What is the MPC’s aim?

 

              For more than a year inflation has been well above target. It rose to nearly  double the 2% target last month, whilst RPI inflation is almost 5%.

              None of this should come as a surprise to the MPC members. After all, some of us have been forecasting this for more than a year, warning that there was bound to be a prolonged period of above target price rises if  the Bank kept interest rates down so low and  created more money, driving the value of the pound down.

              It is difficult to believe that the hand picked economists on the MPC were unaware of these forecasts, or unable to see what was happening to the pound, to world commodity prices and to public sector taxes, fees and charges. So it seems more likely that the MPC have been running their affairs with a different end in  view. It looks as if they have given greater priority to helping secure more growth and recovery, than to keeping prices down.

            This should require a change of requirements imposed by Parliament and the government on the Bank, and a change of reporting based on new targets. If the Bank’s main concern is to issue enough money to avoid  slow growth or double dip, let’s have that as a target, measure it, and hear from the Bank how they are going about it.

            The constant question now to those who argue for higher official interest rates is Why do you want to damage the recovery? If you ask why they think this would be the result, they tell you that higher rates would reduce demand, as borrowers have to pay more interest and therefore have less to spend.

              It is not quite as simple as that. Many borrowers are on fixed rates. Most businesses and many  mortgage holders are already  paying rates far higher than the 0.5% official rate. Meanwhile savings rates, also higher than the 0.5% , are nonetheless depressed. If rising official rates took savings rates higher as well, then savers would have more money to spend.

               We should not assume that all  borrowers have a bigger propensity to spend than savers. Some borrowers are using the advantage of low rates on floating rate debts to accelerate repayments. In  other words they are saving more. Many depositors are on modest incomes. They would want to spend extra interest if they earned it.

                Traditionally raising interest rates does tighten money, so that should slow an economy. However, when you have as damaged a banking system as we have with as little new credit for business as we see, the official interest rate is not having such a big impact on the outturn. The government and its banking regulators should be trying to find ways of allowing a bit more credit growth in the business sector to fuel the recovery. This is not mainly about the interest rate. It is about regulation of cash and capital.

               The best way of taking some inflationary pressure off is to allow a modest move up in the pound. Indeed, in the last few days when markets have wondered if an interest rate move is closer, sterling has risen. It appears that higher interest rates would help. It is true exporters would not have such advantageous prices, but they would get some compensation from cheaper imported raw materials and components.

                 What the MPC may come to realise is that at a  certain point rising inflation is self defeating. If wages remain under strict controls and inflation rises, there will be a sharp squeeze on living standards and less spending power as a result of high price rises. If wages started to rise to catch up with prices, we would be into a difficult  inflationary spiral.

                 In a year’s time some of the pressure may be coming off. When VAT and other public sector fees and charges drop out of the rising numbers it will help. If at the same time Asian inflation is coming under control, so will that.  We still have to get there. The VAT rise will be in next month’s figures. So will the higher petrol prices. That fuel tax moderator might come in handy at taking some of the shine off the large price increases at the pumps. The Bank, as always, is in danger of doing too much too late. Sometime this year it might  fight last year’s battle against inflation which it has already lost.

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57 Comments

  1. lifelogic
    Posted January 19, 2011 at 6:59 am | Permalink

    Yes the low rates are only benefiting those will old low margin base linked loans. New loan are on very high margins and are very hard to obtain at all from any of the banks. Best to try a neighbour or friend at the moment.

    Rates clearly need to rise to stop the deliberate devaluation of the pound but we also need to have proper competition in banking . This to lower lending margins at the same time. It would also help if pension fund investment restrictions were eased and bank regulations eased to encourage more sensible bank lending to businesses. They will create jobs if they can borrow and have a belief the the government actually intended to reduce the size of the state, reduce regulation, get rid of daft green energy, and reduce business taxation. Unfortunately we see non of this – just more daft employment regulations, no real bank lending, 50%+ taxes, green energy “taxes” and not even the right words from the government at Westminster or EU level.

  2. lojolondon
    Posted January 19, 2011 at 7:05 am | Permalink

    I do enjoy your bog, John, it is one of the best.

    100% agree with you here – if the bank’s target is to ensure growth we should measure it and track it, but that is not currently the case.

    Note that when the financial crisis hit, my bank changed the terms of it’s tracker mortgage from tracking from within 2% of the base to 3%, so as you say, mortgage owners are paying from 3,5% upwards, meanwhile most savers are on 0,5% or less, this is not sustainable.

    • StevenL
      Posted January 19, 2011 at 7:38 pm | Permalink

      …this is not sustainable…

      Oh yes it is! Person A has £100k in savings which they use to boost their income. Person B has a £100k tracker mortgage. In 2006 A receives £4.5k in interest and B pays £5k in interests, the bank (C) makes £500.

      Now, in 2011, A receives £0.5k in interest and B pays £1k in interest. A is getting old and decides to start spending £4k of their capital a year while they still can. B saves the £4 they are saving. C makes £500.

      This is not only sustainable, this transfer of wealth is right and proper. It serves B right for not ‘getting on the ladder’. B ‘missed the boat’, whereas A made shrewd, sound investments. People who think this is unfair are just jealous. People who think it is ‘unsustainable’ are just fools who don’t understand how ‘the property ladder’ works.

      • davidb
        Posted January 22, 2011 at 10:30 pm | Permalink

        But A is getting 0.5k, B is paying 3.5 k and C is making 3k in the example. So the real winner is the banker who trashed his country for personal gain because he gets 1.5k in a bonus now, after all his country cannot do without him.

        I thought spin might be a thing of the past when Zanu were beaten.

  3. lojolondon
    Posted January 19, 2011 at 7:05 am | Permalink

    Blog, I mean BLOG!! 😉

  4. norman
    Posted January 19, 2011 at 7:07 am | Permalink

    The inflation stuff is all self explanatory, the deficit must come down by fair means or foul.

    I’m now more confident of the fuel tax elevator being put in place too. The Lib Dems are strong in remote parts of Scotland and I heard today on the radio that the locals aren’t happy that Danny Alexander promised it to them last October but now it’s been kicked into the long grass.

    If it had been a nasty Tory asking for lower taxes the idea wouldn’t be entertained but the Lib Dems will need propped up for the May elections up here in Scotland so it may well happen, at least in their favoured areas.

  5. Mike Stallard
    Posted January 19, 2011 at 7:43 am | Permalink

    Nicely said.
    It struck me, while looking at Robert Peston’s programme last night, that we had been discussing everything he said a whole year ago on this blog.

  6. Alte Fritz
    Posted January 19, 2011 at 8:24 am | Permalink

    We now hear little about inter bank lending which was supposed to be a reason for the break in relationship between base rate and “real” interest rates to borrowers. Has this picked up? It was supposed to be important for a bank’s ability to lend.

    • StevenL
      Posted January 19, 2011 at 7:53 pm | Permalink

      It was all lies, the banks were running out of cash to pay back their bondholders (each other in a lot of cases) and spun a massive scare story about how the world would end if they couldn’t pay the bondholders back in behalf of their shareholders (insurance/pensions conglomorates) who also happened to be their bondholders.

      The status quo seems to be that retail depositors (who did not buy risk assets) should bail out all the people who did buy them.

  7. alan jutson
    Posted January 19, 2011 at 8:45 am | Permalink

    John

    Much as I would like a rise in interest rates, for a return on savings, if the base rate does rise, then I do not share your view that the Banks will not increase rates to borrowers. Most borrowing rates seem to be a fixed percentage above base rates, and I do not see the Banks reducing those magins any day soon.

    The fact of the matter is that Banks have increased their margins by about 300% in the last couple of years, so both savers and borrowers have been screwed. The fact that the taxpayer has also funded certain banks, means we have been screwed again through increased tax rises.

    The fact that the Banks balance sheets look better than they were, is no surprise when you can increase your magins by such huge amounts, and thus be able to pay bonuses on the banks financial improvement.

    If all UK businesses could increase their margins by the same amount and as simply as the Banks, then industry would not have a finance problem, but there is the rub, out in the real world of commerce there is competition, real competition, so such rises are simply not possible.

    We need more competition in the banking market.

    Reply: Yes, some busness loans are based on the official rate and they would experience higher rates. There are also a lot of fixed rate mortgages and busienss loans out there, as many have expected rising rates at some point and locked in to fixed rates.

  8. Steve Cox
    Posted January 19, 2011 at 9:12 am | Permalink

    And don’t forget that if banks were paying sensible rates of interest as a result of a higher base rate then the government would reap at least 20% of this benefit in tax withheld at source. Doesn’t Mr. Osborne want to sort out the deficit? A measured move towards restoring some sanity to base rates and thereby start controlling inflation would, I should think, be of much help to government finances. I don’t have the figures readily available. Does anyone know how much income tax on savings account interest the government lost last year compared with, say, the take in 2007?

  9. John C
    Posted January 19, 2011 at 9:18 am | Permalink

    Surely, if the MPC are unofficially allowing inflation to get higher to protect growth, these discussions will be recorded in the minutes of the MPC meetings.

    Is that the case?

    • StevenL
      Posted January 19, 2011 at 8:01 pm | Permalink

      You never been in a meeting where you say something, being quite serious, and they just decide to take it as a joke and don’t minute it?

  10. Brian Tomkinson
    Posted January 19, 2011 at 9:21 am | Permalink

    I note that the Governor of the Bank of England and members of the MPC are not entitled to bonuses. Perhaps that goes some way to explaining why they have so lamentably failed to achieve their objective of keeping CPI at 2% for so long. Payment by results might have produced a different outcome, unless, of course, there is tacit agreement with the Treasury that a good dose of inflation is just what is needed to deal with that inexorably rising public debt. Government policy is: increasing taxation; increasing inflation; increasing government spending. A review of what happened in the 1970s wouldn’t go amiss for those politicians who seem to think that the world began with their election to office. As for the MPC if it doesn’t want or intend to control inflation what is its purpose?

    • Sam Kirklee
      Posted January 19, 2011 at 10:26 am | Permalink

      The job of central banks is to manage the devaluation of currencies to allow politicians to run deficit spending on bribes to voters, subsidies to favoured groups and illegal wars to bolster corporate profits. It also makes continuous propaganda statements to the effect that everything is fine and your wealth isn’t really been stolen by our leaders. Look at the last 50 years from that viewpoint and things become a lot clearer.

      • lola
        Posted January 19, 2011 at 5:08 pm | Permalink

        Boadly seconded

  11. Sam Kirklee
    Posted January 19, 2011 at 9:27 am | Permalink

    I am confused as to why there is always a desire to increase credit. In the medium to long term both business and individuals are better off if they owe less money. I understand the need for short term credit facilities and some longer term finance for investing in machinery and research but credit is not always the best way of obtaining money. Issuing stock is frequently a far better solution for companies and saving up is better for people.
    As we are now in the post industrial age where credit contracts anyway this obsession with expanding credit, that only really benefits the banks, is an anachronism and leads to a bloated parasitical financial sector..
    What the financial authorities would be better off concentrating on is providing a good rate of interest on savings to provide capital for investment and cutting spending and taxes. Anything else is negligence.

    • alan jutson
      Posted January 19, 2011 at 11:01 am | Permalink

      Sam.

      Agreed.

      The problem is that people seem to want things today not tomorrow, so the lending criteria, and the borrowing culture needs to change.

    • Andy Duncan
      Posted January 19, 2011 at 8:02 pm | Permalink

      > I am confused as to why there is always a desire to increase credit

      It’s a very long answer to quite a short statement, but there is one book which will answer every question you’ve ever had about banking and bankers.

      The book is:
      ‘Money, Bank Credit, and Economic Cycles’, by Jesus Huerta de Soto

      You can download a full free PDF copy of the book from here:

      > http://mises.org/resources/2745

      It’s quite a read, but if you make it through to the other side, then you will never have any questions about banking ever again.

  12. John C
    Posted January 19, 2011 at 9:27 am | Permalink

    I found the minutes:

    “Most of those members considered that the accumulation of news over recent months had probably shifted the balance of risks to inflation in the medium term upwards”

    They don’t seem to want to do anything about it though.

  13. waramess
    Posted January 19, 2011 at 10:17 am | Permalink

    The MPC as a group seem so completely puzzled by the entire business they are unable to even convince one another about the way forward, so they do nothing.

    Increasing interest rates will increase the value of the currency against everything and help control inflation, and that after all is what their remit is about.

    There is no growth and so there is nothing to stifle and no matter how closely they examine the entrails of statistics they will find nothing convincing.

    Higher interest rates will cause some discomfort for overleveraged homeowners and that is a hidden blessing as a further fall in house prices will be a good boost for first time buyers. a significant rise in interest rates will however be necessary before that is the case.

    No chance of banks lending against house prices again until they feel comfortable with the future value of their security and that will to some large extent depend on interest rates being at a sustainable level.

    Savers do spend and an increase in interest rates will see savers spending their interest income again.

    The problem with the MPC is they are to a man Keynesians in philosophy and their chosen solutions have not worked. They can hardly now look to the Austrians, for example and so their best way forward is to stick a finger in each ear and sing lalala whilst trying to look serious and learned.

  14. Javelin
    Posted January 19, 2011 at 10:30 am | Permalink

    I think the MPE need to disclose their own assets to prevent a conflict of interest. For example how many houses do they own. Should they have their mortgages paid for.

    • Javelin
      Posted January 19, 2011 at 10:38 am | Permalink

      I obviously meant the interest part of their mortgage.

    • Javelin
      Posted January 19, 2011 at 12:17 pm | Permalink

      Another interesting point. How can the BofE have credibility as regulators when their most important function has conflict of interest between interest rates and the MPC members mortgages. They need full discloser of their loans and mortgages. How do we know the MPC don’t all have a string of mortgages each?

      They are turkeys voting for Christmas.

      • John C
        Posted January 19, 2011 at 7:09 pm | Permalink

        You don’t have to worry about conflicts of interest.

        The MPC seem to be always saying that the upward pressure on inflation is down to “medium term” effects.

        I always hear that the MPC look at inflation 2 years ahead. So, from that, I assume that “medium term” means somewhere between 10-14 months.

        Well, as CPI has been well above target for over 12 months I can only assume that their definition of “medium term” is pretty elastic.

        I was astounded on “The Daily Politics”, Tuesday, that both guests (one an advertising guru, the other “claimed” to be an economist) wanted the BofE to delay raising interest rates to “protect growth”.

        The advertising guru at least mentioned that rates should increase this year. The “economist” wanted any increase delayed until 2012!

        I’m convinced that Peter D. Schiff, in his book, “How an Economy Grows and, Why it Crashes” hits the nail on the head when it comes to government reaction to massive debt.

        The easiest political solution is to allow an increase in inflation to reduce the debt over time. With unsustainable debt (The USA) the best option, but most politically damaging, is to default. (Argentina – doing OK now thank you!)

        The problem is that, you cannot easily have a controlled, limited period of inflation. The danger is that, once it gets hold, it will take a decade to eradicate.

        I’m becoming more convinced that the unwritten (certainly, never minuted) “understanding” between Government and the BofE is that their aim is to allow a short period of relatively harmless inflation to ease the debt burden.

        I bet CPI is 4.0+ next month!

        The “economist” on “The Daily Politics” discounted the inflationary effect of the VAT rise on January 4th as he felt that a lot of companies would have increased their prices before January and would try to claim that they were “absorbing” the VAT increase as a marketing gimmick.

        The problem is that all retailers were desperately competing for custom during December, so which of them “stealthily” put up prices?

    • Paul B
      Posted January 19, 2011 at 12:49 pm | Permalink

      Don’t forget thier inflation linked pensions…

      • John C
        Posted January 19, 2011 at 7:15 pm | Permalink

        Ah,

        That doesn’t help either way.

        (And I have one! Sadly, only for 10 years of my career, not like some MPs I could mention…)

    • StevenL
      Posted January 19, 2011 at 8:05 pm | Permalink

      Yes, you’d think there would be a register of interests for someone who’s job it was to set interest rates declaring how much debt they had wouldn’t you?

  15. English Pensioner
    Posted January 19, 2011 at 10:32 am | Permalink

    I can’t understand why we need an official rate of interest. Why can’t we simply have a free market within the UK with banks charging and paying whatever is competitive in order to get business? There’s no “World Bank Rate”, countries and major organisations which want to borrow on the world markets have to pay the going rate according to their credit worthiness. The UK can apparently borrow on these markets at cheaper rates than, say, Ireland, but they are still well above the mythical UK bank rate. Its just a pity that I can’t invest my savings in this World Market and get a more sensible rate of interest; as it is, there is no incentive to save with the result that before Christmas we went on a spending spree buying every “high ticket” item that we thought we might need with in the next year or so, and will continue to do so. After all, once we get our savings down a bit, we might then become eligible for additional benefits, so just what is the point of saving.
    Or is the devious idea to get all of us with savings to spend our money, so as to boost the economy (of far eastern countries).

    • waramess
      Posted January 19, 2011 at 12:40 pm | Permalink

      The reason of course is inflationn is the best stealth tax of all and probably raises more than any other single tax. that plus the fact you are not being paid money on your savings means the banks rebuild their balance sheets with little or no help from the government.

      Honesty is no more a part of this system so there is no point in relying on it. Just make their lives as difficult as you can. Don’t spend and keep all money on the shortest possible tenor. After all 3 percent is hardly worth the bother.

  16. GJ Wyatt
    Posted January 19, 2011 at 10:39 am | Permalink

    The VAT increase raises the price level; in so doing it takes some spending power out of the personal sector, which is deflationary. It does not have an ongoing inflationary effect except in the illusory sense that it remains visible in monthly year-on-year price level changes until 12 months have passed. So to get a better feel for underlying inflation we should consider month-by-month changes, annualising (roughly, multiplying by 12) if so desired.

    The fall in the exchange value of the pound is a consequence, not a cause of the inflation engineered by this government and its predecessor.

  17. oldtimer
    Posted January 19, 2011 at 10:55 am | Permalink

    To state the obvious: the effect of raising VAT to 20% will indeed drop out of the inflation index one year on (assuming there is not another VAT rate hike then) but it will not drop out of the prices we pay for VATable products. We shall be paying that higher price for ever.

  18. Colin Boyd
    Posted January 19, 2011 at 10:55 am | Permalink

    Excellent piece.

    It would be interesting to know the value of the transfer from Bank margins to Savers pockets of say a 1% increase in interest rates.

  19. JT
    Posted January 19, 2011 at 10:56 am | Permalink

    Raising interest rates is a very unsubtle way of choking off inflation.
    More targetted approaches are needed.
    Given the scale and scope of global financial money flows, raising interest rates has many impacts that are determinental to the domestic economy. Meanwhile higher rates impact many parts of the domestic economy that are not experiencing inflation.
    Therefore the MPC ( firstly should be abolished as a/ its failed in its remit b/ is too important a policy tool for government – who are our representatives) .. but assuming the politicians like hiding behind mpc .. the MPC should be targetting the components that are driving our inflation ..
    Food / Commodities / Materials > thats what needs monitoring/ccontrolling

  20. sm
    Posted January 19, 2011 at 11:56 am | Permalink

    In my opinion the MPC has a higher mission and it is agreed all behind closed doors. How else is the real debt and continuing deficits to be financed in the short term until the next election?

    The MPC is interested in fixing the banks. The banks are interested in doing what they do by creating more money,making more fees ,making more commissions. The banking market appears to be a fixed market. We can’t afford to bail them out again. That is why bank bonuses,salaries and dividends need to be controlled or deferred until all support to the banking system can be removed.

    Dividends are paid out of retained profits? Bonuses are paid out but are treated as expenses and can be paid irrespective of taxable profits. Cash liquidity support should not be required. Perhaps bonuses should be treated as dividend distributions for tax purposes. We should question the “profits” and the re-examine the legal basis for the distributions and the limited liability of banks too big to fail or save.

  21. Acorn
    Posted January 19, 2011 at 12:11 pm | Permalink

    Makes sense to me JR; but, we are really missing a trick not belonging to this Euro thing. The Irish have come up with a great wheeze when it comes to printing them Euros.

    I thought that any central bank still had to practise double entry book keeping, assets in one column and liabilities in the other, that have to balance; apparently not in the Eurozone. All you have to do is print your own Euros and just tell the ECB you done it. Simples!!!

  22. Jacqui D
    Posted January 19, 2011 at 12:20 pm | Permalink

    Surely inflation is being imported through higher prices for commodities and pushing up production costs. An increase in VAT will only serve to suppress demand even further. I thought the Govt wanted to encourage people to spend more, not less, stimulating demand.
    Higher interest rates will increase the value of the £ giving people and companies better value for money. This has to be preferable? And surely it is better to raise interest rates at a slower rate and in a more controlled mannner than have it imposed on us by the markets.

  23. James Sutherland
    Posted January 19, 2011 at 12:27 pm | Permalink

    When I see the current rationale for low base rates, I get a mental image of a motorist in a stalled car, frantically grinding the accelerator into the floor because he needs to get moving.

    I get the impression a lot more credit is decoupled from base rates these days, between fixed rate deals and variable, and even “tracker” deals will often have floors so a base rate of 0.5% is treated as being 1% or higher anyway … I certainly see more upside than downside to raising the rate to 1% now. I don’t have detailed breakdowns of the specific effects on mortgages or businesses, but there does seem to be a consensus in financial markets that this will happen in the next six months now.

    As the article says, the MPC is not currently supposed to set rates in order to achieve growth, but in order to control inflation. Were I a member, I would have opposed QE vehemently, and pushed to increase rates already, but then I have always been sceptical of the claimed fears of deflation.

  24. Mark
    Posted January 19, 2011 at 12:28 pm | Permalink

    On the issue of the direction that loans are made, it’s worth looking at this dissection of Basel III:

    http://londonbanker.blogspot.com/2010/12/more-on-lunacy-of-basle-accords.html

    (and the blog, now reactivated, it also worth following for those who want to understand the influence – or lack of it – of Central Banks)

    Because banks must still hold twice as much capital for commercial loans as for a mortgage, mortgages are still favoured: there is no sliding scale based on say LTV and income of borrower. Lending to governments is favoured most of all – now why shouldn’t that be a surprise?

    These guidelines need turning on their head. Then banks will allocate loans more sensibly, and we can see some economic growth rather than the inflation that is encouraged by lending to finance bubbles and wasteful government spending.

  25. A.Sedgwick
    Posted January 19, 2011 at 12:37 pm | Permalink

    The only conclusion is that the MPC have a different agenda, maybe with undercover briefing by HMG. What is puzzling though is their recent past projections for inflation in the short – medium term. They looked wildly optimistic then, now they are seriously inept.
    The double measure of CPI and RPI continue to display sheer political dishonesty. For those on lower incomes paying the myriad of income and sales taxes they are both about half the real rate without even costing net/gross income requirement to cover inflated prices e.g. 7% inflation needs 10+% pay rise.
    As to the official rate, whatever that means these days, 5% is more accurate than 0.5%.

    • Gary
      Posted January 19, 2011 at 6:35 pm | Permalink

      You have highlighted the futility of central planning of the economy. You end up with a mish-mash of contradictions and errors. Scrap this fractional reserve system, let the market set all rates, let money arise spontaneously in the market using Real Bills cleared for gold and throw these banking cartels to the unfettered free market. Rates and the price of gold will very quickly show you unequivocally if there is inflation and it will just as quickly be arbed away.

  26. Andrew Smith
    Posted January 19, 2011 at 1:04 pm | Permalink

    During the recent financial crisis we saw the political class and the financial regulators react with terror when they claimed they saw the possibility of deflation. They will never allow prices generally to fall by even a small amount or rate because that would increase the real value of the liabilities they have built up by spending more than they can get away with taxing.

    So any inflation which is allowed to take place above the declared policy will be locked in for all time. We will not, in my estimation, ever be questioning why the MPC has allowed inflation to run at below the target for 5 successive quarters.

    The MPC always was a lie in the sense that it was never independent; how could it be so when the Chancellor declared their objective and appointed the committee members. Its current performance is a lie even towards the stated target – the BoE and MPC cannot possibly have believed that QE would not add to inflation, but HoC hearings might in future provide new prospective appointees with a check list to find out which economics tracts they had ever read. And if Keynes is the only one – reject them!.

  27. Paul B
    Posted January 19, 2011 at 1:18 pm | Permalink

    The MPC have FAILED to meet the target 30 times in the last 36 months.

    If I had a similar ‘success’ rate I would have been sacked.

    What aren’t the MPC being held accountable for failure?

  28. Peter
    Posted January 19, 2011 at 2:09 pm | Permalink

    Check out the debt counter here
    http://www.debtbombshell.com/
    This is what the Bank of England and Chancellors have done for Britain

  29. Éoin Clarke
    Posted January 19, 2011 at 2:13 pm | Permalink

    John,

    As far as the MPC’s officially stated remit goes you are correct to say that they have strayed from their original terms…

    However, we do have nearly one million youngsters unemployed..
    Our growth is slowing dramtically, and house prices are already in a double dip recession.

    Would it really be a good idea to have punters paying higher mortgages for properties that have halved in value? As a first time buyer, I paid £18k for a propert [2-bed in Belfast]. It is now worth 100k. To pay rising mortgage rates on top of wage restraint and 5-6% inflation seems unfair, and sure to choke consumer spending so drastically as to cut off growth.

    One final point, are higher mortgages included in the inflation calculations?

    • Mark
      Posted January 20, 2011 at 12:03 am | Permalink

      The housing market in Northern Ireland has moved in sympathy with that in Eire, so you are now seeing prices that have halved – whereas at the other extreme some prices in London have recently exceeded their 2007 boom peaks. If we had seen prices allowed to fall in the rest of the UK we might be facing a rather different prescription (and we might be seeing the potential for economic growth not clouded by impending heavy house price falls).

  30. Denis Cooper
    Posted January 19, 2011 at 4:18 pm | Permalink

    As far as the official remit of the MPC is concerned the position is laid down in law, Sections 11 and 12 of the Bank of England Act 1998, and it’s quite straightforward.

    Under Section 11 the over-riding objective of monetary policy must be the control of inflation, which must ALWAYS take precedence over other objectives such as economic growth and employment.

    Moreover in accordance with Section 12 the inflation target has been laid down by the Chancellor in writing, as it happens still by a letter from Alistair Darling last April, and the CPI inflation target is 2% at all times.

    Some short term variability is allowed because of the impossibility of exactly meeting that target every month, even if there were constant fine-tuning adjustments of interest rates, but if CPI deviates by more than 1% from the 2% target then the Governor must write an open letter of explanation to the Chancellor.

    So a judgement on whether the MPC is deliberately setting aside its statutory duty to control inflation, and is instead pursuing some other objective, must hang upon the view taken of the explanations offered by the Governor in his open letters.

    Personally like many others I’m beginning to find them rather unconvincing, but apparently George Osborne is still accepting them; he’s received three open letters of explanation and sent three open replies, all of which may be read here:

    http://www.bankofengland.co.uk/monetarypolicy/inflation.htm

    and so far he hasn’t expressed any disquiet that inflation may be getting out of control, or that the MPC may have lost sight of its remit as laid down in law.

  31. eddyh
    Posted January 19, 2011 at 4:24 pm | Permalink

    See Peter Brooke’s cartoon in the Times today on ” (Mervyn) King’s Speech 2″. Summarises admirably the efficiency of the B of E at controlling inflation.

  32. Alan Wheatley
    Posted January 19, 2011 at 5:06 pm | Permalink

    If inflation is caused by many factors, how can it be sensibly controlled it by the single means of interest rates?

  33. Lindsay McDougall
    Posted January 19, 2011 at 5:25 pm | Permalink

    There is enough post war data to suggest that inflation boosts GDP growth for one year only, after which the opposite effct occurs and carries on recurring. We are not far off the end of that year.

    The current Govenor of the Bank of England and his MPC have clearly not stuck to the knitting – possibly because Gordon Brown told them not to. We need to sack the lot and give their successors very clear instructions.

    These would be that GDP growth or contraction was none of their business, that the price index should include house prices but exclude VAT and excise duty, and that the inflation target should be reduced by 0.5% per annum until it reaches zero.

  34. The ESSEX GIRLS
    Posted January 19, 2011 at 6:08 pm | Permalink

    Please spare a thought for we Landlady Grannies before we get back on the treadmill of rising mortgage rates.
    We subsidised for our band of young professional tenants most of the soaring fees before they then fell so dramatically 2 years ago. Since then we have earned more and been able to continue to hold rents down whilst most costs have risen for our dozen or so London workers. They have appreciated the fairness of the balanced approach and agree this is a 2-way social street; after all we invested 10 years ago for our own retirements and we provide a good stable service.

    The crucial, economy-supporting housing market began its collapse 5 years ago when rates were increased so rapidly and that led onto much that followed. We caution a repeat now as 1/4%+ will make little difference to the economy, lead to more rises in rapid succession and make huge reductions in discretionary expenditure.

    As much as many readers might appreciate John’s traditional interest rate stance it not time for broader thought and the longer-term balance shown by we Landlady Grannies?

    • The ESSEX BOYS
      Posted January 19, 2011 at 7:41 pm | Permalink

      Well stated Ladies.

      Another headline that caught our eye this evening

      “NHS redundancies to cost £1bn as 24,500 jobs are scrapped in radical reform of health service”

      JR and several readers pleaded months ago for re-deployment before expensive redundancies – with limited success it seems. How little time will it be before these same employees are back in a job on the public purse, quite probably re-engaged in doctor’s surgeries with their redundancy cheques tucked away?
      Oh dear.

  35. zorro
    Posted January 19, 2011 at 8:23 pm | Permalink

    As I have said previously, it is perfectly clear that the inflation target is a useful fable which the MPC has no intention of hitting (neither does the government – cash flat over five years with around 5 or 6% annual inflation is the only ‘cut’ they intend to undertake on a macro scale).
    They will talk about raising interest rates but will keep the official bank rate as low as possible because of the interest payment on the government’s own debts. Quite frankly, they have little choice because they are quite incapable of tackling the major issues on public spending, public service reform and immigration.
    Their tax policies will choke off any entrepreneurial sparks……

    zorro

  36. Andrew Gately
    Posted January 19, 2011 at 10:33 pm | Permalink

    I have read many posts that suggest that there is some kind of unofficial agreement between the MPC and the government but I do not think that this is the case.

    I think that the MPC genuinely believes that there is spare capacity in the UK economy which will offset the current inflation spike and inflation will fall below their target.

    I think now that the emerging economies are exporting inflation there is little that the MPC can do to meet the current 2% target. I personally think the remit to keep inflation at 2% should be scrapped in favour of a remit that takes into account external world factors.

    Also it should be recognised that raising the rate of VAT was an inflationery mistake and it would have been more sensible to raise the basic rate of tax.

    Finally interest rates should now be raised to a more sensible level, I think that the UK economy is like a shower with rates below 3% being to cold and above 5% being to hot.

    I would start raising interest rates by .25% each month until it reaches 3% before pausing for reflection. My worry is that the MPC moves interest rates above 5% which will bankrupt many people.

  37. Robert George
    Posted January 20, 2011 at 1:46 am | Permalink

    Bluntly I believe the MPC is far too interested in keeping its political masters on-side and although they would deny it I think that it is the case.

  38. Paul H
    Posted January 20, 2011 at 4:22 pm | Permalink

    The BoE claims to be looking 24 months ahead but was, of course, making that claim 24 months ago. Similarly the “one-off factor” excuse is threadbare – and anyway has only over been appealed to asymmetrically.
    So, to plagiarise another’s analysis, the MPC members are either mad, bad or right in their claim not to have secretly abandoned the inflation target. “Right” has lost all credibility. This leaves “mad”, ie incompetent, or “bad”, ie fraudulent (to be clear, I do not claim fraudulence in the criminal sense). Either is very worrying, although for some reason I find incompetent marginally less so. Your third paragraph tilts the balance in favour of (the third option -ed).
    You once described Mr. King as a man of integrity. What you write today implicitly contradicts that previous statement and – alas – is more likely to be correct.

    Reply: Fraudulent is the wrong word. People can genuinely get it wrong for the best of reasons. If they wait long enough, they may end up getting inflation back down to target, if world commodity prices fall again or if the pound strengthens, for example. It will now be after manyr months of well above target inflation.

  39. John
    Posted January 20, 2011 at 10:48 pm | Permalink

    Unemployment is rising, inflation is rising, councils are issuing redundancy notices to tens of thousands of staff, police numbers are being cut, libraries closed, bus services withdrawn – it’s a pretty bleak economic picture.

    Still, the bankers are getting their bonuses. Maybe the trickledown effect from their enhanced spending power will help the rest of us who have to live in the real world.

  • 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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