoE staff are fed up with endless and late night meetings full of lawyers offering best redundancy/pension plans with 'privacy clauses'? They have given in because they, ultimately, have no choice?

    Just a few thoughts.

  • Comment number 29.

    Now let's get this straight - does B of E / MPC rate policy fall under the 'Nudge Strategy', or the 'Big Society Initiative'?

  • Comment number 30.

    As the government remains the primary borrower from the banks this becomes a tax hike without being called a tax. The issue is not really about the rates but rather about providing banks with higher income. The non-recovery recovery is of little concern to the investors and the taxpayer will simply pay more for the borrowing of the government. More service cuts to meet the demands of the banks. The same people who turned their heads while the criminal lending was in play.

  • Comment number 31.

    #15. Mike Easy wrote:

    "I do not understand how an interest rate rise will...."

    see a previous blog.... he is a mechanism interest rates up = sterling up = more US dollars for a pound = cheaper oil and other imports etc....

  • Comment number 32.

    the 3 so called experts who want a rise need to live in the real world the housing market is on its knees, only 29,000 mortgages approved in jan banks not lending to small businesses 50,000 nhs staff to loose their jobs, countless councils cuting staff unemployment on the up across the board. everybody knows that china is causing the rise in price of everything from steel to wheat due to its booming economy & then we have opec cuting production to boost price of oil, our economy is on its knees so a rate rise will do nothing about inflation as this is being affected by global influences, only savers benefit, i bet these 3 have massive savings,whilst most of us are living from payday to payday if your lucky enough to have one?

  • Comment number 33.

    #19. corum-populo-2010 wrote:

    "Now we are six" is the title of Stephanie Flanders' blog.

    implications = a six year old could have done a better job!

  • Comment number 34.

    It is scary to think that some of those in charge of monetary policy might actually believe that it is possible to print an extra £200 billion plus increase VAT then fix the resulting inflation by increasing the Bank Rate. But then these are bank directors, such as those who created the mess in the first place. Isn't that like asking a paedophile to babysit your children? And why are there no women on the committee?

  • Comment number 35.

    11. At 1:48pm on 23 Feb 2011, ciderwithdozy wrote:
    So who exactly is running our economy, the Treasury or the MPC?
    ---------------------------------------------------------------
    Or the First Lord of the Treasury and his Chancellor of the Exchequer.

    Oh, Dave's off playing salesman. GO is probably fiddling in his Meccano box: his colleague Lord Oakeshott quit in a huff the other day saying that the Treasury is broke. Broke as in broken, not broke as in skint - which it is mostly anyway - except not after getting all that January tax dosh. GO will be hunting for the screwdriver and the little spanner and a bit with the right holes in it to bolt the Treasury back together and get it running again.

    So now, in the administration of this sceptred Isle we have:

    Home Office - not fit for purpose
    Education - expensively bureacratic
    Treasury - useless at negotiating
    Defence - run by incompetents and wastrels
    Add:
    Business {aka DTI} - judged by most to be surplus, not really needed
    Health - undergoing yet another upheaval, the nth in forty years

    That's the State we're in ...

  • Comment number 36.

    Rising rates any time soon won't bring inflation down to target levels.

    The 2 main drivers behind inflation are the VAT rise and global oil prices. The year on year impact of the VAT rise will drop out by the end of this year thus bringing headline inflation down with it and rises interest rates will have no effect whatsoever on global oil prices.

    and to the poster above who questioned how mortgage rates are set; they're normally based on 2Y swap rates. previously low rates c2006(near bank of england overnight rates) were because the swap curve was flat/inverted. now its rather steep so they charge more for lending you so much for 30years.

  • Comment number 37.

    I thought there one and only remit was to control inflation ???

    As they are unable to do that it seems then they are all surplus to requirements.

  • Comment number 38.

    I had understood that the job of the MPC was to control inflation . If that is the case then a rate rise is long overdue. What they are, in fact, arguing about is the health of the economy which should be the responsibility of the Chancellor of the Exchequer. Maybe they should be replaced with someone with some idea of what their mandate is!

  • Comment number 39.

    26 WOTW

    I bet whoever at Goldman predicted oil at US$110 a barrel spent the afternoon liquidating their position just like they did last time, selling their over-priced futures off to the mugs who believe them.

    If you are stupid enough to speculate and foolish enough to think you can gain through speculation (I recommend neither activity), then don't follow Goldman's predictions.

    The job title `Market Manager' can have many job and task descriptions.

  • Comment number 40.

    Events of recent years show that there is little point in taking economic forecasting seriously. Nobody seems to know when or what is going to happen. The only sure things are that as long as we remain in a liberal free market economy these crises will continue to happen, and the biggest most reckless gamblers will get away with it.

  • Comment number 41.

    #38. recrec wrote:

    "Maybe they should be replaced with someone with some idea of what their mandate is!"

    It is clearly set out in The Bank of England Act (control inflation) - except they obviously can't read!

  • Comment number 42.

    Mike Easy (2pm) has it spot on. I really don't understand why these supposedly intelligent and educated economists don't get it. Raising interest rates would be very bad for most people, who are already cutting non-essential purchases due to rising costs and frozen wages, without the 'stick' of a rate rise. The counter argument that it would be good for savers has little weight: I doubt very much that the banks will raise savings rates until interest rates have gone up by a considerable amount.

  • Comment number 43.

    #35. Up2snuff wrote:

    "So now, in the administration of this sceptred Isle..."

    Don't you mean 'septic'!

  • Comment number 44.

    Only acceptable if the rise is applied to NEW lending only.

    When people are struggling with their existing commitments, costs going up and wages - even if you are still getting any - not, any increase in loan repayments is no more than blatent profiteering.

    Why should the financial industry be the only group not to suffer?

    Things are hard: NOBODY will get just as much as they would like - yet the financial industry - the root cause of the problem - just glides on, taking without return.

  • Comment number 45.

    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. Indeed raising interest rates, far from immediately solving the inflation problem, will have the effect of further cooling the already virtually stagnant growth in the economy.

    Higher rates on savings are wanted, as much as anything, to protect against inflation. In a growing economy there might be some justification for this, as returns would be made on investments. However inflation is currently the result of external pressures, world food prices,oil & other commodity prices plus the effects of government policy such as VAT rates...............Growth is stagnant, there is little investment either from the banks or the government as a result of their 'austerity' drive, which most ordinary people, through no fault of their own, are suffering from. There is no justification in making mortgages or loans more expensive, whilst simultaneously making the storing away of money more attractive. It needs to be circulated to generate some heat in the economy.

    More should be done to encourage those with the money to invest, to do so in the wider economy, not ferret it away in a bank!

    A BofE 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.

  • Comment number 46.

    It has been said several times above, how will interest rates affect VAT, Fuel and Food prices which are the “temporary” causes of the inflation?
    The answer is simple they won’t! So BBC pundits please stop trying to make it sound like we are on the brink of a major rate rise when clearly we are not.
    If you want cheaper commodity prices simply stop the City of London from making inflationary profits on sales of as yet not produced things, simply selling them in circles and making a profit as it goes around .... oh and then the merry-go-round stops and we consumers have to pay the now inflated price. I think that’s how it works!!! So well done City, you cause both a recession and inflation you are just so clever!

  • Comment number 47.

    Who actually benefits from 0.5% base rate? Well, tracker mortgage holders for sure plus all mortgage holders to some extent - not savers that's for sure! Personal loans are still at 7 - 10% and only for those with a good credit history. My daughter and partner have just had their first mortgage agreed but at around 6% over 35 years! Credit card rates are 15% ish and store cards charge considerably more - what's going on? Faced with a question like this I find it best to adopt a scientific approach and return to 'first principles'. Imagine I was going to lend any of you guys on this blog £100 over one year - how much would I want back from you at the end of the year? Well for a start with inflation at 5% I would want £105 back just to break even, then I'd want some compensation for not being able to use that £100 myself for a year. If I was lending all of you £100 each (as is the case in the real world) then I'd also want a premium to cover the risk of some of you defaulting. As a ball park figure, then, I'd want around 10% interest to make it worthwhile. If I then had to attract funds from savers to be able to lend to you all in the first place I'd have to pay them at least a couple of % more, say 12%, for them to want to 'lend' me their money. I repeat, WHAT'S GOING ON??

  • Comment number 48.

    #45. History Repeats précis: never put up interest rates.

    You clearly haven't thought things through very well. If money remains free then there is no incentive to invest in anything as the return for investing in nothing.

    Money has to return to having a positive cost to use and a positive return fro holding. If this does not happen you can kiss goodbye to your pension!

    Further, on a technical point: economics is mediated through the medium of money - all policy, such as fiscal or macroeconomic policy is dependent of money having a rational positive price or they do not work.

    Your recipe is one of rapid total collapse.

  • Comment number 49.

    PS to #48

    History Repeats wrote:

    "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."

    Cods-wallop!

  • Comment number 50.

    Sterling devalued = cost of everything we import (i.e. almost everything) up = inflation
    Cost of oil up = inflation
    Cost of food up = inflation
    BoE printing money (QE) = inflation

    Yet, one member of MPC will "not be tyrannised by popular fears or spectres of (inflation) expectations."

    Well, I'm very pleased to hear his opinion, but would he be so kind as to explain it?

  • Comment number 51.

    All this user's posts have been removed.Why?

  • Comment number 52.

    #15 Mike Easy. Sadly Mike things are not easy. Raising interest rates will adversely impact on a lot of people. People will be thrown out of their houses and things like that. Not good, but not as bad as the alternative.

    Keeping interest rates at zero and printing up a lot of funny money both overtly and covertly has some interesting effects, effects you can see throughout North Africa and most probably coming soon to the House of Saud.

    All this funny money has to go somewhere - and so it is going into blowing commodity price bubbles. Where else can it go? It will not go into real assets because those in the know understand that one way or another asset prices must collapse.

    So large amounts of people (something like 45 million in the past year) are tipped into absolute poverty i.e. they cannnot afford to eat. When you think about it threatening to shoot starving people is not much of a deterrent.

    Over the years our enlightened foreign policy has propped up a variety of despotic regimes who have looked after themselves to the exclusion of their general populations. We have done this because they have control over a lot of oil which they sell to us quite cheaply.

    Now the game is up try and guess the likely effect on oil prices. Imagine if you were a commodity speculator, what could look more attractive than oil. So oil prices are given a turbo charged boost to the moon.

    This leads to domestic inflation. If you raise interest rates people are going to be really screwed because they have to contend with high oil prices and higher debt repayments. Wages cannot respond because organised labor has been smashed. This toxic combination leads to asset price falls which drives more money into commodities. At some point commodity prices will exit the gravitational field.

    So in order that people can continue their love in with house price levels a lot of people are going to starve.

    Is it not fortunate that in the UK there is such a strong supermarket presence with their price promises and customer services mantras, otherwise we too could find it difficult to afford food at some point in the reasonably near future.

  • Comment number 53.

    @30 I agree

    the markets have already priced in the increase and most of the clever people who called the whole thing right expect a .25.% increase with a further .5% at the end of the year.


    This is not being done to help the prudent or the saver, they are being sacrificed
    It is also not being done in an attempt to control inflation they are trying to inflate as much as they can away

    The inflation is not being caused by us all going out and buying stuff
    IT is not all down to the oil but we are importing the inflation from the USA and Asia , the US because it is the world currency and Asia because they are buying up everything and anything they can.
    The hedge funds and the city whiz kids seeing this are jumping on the bandwagon to take a nice cut of the action in price increases whilst looking for maximum return

    They wont put rates up more than mentioned because:

    it will impact on those who have huge mortgages and are using the low interest rates to live

    it will impact on those businesses who held assets sold them off for short term who trade on just in time payment and having large debt due to mergers etc

    It will impact commercial property holders g on interest only deals if they want to try and put their rent up more shops would pull the plug

    The rates are being put up to allow the banks to cream in a bit more because whilst posting profits and paying themselves bonuses they still sit on a shed lot of debt that is hidden and have not due to the Basel rules marked their assets to market

    they are trying to keep all the plates spinning some are more wobbly than others but in order to keep their game running they need to keep spinning

    all we really need is for the game to change so we are not spinning the plates all the time for the benefit of the few.

  • Comment number 54.

    42. At 3:15pm on 23 Feb 2011, John wrote:
    Mike Easy (2pm) has it spot on. I really don't understand why these supposedly intelligent and educated economists don't get it.
    ================================================

    Because their remit is price stability and not managing the overall health of the economy.

  • Comment number 55.

    #45 History Repeats. Inflation is NOT the result of external pressures. Commodity prices are rising because of the free money policy being pursued by London and Washington, and the wholly predictible uses to which that free money is being put to.

  • Comment number 56.

    45. At 3:20pm on 23 Feb 2011, History Repeats wrote:
    More should be done to encourage those with the money to invest, to do so in the wider economy, not ferret it away in a bank!

    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.
    ===============================================

    A zero nominal rate does not matter, mate. REAL interest rates are already well in the NEGATIVE and yet this does not encourage any investment whatsoever. There is nothing worth investing in other than commodity futures.


    Growth is stagnant, there is little investment either from the banks or the government as a result of their 'austerity' drive, which most ordinary people, through no fault of their own, are suffering from. There is no justification in making mortgages or loans more expensive, whilst simultaneously making the storing away of money more attractive.
    ================================================

    The answer is obvious. Reverse the austerity drive and raise rates.

  • Comment number 57.

    The MPC have made themselves, and the BoE base rate, irrelevant to the rest of us.
    What we should be looking for is a way to freeze or reduce property prices over an extended period, lets start with 5 years. This implies a major increase in supply (build more) and a reduction in demand - for the latter we could start by limiting the financial gains people & organisations make from dealing in property and land. Putting a lid on the growth of the largest single cost for the UK economy would seem to be a not unreasonable step.

  • Comment number 58.

    #9 mose

    Thank you Mose, you're a real friend, not like some. Ouch! Those damned thistles.

    PS Middle Class and also quite well read including all AA Milne classics whilst I was young - books I have also read to my children.

    Perhaps I am rather gloomy when posting on here about the current financial position however from your very brief blog poked mainly in my direction it is difficult to establish your own views - perhaps another day you might write something about the blog itself.

  • Comment number 59.

    47. At 3:41pm on 23 Feb 2011, morkandmindy wrote:
    I repeat, WHAT'S GOING ON??
    ===============================================

    Your return to first principles is spot on and demonstrates why the cost of money should be much higher.

    The Bank is holding it down beasically to do otherwise would likely cause a massive mortgage default as all the squeals of pain on this blog aptly reflect. They don't want to do this not from some philanthropic reason or because it's their remit but because the massive default and subsequent drop in property values will cause the UK banks to finally become insolvent. The price to pay for this is inflation for society as a whole. As writings has said they are caught in an impossible bind.

  • Comment number 60.

    Is it just me, or do the British econmic decision-makers have more waffles than a breakfast restaurant?
    UK monetary authorities are apparently shifting towards a possible tightening of monetary policy within the near future. Vote moved
    - to 3-6
    - from 2-7 (the previous month).
    Mr. Sentance & Mr. Weale were joined by Mr. Dale (not Charles Bean) which explains the change from 2 to 3. Regardless, the momentum for tightening the monetary policy seems to be ever-so-slowly moving forward. The BOE concluded that "the case for an increase had grown in strength."
    The yea-sayers contended: that the the upside risks to the medium-term inflation and the possibility that inflation expectations would move up outweighed the downside risks to inflation associated with uncertainty about the strength of the recovery and the possibility of persistent spare capacity.
    Honestly, that's as close as I can remember about what they said, and if you can explain that to me, I'd thank you very much.
    Despite the modest change in yea-sayers from 2 to 3, I doubt that the BoE will increase rates any time soon (like before Q2 of this year).
    Why?
    Because there is as much uncertainly, expressed as waffling, in the BoE as there is in the MPC itself. Most MPC members want to wait to see how the economy performs in early 2011.
    Eonomic data over the next several weeks could prove critical to determining the probability of a rate hike. UK decision-makers remain uncertain whether the contraction in Q4 GDP of last year was a one off event or the start of a more serious economic slowdown.
    This means they are unlikely to commit to a rate hike unless they see some clear signs of pick up in UK economic activity.
    So how do I interpret all this:
    I do not expect the UK economy to big up to any great extent - certainly not enough to squash the wafflers. So, does this mean that interest rates should remain unchanged? If I had the power, there are two things that I would:
    a) wipe my mind clear about anymore QE. What did the last QE get you? So whoever it was that suggested that should be politely shut up.
    b) increase interest rates to provide incentive for lending.

  • Comment number 61.

    It should be noted that £Sterling has gone up against other currencies in the expectation that the BoE base rate will go up very soon. Therefore inflation should already be coming down.
    If not, then raising the interest rates is not the correct mechanism to curb inflation.
    The speculators of commodities have driven food prices up and stoked the current turmoil in North Africa and Middle East. This has now led to uncertainty in oil supply, driving the oil price higher and further adding to inflation.

  • Comment number 62.

    It appears that Stephanie is having a long lie down in a darkened room.

    Mr Peston, on the other hand, told us all that the MPC's days are numbered.

    http://www.bbc.co.uk/blogs/thereporters/robertpeston/2011/02/the_fpc_running_the_financial.html
    ~~~~~~~~~~~~~~~
    @15, I have continually asked the same question. Nobody answered.

    Google "transmission mechanism" and it gets a little clearer.

    FDD expressed his conviction yesterday that economics is a human endeavour, and is therefore not subject to any mechanistic laws of cause and effect.

    Therefore, there is no "rational" link between BoE base rate and anything else. Only what people believe. The real "transmission mechanism" is social psychology. Which is the main reason for the existence of "the media".

    So, BBC news items may make us believe that a BoE base rate rise will impact on x,y, or z. But what they don't often say is that it will only do so if people behave in a certain way. Past performance is not an indicator of future returns. (As they like to say in the small print.)

    I think I would like to start a campaign to explain that BoE base rate does not have to affect mortgage rate. And to appeal to the masses that only long overdue government legislation can curb the activities of the banks.

    But it would be a still small voice on a blog, versus those with a platform to "inform, educate and entertain", who's masters are hoping to blame "inflation" for the fact that many people are about to lose their homes.

    C'est la vie, non?

  • Comment number 63.

    Not so much `Now we are six' but more `The House at Pooh Corner'.

  • Comment number 64.

    #62 stillpuzzled,

    Now aren't the musings of the MPC a classic example! Base Rate no longer has any relevance to any interest rate that effects individuals or business. A rise would have little to no effect upon inflation irrespective of the measure (CPI, RPI or household).

    C'est la vie, OUI

  • Comment number 65.

    When interest rates were lowered to the "emergency level" of 0.5%, inflation was about 2% - giving a real rate of -1.5%, given the higher rate of inflation, real interest rates are now -3.5% or more.

    The effect of this is to give an even looser monetary policy. The BoE should raise interest rates up to 2% over the next 18 months - still massively expansionary but at least gives the bank an chance to get back to normal - if not then there wont be a high enough peak in interest rates in this economic cycle that will allow them to cut again when needed in 3 years or so when the cycle turns down again.

    Inflation will come down over the next year, although NAO should produce a sepatate inflation figure for those in each decile of income, those who spend a large portion of their income on food will at the moment have a higher inflation rate than the higher income levels who spend their money on ipads, and iphones which are falling in price.

  • Comment number 66.

    Here is another problem if there is an increase in base:

    I have already written a letter of complaint that my mortgage traditionally followed the base rate by 2% and that I accepted that my rate went up or down. When the base fell bellow 2% my mortgage didn’t follow and stayed at 4%. I was then informed that my mortgage in fact followed the ‘labor’ but again this cannot be true because when it dropped below 2% my mortgage didn’t drop.

    There as now been an increase in base by 0.25% and my mortgage as risen by 0.25%. It is my understanding that complaints levelled against the Halifax have been upheld and that they are having to credit Mortgages by about 1.5% over the past 2 years. If this does not represent a fare and equitable situation if I am not awarded the same privilege.

    The letter is ready with only the details to be added. At the moment it seems that the Halifax is the only one out on a limb but by increasing the base they will not be the only mortgage provider to suffer. It is estimated that it will cost Halifax £0.5bln.

    What a tangled web them banks have woven, and slowly the sticky brown stuff is hitting the fan. As Status Quo said, Down Down Deeper and Down

  • Comment number 67.

    There is a lot of debate over what might happen and this will only be increased by the fact that the Monetary Policy Committee is now split four ways. Rather than trying to guess what they will do is it not more logical to look at what they should do?
    One piece of analysis I have seen points this out.
    "In pure economic terms it is the increases in nominal demand and consumption which are yet another clear signal. If they are both rising at above 6% and economic growth is slowing then there is a gap between the two which is likely to be filled by inflation. If we look again at the minutes from the Monetary Policy Committee please consider what did happen pre 2007 and read this quote from them………..
    These were both above their average growth rates for the decade before 2007."
    http://t.co/r9L8Riq
    I think the point is well made. If nominal demand is growing as quickly as it is but actual growth is sluggish we will see inflation fill the gap.

  • Comment number 68.

    I'm sorry but I can't help but laugh a little. John-from-Hendon has, with some justification, Whinnie-the-Pooh-Poohed all over this.

    So, more to the point, how will anything the MPC do affect the price of that most crucial commodity, honey? Well, not much. Owing to last year's terrible summer the price of English honey has shot up - £7 a jar in some places; though you might get it for £3.50 at a country garden gate.

    Now if Christopher Robin was on the MPC I'm sure, even at the risk of raising mortgage payments on the House at Pooh Corner, he'd press for a rate rise because the resultant stronger pound would, much to the satisfaction of Pooh Bear - who, incidentally, has his nose jammed in his last pot English Balsam Flower honey - make all that imported honey from Argentina cheaper...Not much, though, because, by all accounts, there's a Whinnie-the-Panda-Pooh Bear who has recently developed a taste for honey and is pushing up its world price with his insatiable appetite for the sweet stuff.

    Then there's Whinnie-the-Commodity Trader-Pooh Bear market to consider. I mean, have you seen the price of honey futures? Very disconcerting. Time for another game of poohsticks.

  • Comment number 69.

    To answer watriler.
    We cannot trust politicans to make decisions like Interest rates because they make short term decisions based on getting re-elected.
    Just as we saw with the nationalised companies in 1970s constant political interference for short term political reasons destroyed effective management and investment.
    We saw a recent reminder of this with the Northern Ireland water board and the mess with water leaks and failures over the cold weather.
    This is why we need something like OBR to stop pre-election splurges on public spending or tax cuts to buy votes.
    We saw this again when Brown could not bring himself to say the word "cuts" before the last election although it was plain we needed to deal with the growing deficit.

  • Comment number 70.

    I am so glad to see that the members of the MPC completely agree with each other about their role in managing inflation and are all following identical strategies with their voting.

    They are all absolutely right that it doen't matter a hoot which way they vote because the BoE base rate is completely irrelevant to controlling inflation, so individualy voting for contradictory policies makes complete sense!

    Making marginal changes in the UK base lending rate in a globalised financial market without controls on money moving into or out of the UK means that it is rather like being in a tank and opening or closing a valve to another tank, when there is a hole the size of an elephant in the tank wall - your ability to control the water level is zero.

    The link between base rate and mortgage costs is very tenuous now, with such a spread between 0.5% base and 5% APR, whilst small business lending is a whole different ball game with all sorts of additional fee costs and collateral requirements.

    Indeed as others have pointed out, MOST of the inflationary factors are either government inflicted or the result of imported price rises, not overheating of the domestic economy.

    There is even the possibility of creating domestic inflationary pressure by raising interest rates simply because a 0.5% increase in base rates on an esisting mortgage rate of 4% translates into a probable cost rise of 10% - and this is bound to fuel wage demands where people can demand them!

    Let's go back to the Greek Oracle and hallucinating Ephors, cockerel entrails or even reading tea leaves to fortell inflation and what we should do about it - these at least have the legitimacy of being out and out superstitions rather than collective delusions.

  • Comment number 71.

    Ms Flanders on the ball as usual.

    I think if I knew how much derivatives money was backing low interest rates, I'd keep them down too.
    The question we must ask ourselves is, why on earth has mad banker punting been allowed to continue unchecked?
    Like Bernanke and Trichet, Merv knows the score. Tne UXB here is not the economy - it's the interest rates derivatives sector.
    Google the Wordpress slog.

  • Comment number 72.

    Would someone please explain why an interest rate rise, which will in effect increase the cost of living, will actually cause the rate of inflation to fall?

    The interest rates currently charged by the banks have never reflected the currently low level of bank rate, and an interest rate rise will give them an excuse to raise them even higher. The rise in the rate of inflation has been deliberately increased by government actions (eg the VAT tax rise) - rather than raise interest rates, surely it would be better to cut the level of VAT.

  • Comment number 73.

    All this user's posts have been removed.Why?

  • Comment number 74.

    The idea that a rate hike can help curb inflation is ridiculous. Are we in an expansion cycle fueled by credit? If that were the case increasing interest rates would work. In the present circumstances? Why is there this insistence with hiking the rates? It has to be for some other reason, let's assume it. Presently with higher taxes, higher fuel prices less available income fro families, are we seeking to increase repossessions?

  • Comment number 75.

    #62 StillPuzzled

    "I think I would like to start a campaign to explain that BoE base rate does not have to affect mortgage rate. And to appeal to the masses that only long overdue government legislation can curb the activities of the banks."

    Happy to back you up on that point.

  • Comment number 76.

    The BoE won't put up rates here until rates go up in Europe, that is what they are waiting for. I think that whatever happens with inflation the BoE will maintain the half % difference between the Pound and the Euro for years.

  • Comment number 77.

    At 3:43pm on 23 Feb 2011, John_from_Hendon wrote:
    PS to #48

    History Repeats wrote:

    "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."

    Cods-wallop!
    ............................

    A reasoned argument I see!

    Why should savers expect a return for, in effect, placing their money under a particularly secure mattress?

    Investment carries risk to capital, but offers potentially significant returns comensurate with that risk. Saving is about protecting capital accumulated, but whether under the mattress or effectively locked in a bank vault (for which the banks should expect payment rather than paying interest),the value of that capital will be eroded by inflation.

  • Comment number 78.

    All this user's posts have been removed.Why?

  • Comment number 79.

    re #48
    You make a point, there.

    Also, if money is not valued, people will let it slip away.

    And, debasing one's currency is as bad as debasing one's nation, monarch and flag.

  • Comment number 80.

    They must not rise rates! They will destroy the value of billions of assets held by the rich!

    Who loses the most from asset devaluations, is it the asset-less poor who have negative equity, or the rich whose stock portfolios dive?

    This is after all what GenBen is printing like mad in the USA. Would want Warren Buffet to die with a single billion digit worth now would we.

  • Comment number 81.

    Prediction - interest rates aint going up anytime soon. Austerity and rising interest rates don't mix whereas austerity and rising inflation do. Besides if we're all going to suffer anyway whatever happens - what's the hurry.

  • Comment number 82.

    14. At 1:59pm on 23 Feb 2011, corum-populo-2010 wrote:
    "Now we are six" is the title of Stephanie Flanders blog.

    Well, the Bank of England, is the new home of the 'parachuted in' Andrew Sentence? A kind of 'mandelson infusion' that operates outside and changes within that the current government can't do legally or openly?

    Andrew Sentence is the new creep on the block whose agenda is to replace the BoE current committee with his Tory master's friends.

    If interest rates do rise, as they always do under a Tory administration, will that improve savings rates - or simply give banks higher lending rates?
    ------------------------------------------------------------------------
    A definite LOL-ly on a grim day here! Ta!

    I would have thought that the spreads on borrowing/saving cannot get any bigger. There are rumours of 46x from a lender somewhere (bank, not dodgy pay-day loan co.) and a credit card co. is said to be nudging 60x on one of its cards.

    However, in a well known High St ex B.Soc. a 15x multiple is available on unsecured lending up to £7,500.

    Just doing their bit to keep the consumer society consuming ...

  • Comment number 83.

    #77 NoNoNumpty.

    I've always wondered what divine right savers have to interest on their cash, after all interest is a deal between two parties and the current deal is - zilch. Incentives to save are for uninspired idiots an enconomist once told me.

  • Comment number 84.

    #77. NoNoNumpty précis: saving isn't investing!

    Rubbish, where do you thing saver's money is stored by the organisation which looks after it --- that's right in some other form of income generating deposit/investment. Try to think please!

    Oh, and didn't you notice my earlier repost to the same guy! Unless interest rates rise you can write off all of your pension! Your ideas are half warmed fish!

    Money has to have a positive price if it doesn't the whole infrastructure of capitalism collapses - is that what you want? What is the point of investing? - to make money! - not to keep people off of the streets. If the money that is made is worth nothing what is the point of investing!

  • Comment number 85.

    79. At 7:02pm on 23 Feb 2011, Up2snuff wrote:

    re #48
    You make a point, there.

    Also, if money is not valued, people will let it slip away.

    And, debasing one's currency is as bad as debasing one's nation, monarch and flag."

    Not so bothered by nations, manarchs and flags, but the only system we have, that works a bit, is capitalism and for it to work money has to have a positive price!

  • Comment number 86.

    re #71
    Good post. I am sure there will be some hidden agendas at work here. I do love a good conspiracy. ;-) But as ever, it is probably more and most likely to be, simply, a cock-up.

    When rates were crashed by the MPC a couple of years back, 'twas said they were making a quick response to the situation ' ... like the Japanese in the early 1990's.' Unfortunately, what these good economists forgot was that the Japanese and their economy are somewhat unique and most definitely unlike Britain and its people.

  • Comment number 87.

    I am following the discussion that has been engaged for some time about interest rates and the continuing debate on the next round of rate increases. Having lived through 6 decades of generally economic (mis) management of the UK economy, I often wonder if we will ever learn any lessons.

    As much of the last decade has demonstrated in more than adequate measure, using interest rates as the key mechanism to control inflation simply does not work effectively. It is too harsh an instrument to be fully effective. There has to be a balance of measures extending to fiscal, economic and monetary policies. In the period to 2007, the authorities focused too much on CPI and RPI and lost sight of the escalation of Asset Price Inflation (API), the consequences of which linger longer than the shorter terms effects of ‘high’ CPI or RPI.

    Secondly, the issue that needs a focus on in the ‘real’ interest rate and not the’ fictitious’, almost anonymous base rate. Real interest rates (the rate at which we can borrow money) has never been so high in relative terms - relative to base rate. The MIRMD (Net Interest Rate Margin Differential) between base rate and real interest rates stand at an all time high.

    The 'high' rates of CPI and RPI are primarily a factor of increased taxation rates (necessary to balance the books) and the rising demand for commodity prices so essential to the basic living requirements - food, energy, metals etc etc etc.... and there is little we can do about them - and given that the UK and the global population will continue to rise steadily over the next 20-30 years, these prices will become more severe as demand is certain to exceed supply

    Taxation increases have a time limited effect on the inflation and eventually they will subside. Core UK inflation stands at around 1% which is not threatening to our economic model or economic growth.
    We have lived through a period of significant economic mis-management when the emphasis was on spending and revenue expense (growth in the public sector spending rounds) and not on ‘investing’ or ’investment’.

    Correcting that imbalance and making it more attractive to invest and not to spend will have the same impact as a raise in interest rates. It should be possible to provide a range of investment products that offer an attractive proposition, so we do not run the risks of a spend now, pay later culture – for this is what we have endured for far too long.

    We need to see a return to when the savings ratio was above 10% of net earnings. This will enable a more secure financial foundation for the future at a family level, which is really where it lies. This needs to be progressive and made to be an attractive proposition. If this is not addressed the long term consequences are unimaginable and wholly un affordable. We will fail the following generations if this is not addressed in the next few years and we will consign our growing and increasingly elderly population to levels of poverty that they do not deserve.

    If base rates rise too early, the risk is those who are able to provide the economic stimulus that we need will retrench, more money will be squeezed out of the economy and growth and investment prospects will recede for 5 - 6 years.

    Let the economic medicine start to have an effect - get a better balance to the books and economic model of the UK and then start to drive the growth through a positve investment strategy and a a focus on creating a more effective and efficient financial model at the family level.

    This is not the time to raise interest rates.... and the focus really does need to be wholly on the real interest rates that we are required to pay on all forms of borrowing and re generating a culture of investment and saving through innovative, tax efficient products.


    Derek Jones
    Wrexham, North Wales



  • Comment number 88.

    @15. At 2:00pm on 23 Feb 2011, Mike Easy wrote:

    "I do not understand how an interest rate rise will reduce/control the rate of inflation when it has been caused by increased duty on fuel, an increase in VAT imposed by the government, world commodity prices. Wages are already at a standstill or being reduced, and as many families are already finding it difficult to make ends meet and with the thousands that will face redundancy in the next twelve months, surely an interest rate rise will just cause the number of reposessions to increase, the economy to stagnate further pitching us into another recession. Putting up mortage and loan repayment rates will only benefit the financial institutions bottom line. I cannot see the link to the rate of inflation as an increase in loan rate will not affect fuel prices, the level of VAT, or the level of commodity prices. As distribution costs will be increased prices will rise causing an opposite affect as that intended for the rate of inflation. What situation am I missing ???"

    By a sheer coincidence so beloved of opportunistic "experts" in the pseudo-study of "economics, this last month with low base interest rate has had a lot of factors pushing prices up.
    Once the MPC push the rate up to 3% or so, we will miraculously see a month-on-month *drop* in the inflation rates. This will be, as I mentioned, purely chance, but they will hail it as a great victory for their policies and as an example of how utterly brilliant, utterly skilful, wonderfully prescient, magnificently wise and expert and of course completely indispensable they are.
    Being an "economist" is just a matter of waiting long enough for your ramblings to happen to coincide with some aspect of reality, however bad the fit may be.
    Move the interest rate in January and you're an idiot. Move it in March and suddenly you shine with the pure light of genius and you are worth all the money paid to you. The timing of the move shows little or no true skill nor expertise, but it's hard to argue that point when there is such a blatantly positive result for the "experts" to wave at.
    Raising the interest rate has *no* effect on prices, save to make borrowing more expensive (which will inevitably lead to those who borrow money passing on their costs to the consumers, but that will take another month and lead to the wise and wondrous experts running their flim-flam show again) (and it will work again, for a month or so, then cause *more* inflation the months after). Raising the rates just after several inflationary factors have kicked in, and just before any others are seen on the horizon, will appear to cause inflation to drop for a while.
    Just remember, propinquity is not causation. No matter how many "experts" tell you differently.

  • Comment number 89.

    87. At 7:29pm on 23 Feb 2011, Derek Jones wrote:
    Taxation increases have a time limited effect on the inflation and eventually they will subside. Core UK inflation stands at around 1% which is not threatening to our economic model or economic growth.
    -------------------------------------------------------------------
    A good post, Derek. Until that point. Inflation does not subside. It does not fade away. It is in the system until you take it away with deflation, currently better described as 'negative inflation'. All it does is disappear from the annualised measures.

    Did you follow my spat with bryhers over inflation?

    I maintain (especially with the benefit of some hindsight although I was firing the occasional letter to No.11 & media on the subject in period '97-'07) that an average of approximately 3%pa from 1997 to date was way too high. In view of the potential for correcting past inflation, we should have been looking for minus numbers in that period.

    She maintains that 3%pa is wonderful and that the Conservative alternative was constantly living with rates of 10-15%. {Despite the stats available from a House of Commons paper. My links to this have been broken so you will have to hunt it out from the HoC Library filings for 2003.}

  • Comment number 90.

    From the MPC Minutes - "A rise at this juncture could damage household and consumer confidence,..."

    Strange, my confidence (what's left of it) would be strengthened by a rate rise.

  • Comment number 91.

    re #87
    Am with you, too, on the rest of the post.

    But I would point out that interest rates can also have an effect on bank liquidity. That is easily forgotten as we have found to our cost.

  • Comment number 92.

    72. At 5:59pm on 23 Feb 2011, Martyn wrote:
    "Would someone please explain why an interest rate rise, which will in effect increase the cost of living, will actually cause the rate of inflation to fall?"

    Unlikely to do so by itself.The BOE are depending on domestic deflation to do most of the work for them.A sustained increase in base rates would raise the value of the pound and make imports cheaper,it would reduce exports which is also deflationary.

    A rise in base rates would need to be sustained to affect Mortgages, apart from trackers,the link between base rate and SVR is tenuous as others have pointed out.

    At present the government and BOE are comfortable with inflation.It transfer resources from people to government and reduces the real value of public debt.

    The risk is the effect of a combination of circumstances on aggregate demand as the motor of growth.Declining consumption through unemployment,imported and domestic inflation,tax rises and lower consumer expectations reduce demand.This is now being seen on the high street.






  • Comment number 93.

    #49. At 3:43pm on 23 Feb 2011, John_from_Hendon wrote:
    PS to #48 "Codswallop"

    #48. At 3:42pm on 23 Feb 2011, John_from_Hendon wrote:
    #45. History Repeats précis: never put up interest rates.

    You clearly haven't thought things through very well. If money remains free then there is no incentive to invest in anything as the return for investing in nothing.

    Money has to return to having a positive cost to use and a positive return fro holding. If this does not happen you can kiss goodbye to your pension!

    Further, on a technical point: economics is mediated through the medium of money - all policy, such as fiscal or macroeconomic policy is dependent of money having a rational positive price or they do not work.

    Your recipe is one of rapid total collapse.
    -------------------------------------------------------------------------

    Putting interest rates up will not solve the inflation problem or the economic situation. Those constantly harping on about it on here or in the media are simply protectionist in their outlook, looking after & to increase what they have & blow the rest of the economy.

    If you read the post properly, instead of selectively, you will see that my suggestion is that central banks should not be concerned with raising interest rates for the betterment of the few who have it & want more, at the expense of everyone else, who have no choice but to use it!

    Take your money out of the banks & use it if you want a return. Don't expect a large return for squirreling it away.

    The country is in trouble. The economy is stagnant. The government's austerity mantra has resulted in it's cutting spending on infrastructure - a traditional growth area out of recession. It's been ineffective in getting banks to increase business loans or home mortgages, whilst simultaneously guaranteeing savings accounts.......off the back of the taxpayer. Those on low incomes, tend to spend all of their money, so don't concern themselves with bank accounts, but have & are continuing to guarantee them nonetheless!

    My suggestion of separating the central bank from other riskier investments is not suggesting money is free, but a necessary tool. The recent banking collapse suggests that the necessity part should be separated from the 'speculative' part, to avoid a repeat.

    The alternative is to increase taxes on interest payments, the government should tax all bank and other risk-free savings. In creating a negative risk-free interest rate this would encourage savers to either invest in property, shares and other more productive assets, or save less and consume more. More consumption and physical investment is what is required in order to reduce unemployment & boost recovery.

    I'm sure you don't like the idea of that!



  • Comment number 94.

    72 Martyn:

    On the other hand the government don`t need the MPC to get them into a mess,they do fine by themselves.

    A government that wants to revolutionize the whole system of public finance from source to delivery, through the NHS,local government,Education and welfare, can`t even get their own people out of Libya.The French have done it,so have the Russians and everyone else.All except the British.

    Their arrogance and incompetence is mind boggling. Cameron instead of peddling weaponry around the Gulf should have taken charge from the beginning.Planes organized by the Foreignj Office are still on the ground in Britain.A superannuated frigate is on its way to Tripoli.

  • Comment number 95.

    #55. At 4:08pm on 23 Feb 2011, armagediontimes wrote:
    #45 History Repeats. Inflation is NOT the result of external pressures. Commodity prices are rising because of the free money policy being pursued by London and Washington, and the wholly predictible uses to which that free money is being put to.

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

    I'm afraid inflation is the result of external pressures, world food prices down to reduced supply, bad harvests etc. & increased demand, as are commodities such as oil & other raw materials. Mostly from emerging economies such as China & India. There is, after all, a finite supply of resources on this Earth.

    I do agree that hedge fund speculation has also had a major effect on the price of commodities. Just another example of where the G20 should regulate against this kind of speculation that effects so many lives, but are just numbers on some rich investment bankers spreadsheet!

  • Comment number 96.

    #56. At 4:15pm on 23 Feb 2011, Reticent_Trader wrote:
    #45. At 3:20pm on 23 Feb 2011, History Repeats wrote:
    More should be done to encourage those with the money to invest, to do so in the wider economy, not ferret it away in a bank!

    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.
    ===============================================

    A zero nominal rate does not matter, mate. REAL interest rates are already well in the NEGATIVE and yet this does not encourage any investment whatsoever. There is nothing worth investing in other than commodity futures.


    Growth is stagnant, there is little investment either from the banks or the government as a result of their 'austerity' drive, which most ordinary people, through no fault of their own, are suffering from. There is no justification in making mortgages or loans more expensive, whilst simultaneously making the storing away of money more attractive.
    ================================================

    The answer is obvious. Reverse the austerity drive and raise rates.

    ------------------------------------------------------------------------
    There is plenty worth investing in, the returns are not as immediate or as financially attractive as the hedge funds which play with people's futures, gambling on commodities in the hope of the big return. The type of thing which should be better regulated.

    Can't disagree with you regarding reversing the austerity drive........like that's going to happen before it's too late.

    A fiscal multiplier of government spending is required to get the economy off the floor. The opposite is happening.

    For example, studies reveal that £1 spent on construction output generates a total of £2.84 in total economic activity (i.e. GDP increase)......Yet all we get is cuts.

  • Comment number 97.


    Is it not time to let the ECB regulate our interest rates.

    The Eurozone has interest rates set at a 'sensible' low rate rather than an 'economicically damaging' low rate and inflation is under control.

    If they will have, unlikely, we should join the Euro.

  • Comment number 98.

    I get the impression the BBC are trying to push for a rate rise, are you? Judging by your headlines on the website and broadcast on the news over the past few weeks even before the BoE announced whether rates would change or not.
    I know nothing about economics except that if things carry on the way they are and rates do increase sooner rather than later, a whole new story of misery is going to occurr.
    Another impression that strikes me from all these financial people that keeping popping up and giving their predictions for this or that, not one of them has any clue whatsoever. They are all trying to play the same game as before the crash and not one of them has actually learnt any lessons.

    In fact I'll give my prediction.... October for a rate rise of 0.5. If I get this right "giz a job, I can do that!"

  • Comment number 99.

    A bit off topic – or is it?

    JFH I think you have finally got me and I think it is showing.

    Just had our evening meal (bacon, eggs, kidneys, sos, beans, fried bread, hash browns, mushrooms and a cider) and for once we had it on trays in front of the tv because she wanted to watch the end of heart beat. She! Turned the Tv channel over ready to watch Waterloo Road and we started to listen/watch to what I think was called rip it off Briton and they were talking to some woman about pensions. Don’t ask me what she was saying (something to do with trust the financial institutes because they know best) and I found myself shouting: but you are the problem, you are the rip off! Why do you want some ones money to pay back a pittance? And then 3 prune’s came on telling me that now I know what to do! I nearly spat out my last kidney with a loud, what the! And stopped before I swore in front of she.

    If some one else saw this please tell me if I have it incorrect or was it pure propaganda on behalf of the banks

    P.S. I really enjoyed the food

  • Comment number 100.

    All this user's posts have been removed.Why?

 

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