The Bank of England’s warning

The Bank is right to warn that inflation will go up again, but wrong if they think this means they need to keep interest rates up. They cannot stop inflation rising a bit this winter – they set that up by fixing interest rates that were too low during the boom times. Today they can decide how quickly we bring the credit crunch to an end,and how much damage it will do to jobs, property prices and activity over the next couple of years.

I find the dithering of the Chancellor and his Bank advisers pathetic. They have lost control of interest rates – rates in the inter bank market are well above the indicative rate the Bank of England is setting. They argue with each other, sometimes in public, about how tight or loose condtions are and whether the economy is slowing down. The MPC is as much use as an academic seminar at the moment. If they want to get back in charge the Bank has to start to lead rates down from the high real levels in the market. (4.5% above CPI inflation)

Let’s make it easier for the authorities – let’s keep it simple.

Commercial property prices are falling sharply.
House prices have started to fall.
Mortgage loans are sharply down.
Other loans are more difficult to obtain.
Credit is getting scarcer and dearer.
Banks are short of cash.

Whenever did you have a future inflation problem on the back of a credit squeeze?
How tough do they want it to get?

It has taken the Bank of England and this Chancellor a long time to undersatand the need to supply liquidity to a strapped banking system – and a run on an important bank. The US and the European authorities got the message much earlier and did not have runs on their banks. It was easy to forsee, as this blog did.

Now the UK authorities have grasped this point, can they not also understand why the US authorities have started to cut interest rates and are talking about cutting them some more?

The Chancellor talks about this credit crunch as if it were a US phenomenon. Let’s try again:


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  1. Colin Hart
    Posted November 30, 2007 at 10:51 am | Permalink

    Curious no one nowadays ever talks about how the money supply is out of control. It has been for some time. The difference between now and then (the 70s) is that it is the banks that have been printing money, or at least lending irresponsibly, rather than government. The result has been too much funny money chasing what are perceived to be too few goods – housing. The supply of funny money has now run out. The system needs to be drained of excess liquidity. The market is doing just that. The best thing for government and central banks to do is stand back and let it happen. It will hurt but sometimes there is no other way for us all to learn.

    Reply: The easy money years created comparatively little inflation because a) there was a big expansion of world capacity through the rise of India and China and b) a big increase in productivity thnaks to the digital revolution. The tight money period is now too tight and will cause more harm than is needed to control inflaiton, looking out a year or so.

  2. paul hill
    Posted January 2, 2008 at 2:42 am | Permalink

    Very much agree with Colin Hart.The current Treasury inflation measure is deliberately designed to reduce the headline inflation rate and not " frighten the horses".

    Whilst it is reasonable to point out that through outsourcing manufacturing to Asia and (until now) low commodity prices we have kept this measure at low levels there has been a huge rise in asset prices fuelled by very cheap money.This is particularly clear in the housing and other asset markets.

    Simultaneously disturbing and interesting that someone I had perceived as an extremely "dehydrated" monetarist makes this judgement at this time.

    My sense of the rather conflicting readings on the economic instrument panel is that there is an increasing risk of stagflation and that Eddie George is beginning to signal this to the Teasury

    Anyway this remains an ocean of calm and courtesy amidst the hurly burly of the Blogosphere-so much a more pleasant place to watch the Governments extraordinary self combustion

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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