MPC gives forward guidance

[Deleted User]

Every silver lining has a cloud!

Given the heavy hint of low interest rates for some time ahead, not much cheery news this morning for savers.

Quick look at moneysupermarket this morning shows best cash isa rate only 2% which includes a 1.5% bonus. Given current and predicted inflation, there is no incentive to save yet. For younger folk, as there has been no incentive to save for some years past and won't be for some years still to come, there is no encouragement to develop a culture of saving, rather then borrowing. The spend, spend, spend/"must have it now" culture is set to continue for a new generation.

WR

Radiantsoul

Graham_Devon wrote: »

An FT journalist at the speech has tweeted:
"Is Carney a banker or a lawyer?" Guidance has "so many escape clauses". Like reading a disclaimer."

Life is complex though. No-one is really expecting him to stick dogmatically to a formula come what may.
The previous system had two objectives; financial stability and stable inflation on a forward basis. The system before that was entirely political.

N1AK

Wild_Rover wrote: »

Given current and predicted inflation, there is no incentive to save yet. For younger folk, as there has been no incentive to save for some years past and won't be for some years still to come, there is no encouragement to develop a culture of saving, rather then borrowing. The spend, spend, spend/"must have it now" culture is set to continue for a new generation.

WR

Because now is the worst time to start encouraging saving. If people save then they don't spend. Less spending means less taxation and less economic activity. Our national debts, and our spending plans, need covering and that requires economic activity.

You save during the good times so that you can afford to live during the bad times. People are naturally inclined to do the opposite, which is why government policy has to be pro-active in re-adjusting that behaviour.

There's already plenty of incentive to save, that's why people are doing it and why 'savers' are whining about the rates they are getting while doing it anyway.

We're saving (a bit less this year than in previous years) because we want the financial security. The low interest rates mean that a larger proportion of our savings is now 'invested' which, at least in theory, means the money is in the economy being used help companies grow.

ruggedtoast

This news will be an enormous relief to hard pressed families struggling to balance mortgages and their other outgoings caused by the pernicious rising cost of living.

ILW

N1AK wrote: »

Because now is the worst time to start encouraging saving. If people save then they don't spend. Less spending means less taxation and less economic activity. Our national debts, and our spending plans, need covering and that requires economic activity.

You save during the good times so that you can afford to live during the bad times. People are naturally inclined to do the opposite, which is why government policy has to be pro-active in re-adjusting that behaviour.

There's already plenty of incentive to save, that's why people are doing it and why 'savers' are whining about the rates they are getting while doing it anyway.

We're saving (a bit less this year than in previous years) because we want the financial security. The low interest rates mean that a larger proportion of our savings is now 'invested' which, at least in theory, means the money is in the economy being used help companies grow.

Savings are invested in the economy though. Banks don't just stick it in a vault and forget about it.

ILW

ruggedtoast wrote: »

This news will be an enormous relief to hard pressed families struggling to balance mortgages and their other outgoings caused by the pernicious rising cost of living.

When he appears to have decided that inflation control is a low priority?
Not everyone has a mortgage.

ruggedtoast

ILW wrote: »

When he appears to have decided that inflation control is a low priority?
Not everyone has a mortgage.

Yes but the workers mostly do. They have big mortgages which go towards servicing big banks that like to pay their employees big salaries and big bonuses which they use to provide big bribes to politicians to ensure that the system continues.

michaels

N1AK wrote: »

He is, and if he is able to say openly that he won't change rates then the government is clearly happy for inflation to remain above 2%. Clearly he, and the government, won't just let inflation rise out of control; however it's clear that if inflation stays around 2-4% they aren't going to do anything about it.

Inflation targetting is not an exact science, even centrally directing prices a la Venuzuela can not control inflation hence whilst 2% is the target a divergence of more than 1% is required to trigger a letter. Thus I can not get upset at inflation anywhere between 1 and 3%.

Now consider the tools available to control inflation, the main one is interest rate changes which take 2 years to have their full effect on the economy. Suppose inflation is above 2% and rising but the best prediction for 2 years time is for 2%. Should the BoE raise rates to try and deal with the current inflation problem and thus virtually gaurentee an undershoot in 2 years time or should they accept higher inflation in the interim - both will result in missed targets?

I think there is an answer to that question. Undershooting inflation equates to markedly supressed economic activity, ie unemployment, recession, misery. Moderately above target inflation in the 3-5% range equates to savers losing out and low fixed incomes being squeezed. Most low incomes are index linked and thus protected. I think given the balance of risks the correct inflation policy is to aim for 2% in 2 years but with the balance of risk towards overshooting not undershooting.

To all the critics of the BoE - what would you policy be?

[Deleted User]

N1AK wrote: »

Because now is the worst time to start encouraging saving. If people save then they don't spend. Less spending means less taxation and less economic activity. Our national debts, and our spending plans, need covering and that requires economic activity.

You save during the good times so that you can afford to live during the bad times. People are naturally inclined to do the opposite, which is why government policy has to be pro-active in re-adjusting that behaviour.

There's already plenty of incentive to save, that's why people are doing it and why 'savers' are whining about the rates they are getting while doing it anyway.

We're saving (a bit less this year than in previous years) because we want the financial security. The low interest rates mean that a larger proportion of our savings is now 'invested' which, at least in theory, means the money is in the economy being used help companies grow.

I agree with much of what you say, but at a basic level eg buying already issued shares might put cash (fees) into the pockets of the brokers, but it puts no more cash onto the companies whose shares are bought. We are increasingly transferring "investors" risk out of the banks where folk feel their money is secure, to the stock market where investors perceive there to be more risk. For most "little people", saving means bank/building society savings and ISAs which are giving very poor returns. Folk who are 16-25, for example, have had no incentive to start saving and it is a lot easier to continue an existing habit than start a new one.

For folk like me and Mrs Wild_Rover, who have no mortgage or other debt, and a monthly pension income which is more than enough to cover all "needs" and even some wants, investing in shares etc is not too risky; many others cannot afford the "risk" and see the purchasing power of their savings eroded.

WR

michaels

Forward guidance is a very simple 'unconventional' policy tool, much more straight forward than QE.

Unconventional tools became necessary when the policy rate fell to a minimum level due to the assymetry that it can not be made negative. Forward guidance is a way of making monetary policy more expansive when rates can no longer be reduced. Some would say that actually the economic climate has now changed such that the tool is no longer needed. It is a fairly inexact tool in that a central bank can not actually tie its hands in terms of future policy direction (in the same way that a govt can not legislate to prevent its successors undoing its policies). Even if the BoE said today that rates 'will not' rise for 3 years no one would beleive it as there might be 'exceptional circumstances' necessitating a rise before this.

I am currently fixing my mortgage for 5 years, I don't see anything in today's announcement that makes me want to change that decison.