What will Mervyns excuse be this time?

ILW

Heyman wrote: »

In all seriousness and leaving aside the debate-jousting that goes on here, it is an impossible situation.

What do you mean by 'strong' message? I think you mean a large interest rate hike or series of hikes to get there - correct me if I'm wrong.

In the year of massive government cuts.

Which are going to hit everyone, most of all the middle-classes. And businesses.

Which are just getting back on their feet after a difficult couple of years.

Some of which may form your customer base.

Are you not a turkey wishing for Christmas?

By giving a message, I mean not sitting back and admitting that the bank is either happy to let inflation run it's course, or is powerless to do anything about it.

System

Heyman wrote: »

Errr....think we're saying the same things Joe

Yes I was agreeing with you, the cracking logic part was aimed at others, not the best worded post I've made!

AD9898_2

RenovationMan wrote: »

lol, at least the bull gang are up front in why they want low rates. The bears try to wrap themselves in a thin veneer of caring for the economy, but its as clear as day that they think an increase in interest rates is directly equatable to a decrease in house prices. At least have the courage to admit that you want a rate rise because you want to pick up a bargain repo.

I love this board.

It's common knowledge RM that I own outright, and I certainly don't want to buy a repo for BTL purposes, thought you already knew this ?

An increase in rates would benefit my savings and hopefully increase the pound's rate against the Australian dollar.

As far as house prices go, it's again common knowledge that I believe the younger generation of today deserve the same opportunites as the older generation. No more no less.

ILW

Kohoutek wrote: »

Wouldn't increasing the cost of credit have a negative impact on your business too though?

From my point of view, we a very low geared with just a few grand rolling overdraft which actuall spends more time in credit. Even if we did have substantial borrowing a 0.25% rate hike on top of currently around a 9% rate would not make a lot if difference. Inflation though is beginning to become a bit of a worry.

Mr_Mumble

"The rise in inflation cannot be put down to VAT or petrol duty, so it may mean that underlying inflationary pressure is worse than we would have hoped or expected." -- Shore Capital quoted on today's FTAML.

"Doves argue that inflation would be close to the target but for indirect tax increases over the past year. This is wrong." -- HGI's chief economist.

The VAT hike was not inflationary, heck it was probably deflationary. The January figures are replacing 2010's 16.6% rise with 2011's lower 14.3% rise.

The same posters (the likes of Generali and Hamish) who are saying not to worry about inflation now were giving protestations about deflation a few months ago. Wrong then and wrong now!

Excluding any factor from inflation is a mugs game. Taxation is a case in point. Tax take is relatively low for this point in the business cycle at 37-38% of GDP. The Thatcher government got this figure up to 47-48% in the 1980s when fighting... inflation. Inflation, when above real earnings, begets tax hikes - the government promises to pay benefit claimants the inflation rate. Now, in addition to benefits (14% of GDP) we have the NHS (9% of GDP), Education (6% of GDP), debt repayments (4% of GDP) all with inflation+ rates of growth. We have further tax rises in the pipeline and considering u-turn Dave is surrendering on everything from milk to forestry anyone who thinks the taxpayer is going to win over spending cuts is a chump.

Replacing CPI for some other barometer that comes in around the CPI target is bizarre. The BoE are supposed to target 2% CPI! Not RPI, not core, not RPIX, not CPIY but CPI. Merv & co should have known two years ago that government was going to increase indirect taxes thanks to the deficit. If the BoE didn't factor in a tightening of fiscal policy that doesn't make them less wrong. The policy committee expected 2% CPI for January 2011 in January 2009, they were outrageously incorrect.

This idea the BoE can't do anything about 'imported' inflation is nonsensical considering the BoE 'imported' this inflation by devaluing Sterling!

A 25 basis point rise in May is now being priced in by markets. Nomura anticipate a 0.25% rise every quarter for the next 18 months thereafter. Anyone holding Sterling based investments with Sterling derived cashflow (e.g. UK residential housing) is in a lose-lose situation now. Either the Bank of England keep rates at 0.5% and Sterling falls (as Standard Chartered believe) or the Bank of England start raising rates in the next quarter and margins come under pressure.

Milarky

10.30 15th Feb Governor to G Osborne:

http://uk.finance.yahoo.com/news/Bank-England-King-open-letter-reuters_molt-3048244382.html

Why has inflation moved away from the target?
Three factors can account for the current high level of inflation: the rise in VAT relative to a year ago, the continuing consequences of the fall in sterling in late 2007 and 2008, and recent increases in commodity prices, particularly energy prices. Although one cannot be sure, prices excluding the effects of these factors would probably have increased at a rate well below the 2% inflation target.

Comment: Really? How about trying to quantify this claim rather than simply spooning up with anecdotal tidbits - you are responsible for this area of public policy after all

Over what period does the MPC expect inflation to return to target?
There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal that there are real differences of view within the Committee

Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months, appreciably higher than when I last wrote to you.

Comment: But this is acceptable performance in the circumstances, yes? After all you've only been in the chair since 2003 - exactly the same period as the MPC has been set 2% as the 'target' for CPI.

The MPC's-central judgement, under the assumption that Bank Rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.

Comment: You're giving odds of simply 'hitting' the target in NOT LESS than the two years you normally give yourselves of a mere 50%? Wow, that's stating that the uncertainties are about as high as it's possible for them to get and still be able to cling to the fig leaf of actually doing anything...

The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.

Comment: By 'undershoot' you presumably mean in the range of 1% or less do you? Naah, what you're claiming as a 'undershoot' is anything below 2% isn't it? That's not an 'undershoot' unless you consider 2.5% an 'overshoot'. I bet if CPI were 2.5% you'd report it as being 'on target' wouldn't you?

As I noted above, members of the Committee hold differing views about the risks to inflation in the medium term. On the downside, the main risk is that the substantial margin of spare capacity will cause inflation to fall below target in the medium term. That risk could be exacerbated if growth in the economy is weaker than expected, for example if household saving is higher than expected.

Comment: So now simply being below 2% for a period is a 'downside risk' is it? Again, where's that 'symmetric' target range gone, where you declare yourselves keeping price rises in the 1-2% range as much time as it spends over 2%? And anyone who tries not to spend every penny is being unpatriotic now are they?

Opposing these downside risks, there are also significant upside risks to the medium-term outlook for inflation. The period of above-target outturns for inflation could cause inflation expectations to move up and thereby affect wage and price setting. And import price inflation could remain elevated. A fuller and more comprehensive description of the factors affecting the outlook for inflation in the medium term will be set out in the February Inflation Report to be published this week on Wednesday 16 February.

Comment: there we have it. They want to push inflation as high as possible for as long as possible (it's all but stated policy) and the only thing staying their hand is 'reality-based' stuff like people beginning to think 5% is the new 2% and it becomes self-fulfilling. Well, Merv, you're not first person to think that out loud by a country mile!

What policy action are we taking? Inflation is likely to remain above the target for this year, before falling back in 2012.

Comment: That's any kind of reduction we're talking, not 'on target' or such..

The key consideration for monetary policy is the balance of risks to the outlook for inflation relative to the target in the medium term. At its February meeting, the MPC judged that it was appropriate to maintain Bank Rate at 0.5% and maintain the stock of purchased assets financed by the issuance of central bank reserves at 200 billion in order to balance those risks. But every member of the Committee is conscious that there are large risks in both directions. And no one should be in any doubt that when the balance of risks requires it, every member of the Committee is determined to act to adjust policy in order to bring the risks back into balance.

Comment: So we're hopelessly divided as to the next step but there's going to be the mother-of-all-decisions and we can't put it off much longer. [As Montgomery Scott would say "I caana change the laws of physics. captin'!" ]

How does this approach meet the Government's monetary policy objectives?
The best contribution monetary policy can make to high and stable levels of growth and employment is to ensure price stability in the medium term. The Committee will set policy, in the light of the economic outlook, in order to return inflation to the target in the medium term. I am copying this letter to the Chairman of the Treasury Committee, through which we are accountable to Parliament, and will place this letter on the Bank of England's website for public dissemination

Comment: "Blah, blah.. the cheque's in the post..."

gagahouse

The FT's version of Merv letter:

What he should have said:

For Pete’s sake, George,
We couldn’t even hit a barn door with our past inflation and growth forecasts and now you’ve put us right in the middle of one of the most front-loaded fiscal austerity experiments in British history. Of course we’re going to keep on fudging this stuff.
And oh yes, we’ve actually been secretly targeting 5 per cent nominal GDP growth throughout the crisis.
Sorry for not telling you earlier.
TTFN,

Merv

http://ftalphaville.ft.com/blog/2011/02/15/488781/mervyn-explains-himself/?updatedcontent=1

michaels

Wow - we have so many experts on here who can predict the future price of fuel, energy, food and other commodities, the sterling exchange rate, the impact on the economy of fiscal tightening and how much people's desire to maintain and increase their real wages will feed through in to actual wages and prices with 2.5m already unemployed and major public sector layoffs now in full swing...

For those mere mortals who can not forecast all (or any) of the above with absolute certainty there are two options:
1) Pull a lever now that may reduce inflation further in 2 years time when our best estimate is that it will be at about the target level anyway and risk what may already be the second dip of a recession turning in to a depression
2) Wait to pull the lever until there is more confidence that the economy is not actually already contracting (which is generally a deflationary state of affairs) at the risk of suffering slightly higher inflation than some people are comfortable with at an economic cost which appears to me to be small but which no doubt those suggesting this approach will explain...

RenovationMan

AD9898 wrote: »

It's common knowledge RM that I own outright, and I certainly don't want to buy a repo for BTL purposes, thought you already knew this ?

So your saying you dont want a rate rise just for your own personal reasons or to cause people to get reposessed and lower house prices, you want a rise because you believe it would be for the good of the economy?

AD9898 wrote: »

An increase in rates would benefit my savings and hopefully increase the pound's rate against the Australian dollar.

As far as house prices go, it's again common knowledge that I believe the younger generation of today deserve the same opportunites as the older generation. No more no less.

Ah. Shame. You are saying that you want a rate rise for your own personal reasons and because you want reposessions to lower house prices, and not for the good of the economy.

Glad we sorted that out. Your so altruistic AD9898, surely sainthood is only weeks away?

Milarky

michaels wrote: »

For those mere mortals who can not forecast all (or any) of the above with absolute certainty there are two options:
1) Pull a lever now that may reduce inflation further in 2 years time when our best estimate is that it will be at about the target level anyway and risk what may already be the second dip of a recession turning in to a depression
2) Wait to pull the lever until there is more confidence that the economy is not actually already contracting (which is generally a deflationary state of affairs) at the risk of suffering slightly higher inflation than some people are comfortable with at an economic cost which appears to me to be small but which no doubt those suggesting this approach will explain...

This, I must point out, is the 'slightly more/slightly less pregnant' sort of defence. Merv's letter all but spells out a different policy actually prevails to the official one. He is nonchalant about inflation (by which he means the lower measure of CPI) going from 4% to 5%. He talks about anything just below 2% as an 'overshoot' when technically it's only an 'overshoot' at the sub1%. In fact CPI has next gone as low as 1% - lowest being about 1.2% - so he's being far too modest in not acknowledging he has a 100% score where that is concerned. The truth is that he's raising a straw argument - if CPI never went even to 1% with the props kicked from under the base rate it's not going to now - in order to cover/conceal/downplay the true game - which is to try and carry on with inflation as high as and as long as possible without it taking off once people's 'expectations' are that 2% isn't even on the MPC's now infamous two-year 'forecast horizon'.

He tacitly accepts the policy is in tatters but that doesn't concern him too much if he can just hold on till 2013 [and inflation still won't be at 2%, he's forecasting] and retirement.