The Bank of England’s MPC remains useless(updated)

Today the Monetary Policy Committee met and concluded that it needs to keep the indicative interest rate at 0.5%. Contrary to expectation it did not announce an increase in quantitative easing.

Why?

They have been undertaking substantial quantitative easing because bank lending and money supply are not growing as they wish. What a surprise. Over at the FSA they are instructing the banks to hoard the cash being made available, to shrink their balance sheets and control their lending. No wonder the printed money is not yet hitting the High Street.

The interest rate is silly. We need to encourage more saving in the UK. The economy lived for too long on too much debt. In practise banks offer considerably more than 0.5% to depositors if they want to attract deposits. They certainly charge much more than 0.5% if a company or person is able to get a loan from them.

If the MPC wants to get back into the game, it needs to set an interest rate related to what is going on in the makret.

It looks as if the Bank of England has simply become a vehicle to do the government’s bidding. The government just wants to borrow mega billions to carry on spending. As a result it wishes to keep interest rates down for government debt by setting a very low bank rate and by printing money to buy up government bonds. The Bank has become a branch office of a government determined to go out in a blaze of spending and borrowing on a scale never before attempted. The Bank is helping their scorched earth policy.

And where does all that money go that finds its way into the banks from the printing presses? Into government debt of course. That’s the regulators preferred way for the banks to keep the new higher levels of liquidity needed.

It could all look very worrying once the printing stops. If the yield on government debt then rises the banks will have yet more losses to report as a result. Today’s news on quantitative easing is unclear. The MPC has left open the option of doing more later, whilst carrying on with its current programme.

To go back to the driving analogies, they are still driving by looking in the rear view mirror. The MPC have their foot flat to the floor on the accelerator, but the regulators have their foot on brake as well.

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29 Comments

  1. Mark M
    Posted July 9, 2009 at 7:19 am | Permalink

    So once again we see the ‘independent’ BoE for what it is. An emasculated body with no real power to prevent this government from sending this country down the road to economic ruin.

    The real power is at the FSA. They know if they called time on Brown he’d dissolve the quango and start afresh with a new one and so they are powerless to stop him too.

    Let us hope our children forgive us.

  2. Brian Tomkinson
    Posted July 9, 2009 at 7:59 am | Permalink

    Why is this action regarded as legal? If anyone else printed money to help them continue spending and to pay off their debts they would be imprisoned. Why is the government allowed to do the same thing and even expect to be praised for so doing? In so doing they are putting at risk the future wealth of honest people who earned their money often by hard work. What is the value of a so-called democracy that allows a government to behave in a way that is reminiscent of a tinpot dictator?

    • jean baker
      Posted July 9, 2009 at 8:49 am | Permalink

      You appear to have overlooked ‘General Elections’ which still exist in democratic Britain, along with the right to ‘vote out’ undesirable regimes.

      • Adrian Peirson
        Posted July 9, 2009 at 11:43 am | Permalink

        Unfortunately we are in their Endgame, the same rules may not apply.
        The Swine flu pandemic may usher in new rules.

        • Waramess
          Posted July 9, 2009 at 4:07 pm | Permalink

          My god, you read the Devils Kitchen too

        • jean baker
          Posted July 12, 2009 at 8:22 am | Permalink

          Flu innoculations is a profitable business – not ‘political’ unless the pharmaceutical suppliers are allied to the government.

      • Brian Tomkinson
        Posted July 9, 2009 at 1:29 pm | Permalink

        Jean,
        I think they have elections in Zimbabwe and Iran too!

        • jean baker
          Posted July 12, 2009 at 8:06 am | Permalink

          Corruption and oppression is, indeed, widespread – Zanuliebor & Mugabe have a lot in common !

  3. sm
    Posted July 9, 2009 at 8:25 am | Permalink

    Deflation or inflation as the most pressing problem, and how much of each is the best balance ? They are both happening. Then add an election year not good for balanced policy from an incumbent.

    How will all the QE river of money be reversed, without a snapback in yields and GB£.?

    Looks like, inflation OR taxation and spending restraint.
    How about a hypothecated BBBT (Brown Boom Bust Bank Tax), to provide for the extra interest payments/deferred tax.)?

    All roads do seem to lead to Rome.

    The BOE/MPC has only monetary policy available?

    These huge generational debt spending decisions should require validation via a General Election.

  4. Brian E.
    Posted July 9, 2009 at 10:03 am | Permalink

    I can’t see why there is any need for the Bank of England or anyone else to set the interest rate. We have a commercial environment and logically the banks and building societies should be setting their interest rates such as to draw enough money in from investors to be able to meet the demand for loans. This happened with the inter-bank rates at the start of the present crisis, when they went well above the base rate because is was so hard for the banks to borrow. Now it is starting to happen with some of the Banks & Building Societies, who are offering investors 2-3% above the base rate simply because they have more demands for mortgages than money to supply them.
    The other stupidity that is happening is that the BBC this morning reported that only one in four people were able to get mortgages due to the tightening of financial criteria by lenders, and that this is causing the whole housing market to stagnate. It was reported by the BBC with a sort of disapproving slant, implying it was all the banks’ fault that the market was stagnating and if only they were more generous with their money ……… !
    Seems to me there are a lot of people at the BBC and in the Labour party whom can’t put two and two together and realise that easy and/or generous loans means more risk and that low interest rates are good for borrowers but bad for savers.

    • Steve Cox
      Posted July 9, 2009 at 2:21 pm | Permalink

      Yes, you’ve got it exactly, the elephant in the room that none of the experts seems able to see, or else is simply too afraid to speak its name out loud.

      John, if you read any of these replies, please pass Brian E.’s post on to George Osborne. Interest rates are effectively nationalised. That’s precisely what you are complaining about in this important item. We need to allow the markets to set rates, not some committee of dubious, politically-appointed, wise (ahem), old codgers (who can’t spot an elephant when it’s in the room with them!). With appropriate regulation, of course… 😉

  5. Mike Stallard
    Posted July 9, 2009 at 11:23 am | Permalink

    People often say that the MPs, bankers’ bonuses and fat cats are to blame for just about everything, but actually the whole country has its nose in the trough.
    Mr Brown and his cohort know this. Hence the demands to prevent “Tory Cuts”. I do not think, somehow, that he is referring to defence spending.
    He knows the only hope for the Labour Party is to keep as many snouts in the trough as possible and to keep borrowing until the upturn allows him to pay back the money he is borrowing.
    The pact is this: you keep your snout in the trough and we’ll make sure you can do so.
    I deeply regret that, actually, it is us, the general public, who are to blame because we will not tolerate less money being spent on sacred cows – NHS, Education, Social Services, Benefits, Housing, Railways……
    “Ask not what you can do for your country: ask what your country can do for you.” Wasn’t that fine sentiment first expressed by John Fitzgerald Kennedy?

    • Waramess
      Posted July 9, 2009 at 4:14 pm | Permalink

      Other way round, I think, however the sentiment as it is, is quite poignant

  6. Adrian Peirson
    Posted July 9, 2009 at 11:46 am | Permalink

    If you just assume that Govt is not working in our interests it makes better sense.
    The intention is to destroy us.
    How can they have total control over us and our children unless we are brought to our knees.

  7. jim
    Posted July 9, 2009 at 12:56 pm | Permalink

    I do find it odd that you still seem to think that interest rates should be set by a committee of bureaucrats, instead of by banks based on how much cash they have on deposit and their risk profile. You don’t seem to realise that our current system will always fail.
    O/T The other main issue facing the country is the looming energy crisis. North Sea oil peaked in 1999. Last year we became an oil importer, by 2012 our oil production is projected to fall to 40% of our peak production. That’s another 60 billion pounds per year to add to our structural deficit. It won’t though as we won’t be able to borrow. I hope you realise how bad the next parliament is going to be.

    • Waramess
      Posted July 9, 2009 at 4:30 pm | Permalink

      Well said on both counts but it is something that goes over the heads of most politicians.

      Best to argue with the crowd and then they can pretend they know what is going on (bit like economists really).

      If the proverbial hasn’t actually hit the fan they just pretend that it will never happen and when it does they make great pains to insist you were warning months in advance.

      The chances of uncontrollable inflation are high, a visit or two to the IMF (or anyone else who might lend some money) must be a high probability and, if we ever come out of this crisis we will have to make the best of having almost no industry, very low oil reserves and a pretty dead beat financial services industry.

      Lets hope that by then we will have a government smart enough to have taken an axe to the public sector, Civil Servants and all, and used the opportunity to reduce taxes dramatically, which might just encourage industry to invest here.

      No sign of that happening just yet however whilst Brown makes a virtue out of spending Osbourne wants to share the proceeds of growth (what was he smoking?) and Dave wants to mess around cutting a few quangos down to size.

      Margaret Thatcher, where are you?

    • Adrian Peirson
      Posted July 10, 2009 at 1:53 am | Permalink

      With Sensible population levels, we could strike a balance between growing food and Veg oil in this country.
      (Suggest some people ed) used to pour Veg oil into a Deisel car bought straight from Tescos until they did a programme on the practice on TopGear telling everyone else in the country.

      shortly after that the price of Veg oil in supermarkets went from 50p per litre to around £1.20 per litre.

      Just goes to show how influencial the Petrochemical Lobby is.

      Imagine if we’d kept our fishing grounds too, and if our farming were not stifled by so much EU Red tape.

      And if we hadn’t sold our Car manufacturing to foreign owners.

      can there be any doubt that we are being intentionally gutted.

      • jim
        Posted July 10, 2009 at 1:49 pm | Permalink

        I hope that with the oil issue the recently discovered fungus in Patagonia, which converts plant cellulose to bio-diesel offers some hope. But development time won’t stop us meeting our crunch.
        As things stand we face a government that can’t pay its bills and a deeply divided population.
        It does very much look like we are being intentionally gutted doesn’t it?
        As Waramess says high inflation looks likely, though the BoE seems to have cancelled Brown’s credit card and plans to stop buying our debt. Which means a panic out of sterling can’t be far away. If that is the case then it will be Brown who will have to take the axe to the public sector.

  8. Brian Tomkinson
    Posted July 9, 2009 at 1:26 pm | Permalink

    Something to think about:

    The 100 Euro Note

    It is the month of August, on the shores of the Black Sea . It is raining and the little town looks totally deserted. It is tough times, everybody is in debt, and everybody lives on credit.

    Suddenly, a rich tourist comes to town.

    He enters the only hotel, lays a 100 Euro note on the reception counter and goes to inspect the rooms upstairs in order to choose one.

    The hotel proprietor takes the 100 Euro note and runs to pay his debt to the butcher.

    The butcher takes the 100 Euro note, and runs to pay his debt to the pig grower.

    The pig grower takes the 100 Euro note, and runs to pay his debt to the supplier of his feed and fuel.

    The supplier of feed and fuel takes the 100 Euro note and runs to pay his debt to the town’s prostitute that in these hard times, gave her “services” on credit.

    The hooker runs to the hotel and pays off her debt with the 100 Euro note to the hotel proprietor to pay for the rooms that she rented when she brought her clients there.

    The hotel proprietor then lays the 100 Euro note back on the counter so that the rich tourist will not suspect anything.

    At that moment the tourist comes down after inspecting the rooms and takes his 100 Euro note, after saying that he did not like any of the rooms, and leaves town.

    No one earned anything. No one produced anything. However, the whole town is now without debt and looks to the future with a lot of optimism…..

    And that, ladies and gentlemen, is how Gordon Brown is doing business today.

  9. Jon
    Posted July 9, 2009 at 8:06 pm | Permalink

    We have reached 105 billion of QE so the target of 125 is not far off. A decision will be needed soon and the banks are not really lending yet. As for the FSA, no suprise they are hicking up fines for those tick box errors by 100s of percent. Rake it in for the treasury but act as a bouncer for the real problems that affect people. I heard there was some EDM going through for the Eq Life sham.

    • Adrian Peirson
      Posted July 10, 2009 at 7:08 pm | Permalink

      The banks will be waiting for the Economy to really tank so they can buy up the UK at knowck down prices.
      I don’t know if there is any money to be made
      in that prediction but there it is.

      Now if that money had been given to the Britsh people, say by wiping off their collective mortgage debts, their Car loans and Credit card debt as punishment to the Banks, we’d still have a bouyant economy.

      • Jon
        Posted July 11, 2009 at 9:39 am | Permalink

        A lot of sense there. There are lots of repossessions at huge cost to the tax payer in more toxic debt. This should have been managed by the government owned banks. I would rather knock 20% off someones mortgage in exchange for a share in the property that theowner could then afford to pay rather than repossessions and a big debt on the tax payer.

        Unfortunately for banks like RBS many of the loans are foreign.

      • Denis Cooper
        Posted July 11, 2009 at 2:10 pm | Permalink

        But while that might punish the banks, above all it would punish savers. One man’s debt is another man’s savings; cancel the debt owed by the first, and you also have to cancel the savings built up by the second. I wouldn’t take kindly to that suggestion!

        • Adrian Peirson
          Posted July 12, 2009 at 12:45 pm | Permalink

          I’m sure most savers also have loans, credit card debts, mortgages, practically everyone would benefit in some way.
          They wouldn’t lose their savings, the New Banks could honour their deposits.

  10. Lola
    Posted July 9, 2009 at 9:27 pm | Permalink

    I am becoming more and more firmly of the opinion that the MPC, in fact all central bankers and their political masters are absolutely useless. Their constant fiddling about with interest rates and money supply to ‘manage’ or ‘run’ the economy is entirely foolish. When markets are indicating that rates should be increased, invariably the central banks cuts them. When the markets are indicating a cut in rates, the central bank increases them. What defeats me is why they are so very arrogant that they think they know better than the collective wisdom of the crowds of savers and investors throught the UK, or the world for that matter. This constant tinkering just makes the whole thing worse. It just increases the amplitue of the succeeeding booms and busts.

    Why don’t governments make sure that they run sound money and set the rate of lender of last resort in line with market rates? Personally I reckon it would be a lot safer if the whole state monopoly of money was abandoned. Sound money is much too serious a business to be entrusted to politicians and central banks.

    • Adrian Peirson
      Posted July 10, 2009 at 7:15 pm | Permalink

      They can’t allow sound money, sound money allows us control over our lives and prevents them from having control of our lives.
      The BofE lowers rates, making it attractive to us in terms of credit and loans, when enough of us bite, they raise raites again and haul in the assets of those who can no longer afford the new Interest rates.
      Rinse and Repeat until the Banks own almost everything, that is the purpose of the Boom bust economic cycle.

      All this wealth, misappropriated by thin air credit and unbacked fiat money which they simply conjure up out of thin air.

  11. Ian Jones
    Posted July 10, 2009 at 2:38 am | Permalink

    I wonder if the Bank aren’t testing the waters to see how far the markets will go if they think the bank will stop printing soon.

    The big problem will come when they try to reverse the policy or will they not bother and just leave it to run its course i.e. inflation.

  12. Javelin
    Posted July 10, 2009 at 10:27 pm | Permalink

    I’ve been wondering whether the predicted 3m unemployed includes the 10-20% of Expected government cuts. I don’t think it does because it is calculated as the 4Q2010, which if you think about it doesn’t give enough time for public sector cuts after the election to start rolling.

    So I think Im on pretty safe ground predicting 4 million unemployed, which doesn’t include the 1 million faux disabled sick. So I think a figure of 5 million unemployed turns out to be quite a conservative estimate.

  13. Denis Cooper
    Posted July 11, 2009 at 2:22 pm | Permalink

    “No wonder the printed money is not yet hitting the High Street.”

    Of course it is; the printed money has been passed to the Treasury via the gilts market; the Treasury has provided it to government departments to pay public sector employees and contractors; then the recipients have been spending it in the shops and elsewhere.

    I’ve said before that if the Bank was literally printing money, and teachers, nurses, council workers etc were still being paid in notes and coins in a brown wage packet, then by now they would have noticed an unusually high proportion of crisp, newly printed banknotes in their pay; and also by now shopkeepers would have noticed that they were being offered a lot more new banknotes than usual.

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    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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