The Bank has lost the last battle – it needs to concentrate on the next one

Yesterday’s inflation figures make grim reading – even grimmer than many forecasters were expecting. We may have a few months more of dreadful inflation figures.

Readers of this blog will not be surprised. They will also know that I want the Bank and the government to start tackling slowdown and property crash, recognising that next year inflation will tumble anyway. They need to accept that they lost the battle against inflation for this year during the heayd days of their mistakes in 2005-6, apologise and try and get the next move right.

Fortunately, as predicted, commodity prices and energy prices have started to fall. We are already seeing sharp declines from the unacceptably high peaks on the forecourts for petrol and diesel. Price competition is intense, as supermarkets and large petrol retailers compete for the diminishing spending power of the customers. There could be further declines as the world economy slows and weakens under the impact of the Credit Crunch.

The masochists at the Bank of England want to make the crash worse by keeping rates high and even threatening higher rates. The government is making the crunch worse by its own profilgacy, pre-empting cash needed elsewhere and spending some of it on propping up a nationalised mortgage bank that is then not allowed to make new advances! Maybe the Bank does need to threaten higher interest artes to try to discipline the government. After all, the government has powered some of the borrowing excess with its off balance sheet adventures, its PFIs, PPPs and nationalised companies.

The dollar is now strengthening as the US current account improves and as US companies become more competitive. The European Central Bank will continue to keep rates too high for too long because it also made inflation mistakes in the miiddle of this decade and is sore about the current consequences.At some point they will have to cut rates to ease the pressures, and the Euro will cease to be so strong.

Governments and Central Banks have made a right mess of the last few years. They were too relaxed in the good times, misunderstanding just how much credit they had released and how long it took for that to cause inflaiton. Now they are too relaxed abnout the bad times, and seem unable to understand how deflationary the Credit Crunch will prove to be.

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5 Comments

  1. Kit
    Posted August 13, 2008 at 10:26 am | Permalink

    "The Bank has lost the last battle – it needs to concentrate on the next one."

    That battle, and the war, is always inflation. Your solution is to re-live the 1970s.
    Creating an inflationary boom is the last thing this country needs.

  2. Brian Tomkinson
    Posted August 13, 2008 at 10:31 am | Permalink

    JR: "next year inflation will tumble anyway"

    This is a typical politician's view. The statistics, which by the way no-one believes, may look better next year but I wouldn't count on it. In any case during that time people on fixed incomes, unlike politicians who seem to pay for very little out of their own pockets and have the best pensions in the land, will see their standard of living drop with no hope of ever regaining their previous position. Meanwhile the unions will try to increase wages to keep up with rising prices. Petrol prices may be reducing but are still well above the levels of a year ago. All the basic essentials such as food and energy have gone up massively with no sign of any reductions despite the drop in oil prices. The Bank of England Monetary Committee has the responsibility to bring inflation back under control. If it sends the signal, that you suggest, that it doesn't really matter, then I believe inflation will be far worse. I wrote before about the worrying similarities with the 1970s and haven't changed my view.

    Reply: it's not a typical politician's view. it is a serious forecast, and for once I find myself in agreement with the Bank of England who also today forecast recession and a sharp reduction in inflation next year.

    • Brian Tomkinson
      Posted August 13, 2008 at 8:48 pm | Permalink

      John, I doubt that the Bank shares your view about reducing interest rates at this time.

      Reply: Clearly they don't, so they are determined to make the slowdown worse, just as their ignorance of the credit bubble on the way up fuelled the inflation.

  3. anon
    Posted August 13, 2008 at 11:40 am | Permalink

    It appears that they're following, "Fiat Money Inflation in France (Paperback) by Andrew Dickson White.

    Here's what one of the reviewers from the Amazon link says, "This is an excellent narrative of the problems created by a government eager to generate prosperity through the repeated issue of paper money, without realising the consequences of devaluing the currency.

    Undoubtedly, it represents a story that will be repeated again in the future, which makes it all the more a worthwhile read. "

    But then again, John, didn't you call for a bit of inflation?

    The book is an interesting read: I'd recommend it but I get the impression that you've all read it before: that's one of the things that hurts.

  4. Tony Makara
    Posted August 13, 2008 at 2:05 pm | Permalink

    The more Britain can supply its own market they less it will need to pursue a stong pound/high interest rate economy. Nations dependent on high levels of imports are forced to pay for increased liquidity in terms of imported inflation as cutting rates weakens their currency. Why are senior politicians not addressing this fundamental economic question? John, can you see a way in which liquidity can be increased without importing inflation?

    Reply: Yes, if other Central Banks also see the need to expand liquidity and lower rates at the same time. The UK needs to curb its public borrowing to protect us from a slide in the pound.

  • 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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