Mervyn King: Raising rates would cause another recession

Graham_Devon

IronWolf wrote: »

It's not Mervyns job to take care of savers, its his job to ensure the economy is stable and inflation is on target.

I personally wouldn't like to be in his shoes.

However, I believe the BOE are very reactive instead of proactive. Which in many case they need to be. But Merv is now suggesting people should be out spending instead of saving.

That's great, but it needs a reactive approach again later when people have no pensions, no savings, debts, and have lived for yesterday. We've just been through that very period. More of the same isn't going to fix anything.

DervProf

Mervyn King is simply failing in his job in my opinion.

How can we take seriously, his (strangely precise) prediction that inflation will be 1.8% (up from and earlier preiction of 1.5%) in a couple of years time ? His predictions on inflation for the past few years have been anything but accurate. A couple of years ago, he said that inflation was just a "blip".

Another thing to consider is the fact that the BoE's remit was not to consider the property market when setting interest rates, and they might claim that they still don't. They know, and we know, that more and more, the UK economy and it's wealth is tied up more in it's bricks and mortar. It is the policies of government, and more recently the BoE who have allowed this to happen. It's a dangerous situation to be in, allowing the tail to wag the dog.

It's going to be interesting (no pun intended) to see what they do with interest rates when the economy starts to improve. Many people will have got used to relatively low interest rates. If the BoE are keeping rates low to help businesses (and not support property prices, as they claim), then they'll have no excuse to raise rates when business improves. In theory, wages will start to rise when the economy improves, but will they rise enough for those who have taken out mortgages in the past few years ?

My guess is that they will find an excuse to not raise rates too much, and therefore further encourage more of our nation's wealth to be tied up in piles of bricks.

DervProf

homelessskilledworker wrote: »

It's not Mervyns job to look after the debt loaded either.

Officially, no.

However, in his spare time he seems to be doing exactly that.

Road_Hog

hallmark wrote: »

Yes and he hasn't done that job.

Which part of inflation is caused by VAT increases and rising world commodity prices did you not understand? Old inflation was caused by rising wages and too much money chasing too few products. We're in a global economy now, this inflation is global, raising interest rates will have no effect on inflation, all it will do is push the economy further into recession.

When a re people going to understand, that use of interest rates to control inflation is largely redundant now.

Graham_Devon

Road_Hog wrote: »

When a re people going to understand, that use of interest rates to control inflation is largely redundant now.

If that's the case, surely we have another tool to enable us to tweak economic policy?

If so. What is it?

And why, if the above is the case, did Merv & Co increase interest rates in 2005 to combat the effect of oil prices? At what point did that very recent economic policy become a flawed policy that could never be used?

DervProf

Road_Hog wrote: »

When a re people going to understand, that use of interest rates to control inflation is largely redundant now.

I would argue that it isn't largely redundant.

How about the effect of interest rates on HPI ?

HPI affects RPI and has a knock on effect to wider inflation.

AndyGuil

He won't be able to stop the rate rises when the Eurozone collapses. The UK credit rating is already under threat. The cost of borrowing will increase and they have not control of this. The only reason it is so low now is because they can borrow cheaply, this won't last long.

moneyinmypocket

its unlikely rates will hit double figures but anyone buying a home should factor in what their repayments would be at the 5-8% range

IronWolf

AndyGuil wrote: »

He won't be able to stop the rate rises when the Eurozone collapses. The UK credit rating is already under threat. The cost of borrowing will increase and they have not control of this. The only reason it is so low now is because they can borrow cheaply, this won't last long.

The BOE have a lot of control over government borrowing costs, they buy gilts and dramatically increase the prices therefore reducing yields.

I personally wouldn't like to be in his shoes.

However, I believe the BOE are very reactive instead of proactive. Which in many case they need to be. But Merv is now suggesting people should be out spending instead of saving.

That's great, but it needs a reactive approach again later when people have no pensions, no savings, debts, and have lived for yesterday. We've just been through that very period. More of the same isn't going to fix anything.

I think they're being very proactive, and are looking beyond the current high inflation driven by commodity price rises to the period of deflation which could loom, thats why the QE has been continuing. Increasing interest rates would be reactive, trying to close the stable door after the horse has bolted.

Wookster

IronWolf wrote: »

It's not Mervyns job to take care of savers, its his job to ensure the economy is stable and inflation is on target. The former can only be achieved by disincentivising saving, which helps consumerism. The latter has been out of their control for a while, with VAT rises and commodity price increases they can do nothing about.

Savers (and the prudent) always get screwed.