BOE Now Expected To Hike Later Post Poor GDP Data

Procrastinator333

The BOE Mandate:

http://www.bankofengland.co.uk/monetarypolicy/framework.htm

"The Bank’s monetary policy objective is to deliver price stability – low inflation – and, subject to that, to support the Government’s economic objectives including those for growth and employment."

"A target of 2% does not mean that inflation will be held at this rate constantly. That would be neither possible nor desirable. Interest rates would be changing all the time, and by large amounts, causing unnecessary uncertainty and volatility in the economy. Even then it would not be possible to keep inflation at 2% in each and every month. Instead, the MPC’s aim is to set interest rates so that inflation can be brought back to target within a reasonable time period without creating undue instability in the economy."

Not that is worth much, but I agree with the BoE on what they are doing.

a) They do not look at the next 6-12 months. Interest rates have little impact on such a short term horizon.

b) Inflation is being driven by supply / demand issues external to the UK. So the only way interest rates will impact inflation is by strengthening the £. Do we really want that to happen when just about every country in the world is looking for an export led recovery? I think the BoE is betting that while employees may try to pressure for increased wages off the back of inflation, those demands will not be met because of the government cuts and upward pressure on unemployment. Hence at the moment, it is unlikely we will see a similar level of wage inflation.

c) The BoE said long ago that the standard of living (or however it was phrased) would fall. They were talking about this. A period of inflation not accompanied by wage inflation.

d) When will inflation come down? No idea, might not even be for a few years or more. But the BoE can't do anything even if it wants to. Say it did raise rates to 4%. Sterling then gains about 10%. That may hold down inflation in the UK for a while, but then what? If external inflation continues for a further year, raise rates again?

What can the BoE do? I think if this Q had been 0.5% and next Q closer to 1% you would have seen rates start to rise. With this fall, that must have pushed any rise back a good 6 months at least and more if next Q isn't a decent positive number again.

RenovationMan

Graham_Devon wrote: »

That's fair enough.

All I have to say to that is I;ve been told to read some economic books lots of times.

The times when I was suggesting inflation would rise, I was told to read books. , inflation can't happen without wage rises. I dunno who said this, but it wasn't me. We currently have inflation caused primarily by expensive fuel, which impacts transport. Increasing interest rates would help boost the value of the £ and make fuel cheaper to buy but it would also impact exports. The question the BoE have to ask themselves is which is the worst problem. The thing is that high fuel costs has more to do with taxation than anything else. The government could simply lower the fuel tax for haulliers and transport companies and suddenly the issue is solved, without having to trash the economy by raising rates and making us uncompetitive in the global marketplace. There is no coincidence that manufaturing output has rises substantially again (see other thread on this board).

The times I suggested interest rates needed to be put up to combat pending inflation, told I was insane. Interest rates are usually increased to control an overheating (i.e. booming) economy to persuade individuals and businesses to stop borrowing. In essence the BoE is increasing the cost of borrowing to help to contract the economy. Clearly we have no need for the BoE to contract our economy, its doing very well without their help, we are also not in a boom so we dont need the BoE wielding the big interest rate stick to rein in our spending, we are also seeing a tightening of lending criteria from the banks, so individuals and businesses are already finding it difficult to obtain credit, so need no further incentive to stop borrowing - they cant borrow in the first place.

The time I suggested interest rates have an impact on exchange rates was poo poo'ed as not having much of an idea. I dunno who said this as it is clearly wrong. A rise in interest rates clearly has an impact in exchange rates, however even if we double our rates we are only talking of interest rates at 1%, hardly very attractive to overseas investors. Within 3 days, the BBC were talking about raising rates to pull up sterling and lower inflation, even those who poo poo'ed it were now talking abotu it.

The times I suggested house prices would fall back again after a surge, I was told I didn't know what I was on about. I'm not sure what this has to do with interest rates, but I think most right monded people can see that we wont have a housing recovery until we have an economic recovery.

The times I suggested the economy will fall back into recession, I was told I was dumb. I dont know how you (and many on this forum) can be so cetain about something happening. If you had said that there is a risk of the economy falling back into recession then I would agree with you - especially if the BoE raised rates while the economy was still on its knees, as you seem to be suggesting - If you say we will definitely go into recession then no wonder people dismiss your statements. No one can see the future.

The thing is, inflation HAS risen. Houses HAVE fallen back. Economy DOES look to be falling back into recession, though some are suggesting theres a collosal boom around the corner. It will be next year when we know how it actually played out. I havent seen too many posts from 'non-fringe' members on this board suggesting a boom is just around the corner. far from it. I have seen posts from people, myself included, who have said that times are hard but probably not as hard as they have been in the past and we got through those times OK.

Got lots wrong, and nearly every timeframe wrong. But I don't subscribe to the argument whereby no matter which way the economy is going (deflation, inflation, GDP up, GDP down, inmports up, down, exports up, down) the same think is said over and over....can't raise interest rates!!

In my view, and probably the majority of the BoE, the economy was not on a strong enough footing to allow us to raise rates. The fact that we have had a contraction in GDP bears this out. Once the economy is well and truly back on its feet, then the calls to raise rates will be valid. All of your exports up/exports down GDP up/GDP down is related to small increases and decreases in a battered economy.

The economy is simply not robust enough for us to raise rates, the economic conditions that necessitated a drop in rates to 0.5% have not really improved that much. We are still in !!!!!! street. Its especially unwise to increase rates just when you are increasing taxes, squeezing everyone in the middle. Its especially, especially unwise to increase rates just when you are raising taxes AND while there is a credit squeeze on.

I do ask the same question over and over again though, and no one but no one answers....how is the current interest rate HELPING the situation. Never an answer.

My comments is Red. I'm no expert, but I have tried to read economic information beyond this board. Whether I am right or wrong is up for discussion, however, I at least have put my money where my mouth is financially. I did all the above reasoning about interest rates staying low and took out a huge mortgage. So far, so good.

Graham_Devon

Comments are good, not gonna go over them in detail

However, suggested and guaranteeing are two very different things

as I said, I suggested the economy would go back into recession. Didn't guarentee.

It's difficult to get your point across on this forum at times, may be how I explain things. But as above, got linton chipping in telling me I'm wrong again, and telling me all about wage inflation. The fact I was talking about sterling and inflation, I would have thought, would have suggested I wasn't talking about wage inflation, rather external inflation, but it's back to a lesson about inflation, from, it appears, a person who needs a lession in reading

Talking of putting money where the mouth is.....Johnny!!!! Bone to pick with you....my shares are currently experiencing a blood bath!!!

Oh...and another point. Most of my info comes from Radio5. It's on in the background all day at work, as not really allowed music. CPI prediction was approx 8.40-9am. All the other stuff I talked about earlier, was approx 11.20am, from an economist, or at least someone talking like they were.

Linton

Graham_Devon wrote: »

Comments are good, not gonna go over them in detail

However, suggested and guaranteeing are two very different things

as I said, I suggested the economy would go back into recession. Didn't guarentee.

It's difficult to get your point across on this forum at times, may be how I explain things. But as above, got linton chipping in telling me I'm wrong again, and telling me all about wage inflation. The fact I was talking about sterling and inflation, I would have thought, would have suggested I wasn't talking about wage inflation, rather external inflation, but it's back to a lesson about inflation, from, it appears, a person who needs a lession in reading

If you were talking about externally driven inflation why were you expecting the BoE to do anything about it?? What were you thinking they could do ??

smeagold

RenovationMan wrote: »

My comments is Red. I'm no expert, but I have tried to read economic information beyond this board. Whether I am right or wrong is up for discussion, however, I at least have put my money where my mouth is financially. I did all the above reasoning about interest rates staying low and took out a huge mortgage. So far, so good.

How will you cope when interest rates do go up?

RenovationMan

smeagold wrote: »

How will you cope when interest rates do go up?

I have a plan, man. :cool:

Batchy

Graham_Devon wrote: »

Right in a way, yes.

Currently we have high imported inflation, and a lowish exchange rate, only amplyfying that inflation.

GDP has fallen, and so has sterling, by 1.3% currently today, against the dollar.

This will further amplyfy imported inflation. That means, over time, more money coming out of peoples pockets for general living costs (fuel, food, transport).

That in turn means less money spent in the economy, which in turn means less demand, less jobs etc, lower GDP.

I'm not going to get into the usual argument over interest rates, when I think they should rise, however, I'm just finding that people are writing off interest rate rises for whatever reaosn they can.

When GDP was rising, we couldnt raise them because it would hurt that rise. Now, we can't raise them because GDP has fallen slightly. When GDP is back to rising, we'll be back to "no, don't raise rates, we'll fall back again".

Whichever way the economy goes, the same people seem to be suggesting we can't raise rates. However, this completely ignores everything else thats going on in the economy. Ignores sterling. Ignoes imported inflation. Ignores the effect of low rates, combined with high inflation, and inflation set to go much much higher, while GDP is set to fall away.

This is all down to the weather...

I know I couldnt spend my money fast enough when i could get to the shops... I know people who had xmas with the family in January... due to travel problems!
Dont be surprises to see a jump up in jan...

lvader

CPI ex VAT is only 1.9%, inflation isn't high right now.

purch

BOE Now Expected To Hike Later Post Poor GDP Data

I keep reading this headline, and I keep thinking it means later today, after the GDP data is released

diable

RenovationMan wrote: »

I have a plan, man. :cool:

Touting your body on Old Compton St?