Muddled messages from Central Banks

This week the ECB seemed to hint that Euro rates might have to rise and bond buying be reined in given the uptick in inflation and some recovery in activity. The Euro strengthened, then the ECB seemed to stress again continuing easy money and negative rates.

Meanwhile the Bank of England Governor said UK rates would stay low, only to be followed by his Chief Economist arguing that we might need an earlier rise. This led to a revised view from the Governor not ruling out some earlier rise. The pound rallied more against the dollar as a result. The pound has now risen 8% against the dollar from the low. All those who think UK inflation is driven by sterling will presumably now revise their inflation forecasts down, though they do not do so noisily as they did when get pound was falling.

Does any of this matter? Yes it does. Markets which determine mortgage rates and other real world matters have been unsettled by wobbly guidance from mighty institutions that have great impact on the rest of us. They need consistent and clear guidance, as the Fed successfully gave in the run up to its rate rises, and is now seeking to give in its wish to cut back the amount of created money and bonds it holds.

The Bank of England wants to cut personal borrowing in general and car loans in particular. This is seeking cuts and tightening before the recovery is well advanced. It comes on top of the damage the large increases in VED on dearer cars have caused, and the adverse impact of high Stamp duties and Buy to let changes on the housing market.

It has been a good couple of weeks for those of us who think the main determinant of currency moves is actual and expected interest rate differentials, not Brexit. The UK authorities are tightening prematurely, so expect less inflation and a bit less growth as a result.With expanding numbers of jobs, a short term spike in inflation and more growth to come allowing current levels of consumer borrowing would be a sensible approach. Just as the Bank tells us it is looking through the inflation spike, so should consumers who have jobs.

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64 Comments

  1. Enigma
    Posted July 1, 2017 at 5:14 am | Permalink

    “Muddled messages from Central Banks”
    Now more than before, in my opinion, the economists seem confused. Predictions they have made in regard to everything do not seem to have come to pass. They got it wrong about the economy of China, India, even Africa. They got the Russian economy dead wrong.Mr Carney did not exactly say the sanctions against Russia would finish her but more or less. Not quite right!

    The EU didn’t expect the Baltic states and Finland to do particularly well. It got that wrong. It didn’t get Greece wrong. Just that it remains the same problem as before despite their best efforts.
    Pointless listening to Canadian “experts” about the effects of Brexit. You might expect them to have a better inkling due to language and culture to ourselves but they are ignorant and perhaps have lost touch altogether with their British roots. It must be the hard cold winters!

    • Hope
      Posted July 1, 2017 at 2:19 pm | Permalink

      Iceland said no thank you to the EU. They got it right.

  2. Newmania
    Posted July 1, 2017 at 5:34 am | Permalink

    Its nothing to do with Brexit Part 97

    This sort of “material “ ought to come with a twirling bow time and a red nose , just in case anyone took it seriously . No , Brexit dropped sterling , Brexit meant interest had to be held down and Brexit is causing both the slow down in growth and inflation , as any fule do know
    Thank you John for making us all poorer , thanks for the collapse in savings and investment and thanks for the pointless consumer boom with which the country was driven over the Brexit line and must now pay.

    Thanks for all the lies that have dumped increased borrowing on my children, worse austerity than was needed , and thanks for jeopardising jobs across the country .No thanks for buoyant employment which pre dates Brexit and if anyone may take credit is George Osborne the last Tory with to leave the building

    I see you chums Katie Hopkins Corbyn and Farrage are all delighted with the way things are going …. Which just about sums it up. Nuts nuts nuts

    Reply These silly rants demean you

    • Edward2
      Posted July 1, 2017 at 9:01 am | Permalink

      Similar inflation levels in USA and Germany.
      Odd that.

      • Hope
        Posted July 1, 2017 at 10:11 am | Permalink

        JR, May and others want/advocate European Arrest Warrant, when she did not have to give away our rights formed over hundreds of years, ECJ, ECHR and Sharia law. Independent England wants none of it. We want our law with our courts. You need to ask is May with side kick Green, the people to bring this about. Or will dithering Maynput one foot in and one foot Out?

        • Hope
          Posted July 1, 2017 at 2:22 pm | Permalink

          We read today Green. A,I g. Moments to draw your party further left to get the younger vote. He might think about those middle aged and older people who left him at the last election. People like me. Those Labour voters who went to UKIP and then returned to Labour.

          Good grief your leadership is so out of whack with the public it is breathtaking.

    • stred
      Posted July 1, 2017 at 9:08 am | Permalink

      ‘mania. Put on specs, look at chart and note date when Sterling was at £1.40 to Euro.
      Take tablet and lie down.

      http://www.xe.com/currencycharts/?from=GBP&to=EUR&view=2Y

    • Denis Cooper
      Posted July 1, 2017 at 10:31 am | Permalink

      Another thing which predates the referendum is the decline in the external value of sterling, which started two years ago.

      There is a chart of the trade weighted sterling index on page 24 of the June 2017 House of Commons Library report linked here:

      http://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7994

      it would now be very difficult to see from that chart when the EU referendum took place, if the only information available was that it had the effect of knocking back the external value of sterling.

    • NickC
      Posted July 1, 2017 at 1:57 pm | Permalink

      Newmania, When you go off on one like this, just pause for a moment before hitting send, and use “Brazil” say, or “India”, instead of “the UK”, even if the description “the UK” is merely implicit. Does India being independent of the EU cause the rupee to drop?

      Provided the government carries out the wishes expressed in the Referendum, the UK will simply join the other 168 independent countries in the world. There is nothing terrible, or terribly difficult, about that.

  3. Ed Mahony
    Posted July 1, 2017 at 6:26 am | Permalink

    It looks like Daniel Hannan is going for the Swiss option (where we’re sort of half in, half out of the single market). I imagine this is the position of David Davis and many others in the Conservative Party who voted to leave?

    Please note, the Swiss have spent years deliberating about joining the EU (in other words, experts on the pros and cons of the EU), and their latest position towards the EU is to reject imposing quotas on EU workers so as to enhance access to the EU single market.

    So no way do the Swiss want to be outside the single market. Although the Swiss export more to the EU than we do, our economy is much larger, and a larger economy like ours, would be much more challenging to re-jog outside the EU, not forgetting our exports to the EU are still a sizeable 40%.

    Another reason why people should be extremely concerned about the UK leaving the single market, and why some kind of Swiss model is now looking like the most likely option (appealing, no doubt, to many Conservatives MPs who voted to leave, as well as many others in Parliament).

    Reply Not sp. We voted to leave and to take control of our laws, our borders and our money. That is what we must do. Parliament has just voted decisively to leave the single market and customs union.

    • Ed Mahony
      Posted July 1, 2017 at 6:45 am | Permalink

      And if Theresa May is proving intransigent towards David Davis over ECJ (and the Swiss come under ECJ as far as I believe) then Mrs May is proving to be more of a hard Brexiteer than some/many of those Tories, such as David Davis, who supported Leave in the Referendum.

      • Hope
        Posted July 1, 2017 at 10:15 am | Permalink

        Jr, dealers do not want to buy cars. They want people to have PCP’s so they will permanently pay to lease the car.

      • Denis Cooper
        Posted July 1, 2017 at 11:32 am | Permalink

        The intransigence is from the EU leaders. From October 2016:

        https://www.ft.com/content/1ba02b24-8c8a-11e6-8cb7-e7ada1d123b1?mhq5j=e1

        “Jean-Claude Juncker has called for EU leaders to be “intransigent” with Britain when holding talks over the country’s departure from the bloc to prevent the unravelling of the six-decade old institution.”

        “Echoing comments from François Hollande, French president, and from Angela Merkel, German chancellor, the day before, Mr Juncker reminded the audience that once out of the EU, the UK could not win back access to the single market without embracing the same principles imposed on all members, including freedom of movement.

        The uncompromising message from Paris, Berlin and Brussels is a response to a hardening of the UK position, diplomats say. Last Sunday, British prime minister Theresa May hinted that she might engage in “hard Brexit” talks by vowing to regain control over immigration, in a challenge to the single market’s principle of free movement of labour.”

        Which is why our government has accepted that the EU is not going to split its “four freedoms” to enable the UK to stay in its single market:

        https://www.politicshome.com/news/europe/eu-policy-agenda/brexit/news/82451/read-theresa-mays-full-speech-outlining-britains-12

        “But I want to be clear. What I am proposing cannot mean membership of the Single Market. European leaders have said many times that membership means accepting the “four freedoms” of goods, capital, services and people … both sides in the referendum campaign made it clear that a vote to leave the EU would be a vote to leave the Single Market. So we do not seek membership of the Single Market. Instead we seek the greatest possible access to it through a new, comprehensive, bold and ambitious Free Trade Agreement.”

    • Sir Joe Soap
      Posted July 1, 2017 at 8:51 am | Permalink

      Switzerland VOLUNTARILY adopts some EU law, VOLUNTARILY allows EU immigration, and definitely has the right to control its borders. It also VOLUNTARILY pegs its currency from time to time to the Euro, when in its own interest. It de facto has control over its laws, borders and money. Switzerland also has the RIGHT to negotiate its own trade deals, and in this case actually does so.

      My guess is that we are going to hear a lot more about the fine distinction between us having the RIGHT to refuse EU immigration, i.e. the RIGHT to control it, and us actually doing it. The same with laws and EU contributions.

      We will end up with many elements of the Swiss model, and ’twas always thus. Our challenge is to do somewhat better, as we have an adverse balance of trade with the EU, and Switzerland is a net exporter.

      • ian wragg
        Posted July 1, 2017 at 9:28 am | Permalink

        Rubbish, Switzerland recently had a referendum to restrict EU immigration and the government has ignored the result as the EU threatened to cancel all bi-lateral agreements.
        There is nothing voluntary about the ECJ overseeing Swiss law although the latest power grab by Brussels is being repelled.

      • Denis Cooper
        Posted July 1, 2017 at 11:18 am | Permalink

        The Swiss do NOT have the right to restrict EU immigration, beyond some very limited and marginal restrictions allowed by the treaties.

        The Swiss people voted to do so in a 2014 referendum, prompting the EU to threaten that the whole package of bi-lateral treaties would then fall.

        https://en.wikipedia.org/wiki/Swiss_immigration_referendum,_February_2014

        “The EU/CH bilateral treaties are all co-dependent, if one is terminated then all are terminated. Consequently, should Switzerland choose unilaterally to cancel the ‘free movement’ agreement then all its agreements with the EU will lapse unless a compromise is found. On 22 December 2016, Switzerland and the EU concluded an agreement that a new Swiss law (in response to the referendum) may require Swiss employers to give priority to Swiss-based job seekers (Swiss nationals and foreigners registered in Swiss job agencies) but does not limit the free movement of EU workers to Switzerland.”

        • Sir Joe Soap
          Posted July 1, 2017 at 7:18 pm | Permalink

          So, all its treaties with the EU – it still has the right to limit EU immigration, and we as members of the EU do not.
          The point I am making is that it can/probably will be argued that such a situation amounts to “controlling immigration” or “controlling borders” into the UK.

          • Denis Cooper
            Posted July 2, 2017 at 9:34 am | Permalink

            As far as I’m aware Switzerland has about the same rights to restrict EU immigration as we do as an EU member state. But they are very limited rights; for example if somebody is a known serious criminal we may be able to exclude him, if it can be proved that somebody is only pretending to be looking for work while drawing benefits then maybe he can be asked to leave, if there is some serious emergency resulting from immigration then we may be able to impose temporary controls for as long as the EU Commission and then the ECJ agree that it is within the EU treaties. It will be argued by some that this amounts to “controlling immigration”, although in the similar case of the EEA countries at least some of its advocates have the honesty to refer to “some limited control” or a “a little more control than now”.

          • rose
            Posted July 5, 2017 at 10:43 pm | Permalink

            If the Swiss were in control they wouldn’t have a quarter of their population foreign.

    • Denis Cooper
      Posted July 1, 2017 at 11:07 am | Permalink

      The Swiss are outside the EU Single Market and the EU Customs Union. That is why they have a raft of bi-lateral treaties with the EU, to grant them a high degree of free access to the EU Single Market. It is no different in principle from a country having treaties with the USA to allow it a high degree of free access to the USA internal market without it actually being a member state of the USA and so the USA internal or single market. Unfortunately the package of bi-lateral treaties between Switzerland and the EU includes the free movement of persons, and the EU is threatening to terminate all the treaties if the Swiss government carries out the wishes of the people and restricts immigration from the EU. Like some others, but unlike the great majority of UK citizens, Daniel Hannan is not too bothered about controlling immigration into the UK – he has said as much in the past – and therefore he is prepared to consider options which do not restore our control over immigration policy. I would not agree with that, as far as I am concerned we must avoid getting ourselves into the same trap as the Swiss, where in effect they have agreed to the EU applying trade sanctions if they try to limit the immigration of EU citizens into their national homeland.

      • Sir Joe Soap
        Posted July 1, 2017 at 7:33 pm | Permalink

        As said we are in a better position than the Swiss via a vis trade balance with the EU, but do we have negotiators with the balls to exploit that position and play hard ball?

    • NickC
      Posted July 1, 2017 at 2:12 pm | Permalink

      Ed, We voted to return the UK to independence – no EU control of UK wide law-making, laws, courts, “competences”, taxes, policies, or money. We are to represent ourselves to world organisations, including the WTO, and in world, or regional, or bi-lateral agreements..

      The Remain view that we should exchange our independence, or part of our freedom as an independent nation, for a supposed slightly better (it actually isn’t) trading arrangement with the EU is an illusion. It is impossible that we should do better than being independent. To think otherwise is to suppose that the French for example will, in part, work to support us. Why should they?

    • forthurst
      Posted July 1, 2017 at 4:26 pm | Permalink

      Anyone deluded enough to believe that the ‘Swiss model’ is appropriate for us should look first at the benefits systems in operation in Switzerland in comparison with ours.

  4. Posted July 1, 2017 at 6:27 am | Permalink

    What is the effect of the massive national debt interest rates please?
    And how does the resultant low rate affect personal borrowing?
    Or how does it affect house prices? – they are a good investment in times of threatened inflation and low return on money lending.
    Yet nobody seems to have noticed…

    • Caterpillar
      Posted July 1, 2017 at 8:57 am | Permalink

      Mike Stallard,

      As has been noted here before, the Deputy Governor Andy Haldane said last summer that property was a better bet than pensions – this is indeed the misallocation of resources brought on by the BoE’s market distortions.

  5. Richard1
    Posted July 1, 2017 at 6:41 am | Permalink

    Quick idea for raising the £1bn required for the bung to N Ireland agreed with the DUP: privatise Channel 4.

    • Bob
      Posted July 1, 2017 at 11:36 am | Permalink

      How much could be raised by privatising the BBC?

  6. Sakara Gold
    Posted July 1, 2017 at 6:59 am | Permalink

    This country runs on tick. From government – coalition, tory or labour – to students, the unemployed and NHS nurses, everyone is in debt. Our economy depends on the consumer spending money they dont have on credit cards, nobody saves because the interest rates one gets are derisory.

    This cannot go on indefinately and we may be witnessing another sub-prime loans type financial bubble. The interest rate cycle has turned, those with maxed-out credit cards and huge mortgages to service will suffer if we get another 2007 type crisis. Interest rate rises will be toxic to our economy!

    • Caterpillar
      Posted July 1, 2017 at 9:05 am | Permalink

      Sakara Gold,

      Not only does the interest rate cause such problems, but consideration of tax structure has not taken place. If personal income taxes were replaced by expenditure taxes (taxed on what is not left in your bank account each month (what comes in minus what remains – with expenditure thresholds for goats to take a regressive / progressive stance) then we would have the basis for a much clearer link to consuming vs saving.

    • getahead
      Posted July 1, 2017 at 6:49 pm | Permalink

      Well I’ve got a pound or two in my wallet. Would that help?

  7. stred
    Posted July 1, 2017 at 7:51 am | Permalink

    Talking of muddled messages, BBC News last night reported that the saving of £300k by substituting zinc cladding for aluminium may have been the reason for the Grenfell fire, adding to the Labour agenda that spending c£80k/ flat was unequal and murderous. Just at the end, they mentioned that both claddings had the same fire rating, so it didn’t make any difference.

    Meanwhile, experts are saying it may be pointess ripping of similar cladding at Camden, asthe whole assembly should have been tested and not just the outer thin part. Most surprisingly, it is revealed that Camden block had fibreglass insulation and not the foam boards. As these were seen burning furiously but fibreglass is incombustible, it seems strange for the council leader to evacuate all the residents and blame the contractor, especially as her own building inspectors signed it off. It looks like the council and contractor are noe paying lawyers to sue each other. Fibregalss panels are shown on this Guardian report.
    https://www.theguardian.com/uk-news/2017/jun/30/tower-block-cladding-could-be-safe-despite-failed-tests-experts-say

  8. Lifelogic
    Posted July 1, 2017 at 7:56 am | Permalink

    Indeed, meanwhile at the BoE we have Carney and Haldane who are distinctly unimpressive. Carney with him remainer threats surely abusing his position. They also seem to be infected with group think, green crap as James Delingpole points out in the Spectator this week.

    The damage done by central banks and politicians is huge, from the EURO to the ERM to endless wrong predictions and interference in markets.

    Do we even need central banks to fix the price of money what is wrong with the market? Can it not be fixed in the same way as the price of anything else, supply and demand?

  9. acorn
    Posted July 1, 2017 at 8:34 am | Permalink

    The Pound has lost about 20% against the US Dollar and the Euro; 30% against the Yen, since the June 2015 election. About half of that loss was at the time of the referendum.

    MMT followers will be aware that Central Bank operated “monetary” policy, is way past its 1971 sell-by date, you don’t need an economy-wide sledgehammer, under a sovereign floating fiat currency system that the world uses nowadays. But it is available to take the blame for politicians.

    Put the overnight rate to zero and leave it there, with a sign saying “break glass and use in emergency only”.

    BTW. Once the central bank buys in a Gilt / Treasury Bill savings certificate, as in QE, it is equivalent to the Treasury Debt Management Office, never having issued it in the first instance. The interest paying deposit account (Gilt) is swapped back into the original cash (reserves) at the central bank, that bought the Gilt in the first instance. There is no change to the net fiscal assets in the economy, as a result of the swap.

    The central bank of a sovereign fiat currency issuer can put its sovereign’s Gilt interest rates anywhere it wants to. It has unlimited power to issue and withdraw its sovereign’s currency. UK etc Bond traders always end up as price takers, not price makers. That does not apply in the Eurozone, where member states sell Gilts for cash spending money or Canada, which I think, not sure, still sells its Guilt directly to its central bank.

    • Caterpillar
      Posted July 1, 2017 at 9:21 am | Permalink

      Acorn,

      The COMER page indicates that the Canadian Sureme Court is not going to hear the case brought with the aim of Canadian Govt returning to zero interest borrowing directly from the central bank.

      Whilst I am not an MMTer I do think that the UK does need to take a good deep look at money creation here (I think a mix of Govt/central bank creation for social credit – which is where we would probably overlap – , smaller community banks and existing large banks should all be considered, and ath the same time how private currencies should be treated in terms of capital gains)

    • Bob
      Posted July 1, 2017 at 11:40 am | Permalink

      @acorn
      the only people who receive zero interest are the small savers and pensioners.
      Try to borrow at zero percent and see how far you get.

    • forthurst
      Posted July 1, 2017 at 4:19 pm | Permalink

      The Bank of Japan has been buying back the government’s debt mountain; so far the effect has been rather less devastating on the economy than the Fukushima earthquake. Of course, Japan suffers from declining demand due to a declining population so inflationary pressures are lower; but why have the Japanese not solved the problem of reducing population caused by high house prices and the consequent need for two to be in full time work by enriching themselves with high levels of diversity? That might have the added benefit of achieving the pinnacle of Olympic success, namely running the 100m the fastest, surely an adequate payoff for sacrificing a monoculture?

  10. Sir Joe Soap
    Posted July 1, 2017 at 8:35 am | Permalink

    But as you say, higher taxes, particularly on property, are leading both to a slowing of the housing market and to less disposable income. A double whammy on consumer spending thanks to the government, not the BOE. In defence of the BOE, on the one hand they are tied to not putting interest rates up because of this government-induced consumer slowdown, and on the other hand the signals from the Fed and to some extent ECB point to higher rates. At this stage I would begin gentle tightening in the UK; the present rates are EMERGENCY rates induced both by Brown’s inadequacy 9 years ago and the BOE’s over-reaction to Brexit. We have to come off the morphine before the patient slips into a coma.

    • Sir Joe Soap
      Posted July 1, 2017 at 8:37 am | Permalink

      Indeed a mix of slightly higher interest rates, lower taxes and spending (welfare/foreign aid/HS2 vanity project) cuts might square the circle.

      • Hope
        Posted July 1, 2017 at 2:28 pm | Permalink

        Hang on another sensible member of the public who recognises what needs to be done. Why is it. It possible that the Tory lead ratio consistently fails to grasp the nettle when we plebs recognise what needs to be done!

        Sadly Joe, I fear your thoughts will be ignored, May and Green will take a further swing to the left, take your home, take your savings, increase tax until your pips squeak, tax your pension a little more like Osborne did and Brown before him, then claim they are a low tax party and it is a fair society if they make everyone equal by taking the money from strivers, savers and pensioners and giving it to the feckless! Then what?

    • Mark B
      Posted July 1, 2017 at 12:47 pm | Permalink

      I said not to long ago that we are due for a sharp correction. And sadly, I might yet be proved right.

  11. jack Snell
    Posted July 1, 2017 at 8:36 am | Permalink

    yes we need clear guidance if we can get it? but there is so much muddled thinking out there from various commentators coupled with great uncertainty mainly because of the brexit fiasco that it cannot be anything but be unclear where we are headed with all of this.

    We’ll just have to wait until the fog lifts perhaps by the autumn time to see how things are going to shape up, after all, we are also now in the summer ‘silly’ season so what else can we expect except background chatter

    Reply We may not know our future relationship with the EU until 2019. In the meantime we continue to trade with the EU as a member so that has no impact on the forecasts.

    • Caterpillar
      Posted July 1, 2017 at 9:28 am | Permalink

      Reply to Dr Redwood’s reply,

      The uncertainty needs to be resolved earlier than 2019, it should already be on a steep downward curve so that relocations don’t occur purely to reduce uncertainty.

  12. Caterpillar
    Posted July 1, 2017 at 8:39 am | Permalink

    Dr Redwood,

    Giving the recent strong decline in savings ratio I suspect that a concern would be how many households have less saved than the next month’s mortgage or rental payment. How robust is the UK household?

    • ian wragg
      Posted July 1, 2017 at 9:02 am | Permalink

      Why should we save when the BofE runs a ZIRP policy. WE get rubbish returns on our savings and the banks don’t really want them as there is free money available from QE.
      I see according to the Telegraph the City is saying they should be given priority with Brexit. That would be the City which had to be baled out with every penny of tax they had ever paid in 2009.
      The spivs and gamblers who wish to receive large bonuses whilst crippling small companies.
      They are nothing more than shysters who add no value to the country and are well on their way to creating the next crash with the dodgy car PCP scams being packaged and sold as A1 investments.
      Why should the other 99% of the country have to suffer the EU just so they can maintain the lifestyle they are accustomed to.

      • graham1946
        Posted July 1, 2017 at 2:03 pm | Permalink

        Why should we save? For rainy days, which will come, they always do. Yes savings returns are pathetic but during my lifetime I have been in both camps, in debt and in credit and I know which is better. If you want a good night’s sleep, a shiny new car won’t provide it – other than caravans probably the worst value purchase anyone can make.

      • Hope
        Posted July 1, 2017 at 2:36 pm | Permalink

        Well said Ian. You might recall in 2010 we had the BoE telling pensioners to spend more! Personal debt is at record levels, the govt on the hook for help to buy, RBS still not healthy, record amount of govt debt, govt still not cleared the deficit and May stupidly listening to the looney left mad economics of Corbyn! You could not make it up.

        Osborne thought he could do a Blaire and claim one thing while doing the exact opposite. His three main failings being the alleged central economic plank to eleminate the deficit, 80/20 spending cuts to tax rises when the opposite was true, mass immigration to get cheap labour while telling us the numbers would be cut to tens of thousands. This I should. Enforce he imposes a green agenda to cost us billions while he and Cameron were on a being 747 to watch a basket ball game with the president of the US. Oh, this is when he gave his shambles 2012 budget pasty tax etc that he had to revise because he was too busy having his ride on the president’s plane!

  13. AdamC
    Posted July 1, 2017 at 8:45 am | Permalink

    just this week there are business delegations from the city of London over in frankfurt, brussels and dublin making plans for some sort of departure- at least they see the writing on the wall and know what needs to be done even if government and central bankers don’t.

    • Denis Cooper
      Posted July 1, 2017 at 10:42 am | Permalink

      Yeah, sure.

  14. stred
    Posted July 1, 2017 at 8:51 am | Permalink

    The way inflation is measured is changing to include housing costs. During the recent housing bubble, it would have been higher. Luckily for the Treasury or perhaps by design, extra taxes seem to have burst the bubble.

    Osbo says Carney is the world’s best banker. Well, the pay deal for a civil servant must be the best.

    • Lifelogic
      Posted July 1, 2017 at 9:14 am | Permalink

      Osborne is economically illiterate so how would he know?

      He even thinks 15% stamp duty turnover taxes is a good plan, taxing landlords on profits they are not making, mugging pension pots and ratting on his £1M IHT promise is a good plan. Also passing laws that prevent low earners from working. He is rather like Hammond a tax borrow and piss down the drain merchant. He even liked HS2, Hinkley C and subsidies for mad renewable projects.

      His pathetic punishment budget threat did at least back fire. Why would anyone listed to a word the man says?

    • Denis Cooper
      Posted July 1, 2017 at 10:48 am | Permalink

      Which change, and its implications, have received little media attention.

      I recall that the last time there was a change in the definition of consumer inflation to be used when setting the target for the Bank’s monetary policy, namely the move from our RPI-X to the EU’s CPI, which caused some unhelpful disruption.

  15. Epikouros
    Posted July 1, 2017 at 8:54 am | Permalink

    The central banks are one of the biggest contributors to the boom and bust cycle. By their intervention in the money supply, interest rate markets and allowing fractional reserve banking guaranteeing that boom and busts are frequent and busts increasing harder to recover from. Their actions cause booms by creating asset bubbles and price inflation by artificially increasing the money supply and the suppression of interest rates. The central banks are not alone in creating this situation as successive governments contribute to this with their ever expanding tax and spend policies to prop up a welfare and wealth redistribution state that has a voracious appetite for public funds. A propensity to spend wastefully, inefficiently and inappropriately to placate a multitude of vested interest and to promote ideologies.

    Since 2008 trillions have been pumped into banking, bond/gilt and share markets enriching those who receive this largess first and interest rates have been kept artificially low. Creating the bubbles that they now realise have to be deflated and that the money that has been pumped into the economy out of thin air has to be plucked back. In panic they realise that something must be done if there is not going to be an almighty bust again. No doubt as they badly misjudged how to deal with the last one they will be true to form and badly misjudge how to stop the next one that is inevitable what ever they do by their previous actions alone. They have set us all up for a mother of all financial crisis after which we will really understand what austerity and living within our means actually means.

  16. Bert Young
    Posted July 1, 2017 at 9:35 am | Permalink

    There is no doubt that personal debt has reached an unsustainable level and Carney is absolutely right to flash warning lights on this issue . The use of Credit Cards has impinged considerably on the need to save and to adopt a lifestyle that is linked to earnings . The role of the High Street Bank has almost disappeared from our day to day lives . These are factors I regret .

    Carney has caused confusion in the markets during the past 2 years and his dancing off one foot to the other is the last thing this country needs . Equally I agree that the Government has been wrong to impose taxes that have had a serious effect on the housing market and made it difficult for young couples to plan ahead . The comments now about the need to raise interest rates are confusing and the BofE should clarify its position once and for all . There are many efforts the Government ought to take to establish an attitude of trust and confidence in our future ; leadership is all important .

  17. jeffery
    Posted July 1, 2017 at 10:01 am | Permalink

    After economic hubris comes nemesis. UK inflation is way over stated target and has not reversed in the way EU and US rates have. Unemployment is allegedly at rates not seen since the 1970s (debatable), while the participation rate is nearly 75% (literally incredible!). Taken at face value, this is a major inflationary constraint in an economy notorious for wage inflation. Not to mention those Brit icons the TUC, BBC and Labour calling for “a pay rise for Britain”. If any of this made sense, interest rates should be at least 1%. O dear.

  18. Terry
    Posted July 1, 2017 at 10:34 am | Permalink

    I feel the BoE has lost its way in OUR world. Eddie George was the last “Good” Governor although Mervyn King certainly did more for us than the incumbent one.

    Mixed messages from him seem to be a weekly occurrence and I cannot understand why, after his outrageous interference in a British Referendum, he was allowed to hold his job.

  19. ian
    Posted July 1, 2017 at 1:12 pm | Permalink

    As i have said before, they have no control over interest rates, that’s why they are putting two messages out, because they do not know which way the markets are going to go. As for the usa, they are putting up interest rates because they are forced to, because if interest rates go up and they do not follow suit the illusion of them being in control of interest rates will be debunked once and for all, and the policies illusion of neo liberalism will be dead for good with the media unable to revive it.

  20. ian
    Posted July 1, 2017 at 1:56 pm | Permalink

    BOE to the banks, don’t give out more money to buy cars on pcp contracts. The reason they give this sort of message out is to make out they have everything under control, when in fact pcp contracts on cars start to fall three months ago and they just catching to what has gone on.

  21. ian
    Posted July 1, 2017 at 2:19 pm | Permalink

    Of cos you have national debt which is advertise as 1,735 billion when in fact it is over 500 billion less. They use this tactic to make it easy for them to cut services and keep wages down and not build infrastructure which the people need while they bring in more people to the country and give away more money to other countries.

  22. Posted July 1, 2017 at 2:35 pm | Permalink

    The recent decline in the household savings ratio is easily explained the government budget deficit has reduced from 4.3% to 3% .

    Since the accounting shows that the budget defict = non governmental sector sterling savings to the penny. Then this is no suprise.

    If you reduce the budget deficit then you destroy peoples savings. Taxes are too high.

  23. ian
    Posted July 1, 2017 at 2:41 pm | Permalink

    That’s why neo con libs and neo libs do not care about debt and how much they spend as long as it not spent on the majority of the people in this country. Gov spend is 39% of GDP now while the population has risen by 9 million, i know overall GDP has gone up in that time, but it dose not come back in taxes because more money is taken out of the country by overseas companies without paying tax and people working hear from aboard sending money back home.

  24. Posted July 1, 2017 at 2:56 pm | Permalink

    As for the central banks they are clueless all based on gold standard, fixed exchange rate thinking and we’ve left both.

    You just need to look at the US for proof. The $ has become weaker after every hike.

    Rate hikes are price increases and price increases are inflationary, all else equal. There’s another thing that rate hikes are — and that’s fiscal expansions. The government spends more when rates go up. Bearish for a currency.

    It doesn’t mean the gold standard, fixed exchange rate brigade will make it stronger first by all going the wrong way.

    The $ is down and falling and since the first interest rate hike in the US in 2015 the Consumer Price Index is now rising at 2.8% year-over-year. That’s the fastest rate of increase in five years. You have to go all the way back to January 2012 to see prices increasing at that rate. Interest rate hikes should be called what they are price hikes.

    When the central bank increases the rate that firms can borrow at the firms increase their prices and all prices follow from that. Rate adjustments are price setting. You raise rates, you raise prices and the dollar goes down. Very simply, your money buys less in a rising-price environment and it’s reflected pretty quickly in the foreign exchange value of the currency. Look at USD/JPY since the FED started hiking and EUR/USD and GBP/USD.

    Currencies are like bonds, the only difference being they have zero maturity. Everyone seems to understand that when rates go up bond prices go down. It’s an inverse relationship. The discount to par reflects the implied yield and that discount increases as rates go up.

    Same with currencies. The spot price of a currency can be considered par. In a rising-rate environment the forward prices of a currency are lower. The market is literally pricing in a lower exchange rate. The degree of discount to par reflects the implied yield. Buy a forward and hold it over time until it converges to spot and you will earn the implied yield.

    Ultimately, rising rates are not a bad thing because they raise the level of aggregate income to the point where people have more money to spend. From that flows rising consumption, which will equate to higher corporate revenues and, potentially, higher corporate profits.

  25. Peter Martin
    Posted July 1, 2017 at 10:22 pm | Permalink

    The Bank of England wants to cut personal borrowing in general and car loans in particular.

    Too late. The damage has already been done by letting it happen in the first place. Increased private sector borrowing will always give a stimulus to the economy. The borrowing allows us to afford to buy things in advance of what we might otherwise have done. However, it doesn’t permanently put any more money in our pockets. So the initial stimulus will naturally have to be balanced by a later drag on the economy as loans plus interest are repaid.

    So interest rates then have to be lowered further to encourage us all to borrow even more to compensate for us having borrowed too much previously. That’s why we have interest rates close to zero at present.

    Of course it eventually becomes apparent to those who run the central banks, and others, that we’re all overborrowed. They then decide to fix things by raising interest rates and restricting new credit. So we have a credit crunch! And guess what follows next! Just think back to what happened in 2008 if you don’t know the answer!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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