BOE to hold firm on low interest rates

OffGridLiving

ILW wrote: »

This may help.

http://www.google.co.uk/#fp=5a2359cf96dc5f79&q=reposessions+1990

It doesn't. Googling 'repossessions 1990' doesn't provide a link to back up your claim that 'During the last crash in the early 1990s the government did let things go naturally'

I did find an interesting thesis that showed that the government did intervene and actually caused more problems. It's interesting because in the subsequent recession (2008), they seemed to have learned from history and did the right thing. Amazing, people learning from their mistakes!

" By 1990, unit labour costs in the UK stood at 12.5% compared with an European average of 5.7% (Deakin 1992: 185). When the balance of payments started to deteriorate, the British government's resolve to control inflation was called into question. Lawson's easing of monetary and fiscal policy enabled Margaret Thatcher to claim that 'we picked up our inflationary tendency during the time when we were trying to hold our pound level with the Deutschmark.12 Similarly, the Governor of the Bank of England, Robin Leigh-Pemberton, retrospectively concluded that government economic policy making 'went quite badly wrong' under Lawson when 'interest rates were reduced over a period when we now see they clearly should not have been' (Financial Times, 6.4.90).
Although the easing of monetary and fiscal policy undoubtedly tipped an already overheating economy into an inflationary upsurge, the relaxation of a policy of state austerity was pursued globally in an attempt to avoid financial turmoil after the crash.13 Further, the underlying weakness of the real economy indicated that the expansionary policy of easy credit throughout the 1980s was not sustained by capital growth but, rather, by an inflationary growth in the money supply. In other words, the exploitation of labour did not deliver the resources with which to check the debt burden on a global scale. In the UK consumption was not sustained by a real breakthrough in productivity growth but, rather, by credit expansion for which there was no corresponding expansion in assets against which to charge the increase in the money supply. The pound fell dramatically by 20% between Spring 1989 and December 1989 (Smith 1993: 159). Government responded by tightening monetary policy. By October 1989, interest rates were raised to 15% where they stayed for twelve months. This tightening of monetary policy led not only to a slowdown in consumer spending, including mortgage default, and a huge transfer of resources from debtors to creditors but, also, to growing pressure on companies. After the crash of 1987 most company borrowing was no longer by means of stock-market issues. The major share of company borrowing was from banks. 'In 1988 and 1989 together, companies borrowed 113bn, an average of 74% of income', of which 65bn was from banks (Smith 1993: 192). In the final few months of Thatcher's tutelage the government depended on high interest rates to defend the pound in an attempt to attract money to London to finance the growing balance of payments deficit. This deflationary response to the 'overheating of the economy' reinforced bad debt problems, threatening company bankruptcy and unemployment, and intensifying the financial distress of private debtors.

http://libcom.org/library/britain-european-exchange-rate-mechanism

ILW

OffGridLiving wrote: »

It doesn't. Googling 'repossessions 1990' doesn't provide a link to back up your claim that 'During the last crash in the early 1990s the government did let things go naturally'

I did find an interesting thesis that showed that the government did intervene and actually caused more problems. It's interesting because in the subsequent recession (2008), they seemed to have learned from history and did the right thing. Amazing, people learning from their mistakes!

" By 1990, unit labour costs in the UK stood at 12.5% compared with an European average of 5.7% (Deakin 1992: 185). When the balance of payments started to deteriorate, the British government's resolve to control inflation was called into question. Lawson's easing of monetary and fiscal policy enabled Margaret Thatcher to claim that 'we picked up our inflationary tendency during the time when we were trying to hold our pound level with the Deutschmark.12 Similarly, the Governor of the Bank of England, Robin Leigh-Pemberton, retrospectively concluded that government economic policy making 'went quite badly wrong' under Lawson when 'interest rates were reduced over a period when we now see they clearly should not have been' (Financial Times, 6.4.90).
Although the easing of monetary and fiscal policy undoubtedly tipped an already overheating economy into an inflationary upsurge, the relaxation of a policy of state austerity was pursued globally in an attempt to avoid financial turmoil after the crash.13 Further, the underlying weakness of the real economy indicated that the expansionary policy of easy credit throughout the 1980s was not sustained by capital growth but, rather, by an inflationary growth in the money supply. In other words, the exploitation of labour did not deliver the resources with which to check the debt burden on a global scale. In the UK consumption was not sustained by a real breakthrough in productivity growth but, rather, by credit expansion for which there was no corresponding expansion in assets against which to charge the increase in the money supply. The pound fell dramatically by 20% between Spring 1989 and December 1989 (Smith 1993: 159). Government responded by tightening monetary policy. By October 1989, interest rates were raised to 15% where they stayed for twelve months. This tightening of monetary policy led not only to a slowdown in consumer spending, including mortgage default, and a huge transfer of resources from debtors to creditors but, also, to growing pressure on companies. After the crash of 1987 most company borrowing was no longer by means of stock-market issues. The major share of company borrowing was from banks. 'In 1988 and 1989 together, companies borrowed 113bn, an average of 74% of income', of which 65bn was from banks (Smith 1993: 192). In the final few months of Thatcher's tutelage the government depended on high interest rates to defend the pound in an attempt to attract money to London to finance the growing balance of payments deficit. This deflationary response to the 'overheating of the economy' reinforced bad debt problems, threatening company bankruptcy and unemployment, and intensifying the financial distress of private debtors.

http://libcom.org/library/britain-european-exchange-rate-mechanism

Sorry it was a bad link, the entry about 4 down refers to 1990 repos hitting around 75,000.

Not saying it was right just that it can happen.

I believe the ERM crisis was also involved and IRs rocketed.

OffGridLiving

ILW wrote: »

Sorry it was a bad link, the entry about 4 down refers to 1990 repos hitting around 75,000.

Not saying it was right just that it can happen.

I believe the ERM crisis was also involved and IRs rocketed.

So rather than doing nothing and allowing the market to find its own level, the government intervened and created a drama out of a crisis.

That article I linked to was really informative and gave me a real insight into the 1990 recession, which was the first one to really impact me (I graduated from Uni in 1993 and struggled to land my first job). By comparing 1990's government response to the current crisis and response, it confirmed that it was a correct choice to lower rates to fend off a worse catastrophe.


Thanks for raising the discussion, I've actually learned something on this forum!

sabretoothtigger

Do you understand that government cannot dictate interest rates. 14% in 1990 was not because they were meanies or negligent about it.
I'd prefer they stay zero forever but it doesnt add up

However Carney is saying different seems like

BOE's Carney Warns Markets On Rates
By Jason Douglas NOTTINGHAM, England--The Bank of England is prepared to inject fresh stimulus into the British economy if rising interest rates in financial markets threaten a fledgling economic recovery, BOE Gov. Mark Carney said Wednesday. In his first speech since taking office July 1, the Canadian central banker sought to push back against expectations in financial markets that BOE officials will raise the central bank's benchmark interest rate sooner than they predicted earlier this month. The BOE Aug. 7 pledged to keep its benchmark rate at 0.5% until unemployment in the U.K. falls to 7%, a threshold the BOE doesn't think will be met until 2016. But markets are betting rates will rise in 2015, and central bank officials fret those expectations may ripple through into higher loan rates for households and businesses, potentially choking off a nascent recovery. Mr. Carney signaled the BOE's Monetary Policy Committee stands ready to bear down on those market rates if they start to damage financial conditions in the economy. "The MPC will be watching those conditions closely. If they tighten, and the recovery seems to be falling short of the strong growth we need, we will consider carefully whether, and how best, to stimulate the recovery further," Mr. Carney said, according to a text of his speech. The BOE governor did not specify what action the BOE is prepared to take. Economists say the central bank's options to drive down rates include reviving a bond-buying program currently paused at 375 billion pounds ($583 billion) or cutting the BOE's benchmark rate even further. Mr. Carney stressed the vast majority of loans to households and businesses in the U.K. are tied directly to the BOE's benchmark rate, over which officials have direct control. "The knowledge that interest rates will stay low until the recovery is well established should give greater confidence to households to spend responsibly and businesses to invest wisely." Mr. Carney said the MPC is prepared to take a little longer than two years to bring annual inflation back to its 2% target to support a recovery he said appears "broad-based" and accompanied by "a rising tide of optimism." But he cautioned that the U.K. economy still has problems. Unemployment is too high and the economy is still roughly 3% smaller than it was before recession struck in 2008, he said. Growth prospects for the next three years are "solid not stellar," Mr. Carney said, and joblessness is unlikely to fall quickly as there is considerable scope for companies to produce more as the economy recovers without hiring additional employees, perhaps by giving existing staff extra hours. The 7% unemployment threshold is not "a trigger" for a rise in interest rates, rather a "staging post" at which officials will reassess their policy stance, he said. Mr. Carney also said Wednesday the BOE has decided to further relax rules on how much cash and saleable assets banks have to hold to weather a funding crunch. This should free up another GBP90 billion of credit for households and businesses, he said.

Dow Jones Newswires August 28, 2013 08:59 ET (12:59 GMT)

it confirmed that it was a correct choice to lower rates to fend off a worse catastrophe.

They started QE March 09, 4 years and it has not proved itself. There is always the fear of worse but what of the hope for better and for 375bn its not achieving its aims