Interest Rates - BoE should cut them or the governer should go!

mystic_trev

I see the ECB have just raised rates by 0.25% Looks like ours will be going up shortly?

SuperV

Quote:
"Rising food and fuel costs encouraged the European Central Bank to put its key lending rate up from 4% to 4.25%. Inflation in the eurozone hit an annualised rate of 4% this week."

Inflation in the UK is 3.3%, so interest rate should be 3.3%? :D:D:D

Few years ago EuroZone rate was 2%, BoE around 5%. That was when EuroZone (read Germany) was in recession.

Right now EuroZone is doing very well. They produce more locally in EuroZone, so their inflation was not hidden so much by cheap imports, hence core EuroZone inflation was in the past estimated better than the UK's, when the price of oil was not so high. And as they do very well, they can allow themselves an error.

The UK is ... in not so good situation. Starting point BoE used to estimate inflation was completely wrong as they believed that the UK economy is growing faster than German (few political points were made).

SuperV

With even more news of doom and glum, maybe you will start changing your minds? The rate has to be cut significantly VERY SOON, the latest at the end of August. After that companies will start checking how many employees they really need. Petrol at £1.4 and diesel at £1.6 will not help.

SuperV

http://www.guardian.co.uk/business/2008/jul/08/economicgrowth.economics

It seems that my estimation of inflation works even better than what I thought - take a look at the end of this article - Germany also needs lower interest rate! EuroZone interest rate can not affect price of oil - and oil is a tax you can avoid in the same way you can avoid VAT and tax - don't buy anything, don't do anything, don't earn anything.

At the moment, BoE's MPC reacts AFTER the tipping point - either up or down. It should take more proactive role using better inflation model.

And cut the interest rate as soon as possible!

p.s.
An ominous point of view (and not the right one, I hope): members of BoE MPC have safe jobs and nice salaries. So, they have an incentive to cause a crash. The same happened with the mortgage market - brokers had an incentive to sell as many mortgages as possible, no matter what was the real income of applicants.

lisyloo

With even more news of doom and glum, maybe you will start changing your minds?

Can you explain why please.
My understanding is that the BOE remit id to keep inflation at 2%.
Not to keep out doom & gloom or any other target.

SuperV

http://www.britishchambers.org.uk/6798219246661929941/alarming-results-highlight-serious-risks-of-uk-recession.html

"Some key results, mostly in services, are at historically low levels not seen since the recession of the early-1990s. The threats facing the economy will be exacerbated by plunging confidence across both sectors. Overall, the Q2 results point to growing risks of outright falls in UK output in at least one or two quarters."

In 1990s the price of oil was very low in historical terms. Now it is very high. Trying to control the external drivers of inflation will kill the UK economy.

lisyloo

Yep agree with everything that you say but my question is what does recession, threats facing the economy etc. have to do with the BOE remit? (which is to control inflation).

SuperV

quote:
"Can you explain why please.
My understanding is that the BOE remit id to keep inflation at 2%.
Not to keep out doom & gloom or any other target."

For example - a product cost consists 50% of external input and 50% of internal input. If external input cost increases by 20%, in order to keep an increase of the whole product below 2% the internal cost will have to shrink 16%.

Ask police officers, GPs, civil servants, BBC executives, fire-fighters and so on will they accept cut of 16% of their pay? Will you?

BoE basic rate can not control price of oil. It can control only internal drivers - family and company purchase budgets.

So, it has to use British caused inflation to calculate basic interest rate.

In the past it didn't - sometimes the BCI was too high but hidden by cheap imports and the BoE rate was too low causing boom, sometimes it was and it is very low (as I can bet it is now), but the BoE rate is too high because of external drivers (like the price of oil) causing busts.

In short, BoE dependance on wrong data (or the Governements wrong definition...) is a reason. Simplisticly - it is not possible to sail against wind. And trying to keep inflation very low when all external inputs into the UK economy are going up is not possible.

It will cost a lot of time, it will cause a lot of pain and at the end only a monirity will benefit!

Gorgeous_George

I agree.

Rising oil prices will control inflation. The MPC can cut rayes and inflation will still fall as oil prices stabilise at the the new, higher levels.

Higher interest rates will heap more misery on the banks (and therefore everybody and every business). The next move cannot be up.

I don't think now is the time to be do nothing so I expect a rate cut. Possibly 0.5% leaving it still higher than Eurozone.

GG

Dan_Collins_2

Get ready for the ride, jobs will go later this year or early next! This is when it gets messy!