Attention Armchair Economists

HAMISH_MCTAVISH

Congratulations!!!!!!

You have now been elected to the MSE Shadow-MPC.

Your goal is to accurately forecast what will happen to inflation 18 months to 2 years in the future, because that's how long it takes for a change in rates to work through the system.

To determine what the right move will be with rates today, you'll need to factor in capacity within the economy, unemployment, external factors such as energy costs and exchange rates, the speed of recovery both within the UK and overseas, and the effects of not-yet-determined-nor-announced government policy and tax rates.

To be clear, your mandate is to use the likeliest course of events to determine what rates should be today, which will only impact inflation 18-24 months from now. A rise in base rates today WILL NOT change inflation today.

So, answer the following questions to arrive at your conclusion:

1. What will the economic recovery be like? Growth in GDP, spare capacity, etc.

2. What will happen to exchange rates, and why?

3. What will the price of oil be in 18 months? And why?

4. What will the VAT rate be within the UK in 18 months? How will this impact CPI? Give reasoning.

5. What will the unemployment rate be in 18 months?

6. How much demand within the economy can you afford to destroy with a rise in base rates now? How will this impact the other scenarios, including economic growth, tax revenue and thus likely government response. Give reasoning.

Seeing as how we have so many experts on here, I expect this will be an immensely informative thread.

And........ GO!

Loughton_Monkey

HAMISH_MCTAVISH wrote: »

And........ GO!

I've gone.

HAMISH_MCTAVISH

Surprised Graham isn't all over this one.

Always so keen to share his wisdom about raising rates in other threads......

System

I don't think people generally think beyond "OMG INFLAYTION! rates should be eleventy billion percent to fix it"

That's not to say I have any clever answers for your thread either, too conplicated for me.

abaxas

Personally I dont believe that our economic policy is actually defined internally, it is mearly a proxy for the rest of the world.

We follow, but the question is what happens to us if when we follow we break ourselves? Ie I beleive there will be a shock somewhere in the next 2-3 years as others come out of recession/stagnation forcing our hand.

Ie we will be Soros'ed bu other countries.

Marine_life

HAMISH_MCTAVISH wrote: »

Congratulations!!!!!!

You have now been elected to the MSE Shadow-MPC.

Your goal is to accurately forecast what will happen to inflation 18 months to 2 years in the future, because that's how long it takes for a change in rates to work through the system.

To determine what the right move will be with rates today, you'll need to factor in capacity within the economy, unemployment, external factors such as energy costs and exchange rates, the speed of recovery both within the UK and overseas, and the effects of not-yet-determined-nor-announced government policy and tax rates.

To be clear, your mandate is to use the likeliest course of events to determine what rates should be today, which will only impact inflation 18-24 months from now. A rise in base rates today WILL NOT change inflation today.

So, answer the following questions to arrive at your conclusion:

1. What will the economic recovery be like? Growth in GDP, spare capacity, etc.

2. What will happen to exchange rates, and why?

3. What will the price of oil be in 18 months? And why?

4. What will the VAT rate be within the UK in 18 months? How will this impact CPI? Give reasoning.

5. What will the unemployment rate be in 18 months?

6. How much demand within the economy can you afford to destroy with a rise in base rates now? How will this impact the other scenarios, including economic growth, tax revenue and thus likely government response. Give reasoning.

Seeing as how we have so many experts on here, I expect this will be an immensely informative thread.

And........ GO!

I won't answer your questions individually but what I will say is that there are a number of dependencies.

First of all you have to assume that there are no unpredictable events e.g. natural disasters, acts of terrorism or civil unrest.

Secondly you have to say that the UK is in a very difficult situation (compared to the rest of the world) which means that the government has very little scope for action.

The main issues are:

1. Very little reserve of public money to drive fiscal growth.
2. Persistent slow growth despite low interest rates.
3. High inflation.

Combined with the following:

1. Favourable exchange rate means exports are attractive and the UK is actually a cheap place for investment.
2. Poor housing market means reduced stamp duty receipts but also the "wealth" effect of spending driven by equity release has evaporated.

Increasing interest rates is likely to dent the positives (reverse the exchange rate benefit, worsening of the housing situation) whilst potentially further depressing growth.

This is a gross oversimplification but I believe the development of the UK economy is almost totally reliant on a world economic pick up.

HAMISH_MCTAVISH

Still nothing from Graham?

Always very keen to criticise current rate policy.... So surely he can do better?

Thrugelmir

HAMISH_MCTAVISH wrote: »

Your goal is to accurately forecast what will happen to inflation 18 months to 2 years in the future, because that's how long it takes for a change in rates to work through the system.

External factors outside of the UK's direct control will have far more impact on inflation than a tweaking of base rates. With the level of global financial instability there's a decade of change ahead.

geneer

HAMISH_MCTAVISH wrote: »

Surprised Graham isn't all over this one.

Always so keen to share his wisdom about raising rates in other threads......

I imagine he, like most posters, are waiting to see if you will take up your own challenge Hamish.

HAMISH_MCTAVISH

Well I'm not the one disagreeing with the MPC here..... Or criticising them every month for not raising rates.

Graham seems to make a point of it on a regular basis.

Graham_Devon

HAMISH_MCTAVISH wrote: »

Graham seems to make a point of it on a regular basis.

Not much point in my doing it again is there.

I dont criticise them for not raising rates, per se.

I criticise them for saying the same thing month after month, year after year, and getting it wrong nearly 100% of the time. As I said, even I, about a year ago, stated inflation was heading towards 6% and would top out around there. Yet all the OE can do is keep changing their forcast higher, and stating it will fall to 2% in the next 12 months. 36 months later, were still waiting.

Even their forecast chart, the one with the spread of around +4 to -4% is looking wrong.