The MPC is better at letter writing than controlling money

So it’s another inflation letter. That’s no suprise for readers of this site. What is so sad about the MPC is their failings are so predictable. They lurch from boom to bust to attempted boom, and the inflation figures career all over the place as you might expect. Today they had to report that during the worst downturn in the economy since the 1930s inflation has soared to 3.5% on the CPI, 3.7% on the RPI and well above 4% on RPIX. Now the savage cuts in living standards that Labour’s economic policy was always going to deliver are upon us, as wages are not going up by anything like the current rate of inflation.

In 2008 I explained that rates were too high and this was going to cause a worse downturn. In 2009 I warned rates were too low and too much money was being printed. That was bound to cause an inflationary surge. The MPC is meant to concentrate on controlling prices, and keeping them to around 2% a year. Why do they find it so difficult?

They are not asked to avoid slump or control booms, to consider output or the levels of the currency. Sometimes they seem to be acting as if they were, but they do this also by reacting too severely too late. We have lurched from overheating to severe downturn despite- or more properly owing to – their energetically destructive monetary policy.

Today they tell us we have very low interest rates and they are going to keep them that way despite the high inflation. They have no sense of irony – or apparent knowledge of the real world. On this very day we learn credit card rates are above 18%, or 37 times the base rate! The other day a local bank told me a small business could borrow at 8.5% or 17 times the base rate. Mortgages if you can get one are on offer at around 9 times the base rate.

Who is the MPC kidding? I fear, just themselves. Their rates are too low and their money printing has been too energetic. No-one in the private sector can do any business at anything like so called base rate. Markets largely ignore the MPC. All they seem to want to do is to help the government overspend, borrowing more cheaply, whilst the rest of the economy pays totally different rates. Meanwhile the regulators force the banks to lend less and raise more capital at the bottom of the slump, making it more difficult to finance a recovery. No wonder we are in mess.


  1. alan jutson
    February 16, 2010

    The answer John as you probably well know, that they are not independent at all, Gordon is probably pulling their strings.
    The whole set up appears to look like a scam.

    If it is not controlled by Gordon, then they should simply be removed to be replaced by people who are truely independent and who can deliver the results requested.

    1. Lola
      February 16, 2010

      It is a scam. It's Darling Brown Balls scam. It's been a scam since the FSMA 2000 when Brown divided and conquered the relatively successful banking and credit supervision systems he inherited. Brown is just a scam merchant.

  2. Phil C
    February 16, 2010

    I am finding it difficult to understand why the base rate matters, given that it seems to be disconnected from all the interest rates people and businesses in the real economy have to pay. Even gilt returns reflect everything but base rate.

    And while I am confessing ignorance, why is the base rate any use in controlling domestic inflation? If we had capital controls and no trade deficit, this might make sense, but while we import cheap goods at low exchange rates this must distort the inflation rate and invalidate it as a means to maintain the value of the currency.

    1. Robert K, Oxford
      February 17, 2010

      As JR has explained, a low base rate allows the government to borrow cheaply, no-one else.

      1. Mark
        February 17, 2010

        Actually, it doesn't. It only allows banks to borrow cheaply – either from the BoE directly, or from you and me. The only ultra short borrowing the government does is rolling over its short term Treasury Bills (about £50bn in issue currently) every few months: however, these can be used by banks as collateral for further borrowing at Bank Rate from the BoE, so the net effect is an addition to QE pumped directly into banks. New gilts are five years plus in maturity: there the interest rates are now 4% and rising. Since effectively the BoE has been the only net purchaser of gilts, to the tune of the government deficit, in reality we don't yet know how little the market is prepared to pay for gilts in free market conditions. That's when we'll really find out what the government has to pay to borrow. At the moment it is a bit like Dad tiding over an overspent teenager until the bank opens on Monday to say on what terms he can borrow to fund his spending.

      2. Phil C
        February 17, 2010

        But the Bank buys government debt from the market, and the market buys new government debt. So it is the gilts market rate which matters. How is this affected by base rate?

  3. Javelin
    February 16, 2010

    Stephanie Flanders, of New Labour, sorry BBC, wrote in Feb this month …

    "Both men are fairly relaxed about the jump in the target measure of inflation [CPI] to 3.5%. It is probably a blip – but an unwelcome one all the same … The first is that, for once, the headline figure did not come as a surprise: the 3.5% rise is more or less what the analysts expected. … That's good news, because there have been so many "upside" surprises on prices in the past year,"

    Stephanie Flanders – BBC wrote in Feb last year

    "The CPI (Consumer Prices Index) measure of inflation fell to 3% last month, and the Bank of England now expects it to fall close to zero by the middle of next year. But they don't rule out the possibility of a negative CPI. And they see little chance of CPI above 2% before 2012."

    So that's good news then Stephanie … that the MPC are completely rubbish at their job.

  4. Arthur
    February 16, 2010

    They cannot control inflation over the long term because they use interest rates to target CPI rather than the supply of money in the economy. Until they control money, rather than prices, they will never succeed. It is the grossest failure of monetary policy we can imagine.

    And why do we want prices rising by 2% at all? The argument that this is required for growth is idiotic.

    1. Lola
      February 16, 2010

      Absolutely. Inflation is a function of money not prices. Price rises are the result of inflation, not its cause. Why is this so difficult for them to grasp. Oh yes. Silly me. They don't give a Damn' as long as the central bank can print money to further their destructive lefty aims.

  5. Norman
    February 16, 2010

    I heard an interview this morning with a Mr Blanchflower (an ex-MPC member, apparently) who was making the argument that 2% is too low a target and that 4% is more realistic. He reeled off a list of reasons but the long and short of it was that we are a nation of debtors and so eroding that debt via inflation would be a good thing.

    It begs the question, are the MPC even kidding themselves? I'm not saying they are deliberately aiming for a target above what the government sets but if ex-members are willing to put forward the opinion that 4% is better than 2% then one wonders if they will that upset that they are over target.

    I guess we'll get the answer when we see how tough a response the government makes over this.

  6. waramess
    February 16, 2010

    And still the Conservative leadership want to retain King, a failed Kenesian forcaster who is now well and truly tarred with the brush of QE.

    For gods sake can't someone point these bufoons in the direction oof Adam Smith or Ludwig von Mises where the economic arguments are so much easier to understand.

  7. Johnny Williams
    February 16, 2010


    You have it in a nutshell.

    This is an excellent piece and I am afraid indicates my own fears that we are headed for a double dip recession, as real lending rates and have disconnected themselves from the bank rate. Real rates of borrowing are way above the Bank of England figures and small business is also not gaining loans from banks in any event.

    If the Conservatives do not get in at the next Election with a large working majority, times will get even tougher. We have to cut the Public Debt NOW and at big chunks too. Otherwise we shall follow Greece down the road to the IMF where I feel they will be going. Germany is not about to save Greeks at the expense of its own taxpayers, Euro or no Euro. Germans would prefer to go back to the DMark in any event.

    The UK economy is truly at the edge of the precipice, a situation which may prove the worst since the 2nd World War. All it needs now is for a run on sterling to cause house price falls as foreign buyers stay away from property in London.

    I really hope others see this "mess" too and soon, before we hit a full scale depression, with no easy ways out.

    1. Robert K, Oxford
      February 17, 2010

      Don't kid yourself; there is nothing in official Conservative policy that remotely resembles a return to free markets, small government and the end of tax and spend.

  8. startledcod
    February 16, 2010

    John. You should read Andrew Neill's latest blogpost where you get a mention. Not only that but it makes so much sense –

    1. Robert K, Oxford
      February 17, 2010

      Krugman, as usual, appears to have missed the point. The euro was created specifically with the intention of advancing political union in Europe. For the Europhile elite in France and Germany the problems faced by the PIGS countries represent an opportunity, not a menace. As several analyses have pointed out, Greece does not have the option of devaluation or default which means the only solution is for it to be bailed out by its bigger, richer neighbours. France and Germany are unlikely to do this without extracting their pound of flesh, and so political union moves forwards, with all its attendant threats to liberty and democracy.

      1. Citizen Responsible
        February 17, 2010


  9. javelin
    February 16, 2010

    For my money I think one potential hot spot are the Government's Public Private Partnership. The off balance sheet loans are looking increasingly like a hidden liability that will not be taken into account.

    I wonder whether private capital in the Private Finance Initiative (PFI) has already failed. the The Infrastructure Finance Unit (TIFU) was set up by Yvette Cooper.

    "The Treasury will build a professional lending capability to lend to PFI projects that cannot raise sufficient debt finance on acceptable terms"

    That doesn't sound a lot like a public private joint partnership it sounds like an on the book liablity. A loan was given in April 2009 but I'm not sure what else has been lent out.

    Just look at the agenda on this conference

    For example, what does this mean ??!

    * Investment in infrastructure by local authority pensions funds

    Using local authority pensions funds to invest in infrastructure?

    * De-risking a project to attract funding – the Southmead Hospital case-study

    Does this mean shifting liablities back onto the books?

    There is some very, very dodgy banking going on here !!!

  10. dimwit
    February 16, 2010

    The penalty for missing an inflation target – having to write a letter – seems not knee-tremblingly terrifying. How about if Mr King had to stand in a pillory outside the BoE for a couple of hours while pensioners whose savings he'd trashed hurled dead cats and offal at him? That would concentrate his mind more.

    Anyway, what's with these inflation targets at all? Surely the only honest target is zero inflation; anything else is government-sponsored theft from those who, naively, believe the promise on their banknotes. As I understand the pro-inflation argument, it's no more than a wheeze to get money out from under the mattresses and into circulation. Anyone who thinks that makes sense needs to have his moral compass serviced.

    1. Sally C.
      February 16, 2010

      I absolutely love the idea of Mr. King, Mr. Bean et al having to stand in the stocks outside the B of E while we peasants throw nasty things at them. James Grant of Grant's Interest Rate Observer feels the same way about Ben Bernanke and he recently wrote an article which began as follows: 'Ben S. Bernanke doesn't know how lucky he is. Tongue-lashings from Bernie Sanders, the populist senator from Vermont, are one thing. The hangman's noose is another. Section 19 of this country's founding monetary legislation, the Coinage Act of 1792, prescribed the death penalty for any official who fraudulently debased the people's money.' From that point of view, a few hours in the stocks seems quite a light punishment!

  11. Sally C.
    February 16, 2010

    The Bank of England is rapidly running out of credibility. (Of course, as far as I am concerned it ran out of credibility a long time ago.) But there are some very important issues at stake. The first is the potential for a wage/price spiral. Why aren’t the unions complaining that their wages aren’t keeping up with inflation? Well, we all know the answer to that question. The ‘brothers’ will not rock the boat before the general election. Secondly, all savers and people on fixed incomes are being squeezed to breaking point. Thirdly, there is a big social divide opening up between the haves – ie. bankers paying themselves huge bonuses, and the have nots – ie. the rest of us, but especially pensioners and people on low or fixed incomes. This point was brought home all too clearly today by the reports of Barclays record profits, up 92% in a year. The fact is that Barclays would not have made anywhere near the profits that they made if it wasn't for huge government stimulus packages plus unlimited cheap funding from central banks, notably in the case of Barclays, from the Bank of England. BGI would not have been worth the price they got for it and the markets would not have risen in the way that they did without all that stimulus. This brings me to point number four: Has Barclays written down the value of all its toxic assets? I am guessing not, consequently, we, the taxpayers of the UK, are still on the hook to bail Barclays out at some stage down the road. This could expose us to huge potential losses, in the same way as bailing out RBS did. This is why the Volker plan is a good one. BarCap should be hived off and left to its own fate. Then Barclays domestic/retail bank could run its core business without exposing all of us to huge potential losses.

  12. Brian Tomkinson
    February 16, 2010

    What hope is there for resolving the mess? The next election should be an obvious choice to vote Conservative as the party to sort out the mess. However, it is turning into a difficult decision as the Conservatives seem to lack the determination to dispense the necessary medicine. They also want to give more power to the BoE. Given their record why should they want to do that? Prudent stewardship of the economy should be the Conservatives strongest card but it seems weak and flabby. Apart from that, the shadow cabinet comprises many who are already clearly not up to the job. I can already feel my hackles rising when I listen to many of them. Daily, "traditional" Tory supporters are informed that the leadership has little interest (if any) in their views. I could go on about immigration, the EU, AGW and other policies with which I find myself unrepresented by the Conservatives.
    My answer to my opening question is: very little until the IMF is called in. We seem to lack politicians with the necessary backbone to handle today's crisis.

  13. adams
    February 16, 2010

    John is so right . the MPC are now in the same leaky boat as the Liebour party and Gormless McNutter. they are forced to bail out the boat alongside the goverment, as their 'glittering' careers depend upon it. The independence of the bank of England is exposed as one more con upon the British people from a discredited political elite . the image in my minds eye of the institutions and parliament of our country now look like Hiroshima after the bomb. This coming election will change nothing.

  14. Lola
    February 16, 2010

    No central bank anywhere on the planet ever gets it right. Or rather they mostly get it wrong. Trying to use interest rates to slow down or speed up the economy is just stupid. The moment their wonderful technical models have made a calculation as to what the rate 'should' be the markets (that is me and you) have moved on and a new paradigm exists. There is no way, absolutely no way – short of an absolutist Global totalitarian regime – that any central bank can ever have the information necessary or do the calculations quickly enough or be cleverer or more informed than 8 Bn people resolving billions of equations continuously and instantly, to 'set the correct rates of interest'. It's just another arbitrary price control. And price controls never work*. True the German central bank seemed to do a good job for Germany but they are a mercantilist economy, like China, and are Hell bent on a beggar my customer policy.

    The history of money failure is very closely linked to the monopolisation of money by States.

    The MPC's role, if we persist in money monopoly is to try and keep an eye on its supply, be very very aware of what banks are doing and have strict but low supervision on their capital and as regards interest rates let the markets inform them of the rate. Lastly, don't bail out banks. Ever. Sure, act as lender as last resort, but do it at a very high price.

    * Can't you wean Dave off keeping on promising to keep the minimum wage? Doesn't he know that it destroys jobs? Doesn't he? Doesn't he?

  15. JimF
    February 16, 2010

    This is becoming depressingly predictable. The low base rate is still allowing some tracker mortgagees to borrow at a low rate to keep the last splinters of the housing market prop in place. At the same time the prudent are subsidising them by reduced interest on their deposits.
    Sure, a double dip recession might cause a temporary decrease in inflation, followed by more money printing (with a lite-blue label) followed by another pretend recovery and more inflation. It's called bumping along the bottom.
    There needs to be a real bust to foment a real recovery.

  16. David B
    February 16, 2010

    The government also made the situation worse by changing the target to the CPI. This kept everyones eye of the looming bubble

  17. Robert George
    February 16, 2010

    Nothing will happen until after the election if Brown et al can help it. The MPC is hopelessly politicised.

    I doubt that the current leadership of either party has the political will to make the necessary decisions. An IMF diktat is UK's best bet.

  18. Ross J Warren
    February 16, 2010

    Those of us who are on limited incomes, know that inflation has taken off again since Christmas. Some of this is down to the withdraw of the Supermarkets Christmas low prices, but I am finding that even when that is taken into account prices have risen yet again. The gas and electric companies seem quite happy to allow British Gas to remain the cheapest rather than cut their profit margins. The consumer is of course being squeezed by the supermarkets, who are taking the opportunity to claw back the savings we made in the run up to Christmas. With inflation at 3%+ and average wage rises being around the 1% mark, most people will be feeling the pinch to a certain extent. Then of course we have the fall out from the cold weather of January. Electricity and Gas bills have never been higher. For those of us who care for disabled relatives and who therefore have to heat our homes all day the cost of fuel is a real worry.
    So are we in any sort of recovery? or are we on the verge of another dip? Certainly we are not out trouble yet, there are any number of factors that could drag the economy back down. Not the least of these is QE, which is a inflation time bomb.
    The banks are reluctant to lend money out to small business and as a result many have used expensive credit card debt to keep going. Despite of all this doom and gloom Barclays seem to be doing rather well. Having avoided borrowing they will not have to pay the tax payer back. Is there any justice in this world? I think not!

  19. Tim
    February 17, 2010


    First rate performance on Newsnight tonight. It's surely a redemption after the fractious relationship you've had with the Beeb.

    It'd be a pleasure to re-read your brief and insightful answers to Kirsty Wark's questions.

    I'm delighted that you were allowed to answer without interruption.

    1. alan jutson
      February 17, 2010


      Agreed: For a change no interruptions and an interesting discussion from both sides.

  20. […] View original post here: John Redwood MP » The MPC is better at letter writing than … […]

  21. Adrian Peirson
    February 17, 2010

    Within a few percentage points, you can buy as much today with an ounce of gold as you could 2000 yrs ago.
    Paper money always spirals to oblivion because when you borrow it, there is the interest to pay back too.
    Where does the money come from to pay back the interest PLUS the capital.
    Well of course, by borrowing more, hence increasing stealth taxes.
    And judging the pound against other fiat currencies too is simply misleading, they are all falling of a cliff.

  22. […] John Redwood’s blog is on my blogroll. Why, because of the sound economic sense his espouses, and that’s what he contributed in the brief discussion. […]

  23. botogol
    February 17, 2010

    the low bank rate is also enjoyed by anyone lucky enough to still have a mortgage tied to to it…

  24. backofanenvelope
    February 17, 2010

    It used to be a commonplace that a fall in the value of the pound produced inflation – eventually. No matter what the MPC does, the pound has fallen in value and we are importing inflation. We have, it seems, disconnected the base rate from the actual rate. We might as well disband the MPC and return responsibility to where it should reside – the government.

  25. Matthew Reynolds
    February 17, 2010

    This all proves the need for a fundamental over-haul of our monetary and financial policies as a nation.We should have stopped the boom from getting out of hand by giving the Bank of England the power to impose lending curbs to stop credit getting too loose & to curb asset prices.Banks should have had to amass more capital to help stop lending accelerating to fast.There should have been a credible inflation target based on the reliable and trusted RPI-x set at 1% during the boom times so that the economy did not get out of hand with too much money chasing too few goods.The Monetary Policy Committee members should have been given fixed non-renewable seven year terms to ensure continuity and stability. To stop them setting interest rates to suit the government there should be no chance of reappointment meaning that they would be independent enough to fight inflation.Their appointment should be approved by a reformed House of Lords to curb patronage and to ensure only the best MPC gets chosen.

    Had all of that been in place then the boom would not have got out of control. But if the increased bank capital levels were used to sustain lending and had the MPC printed money then along with the inflation target being 4% during a recession then the down-turn would have been cushioned.If the banks already had had healthy balance sheets and had QE started sooner that with the prospect of lower interest rates sooner owing to 4% inflation target for recessions only then credit conditions could have been easier thus ensuring a more rapid recovery.

    We need a more powerful,more flexible and more independent Bank of England to address such problems in future as the present set up just does not work.

  26. Steve Cox
    February 18, 2010

    I strongly suggest that mentioning the word 'deflation' in any serious article should become an imprisonable offence.

    The BoE is rotten root to branch (and even more inept than most of the economics establishment). I sincerely hope that we shall see root and branch reform in the not too distant future. (Though obviously it will never happen under the auspices of Gordon Clown.)

  27. Lindsay McDougall
    February 19, 2010

    I have long held the view that the American Fed and the Bank of England (and the MPC) have deliberately run monetary policy so as to reinflate asset prices – particularly house prices. Increased inflation is a necessary side effect. We need four things:

    (1) No more QE
    (2) A steady rise in the base rate
    (3) A gradually reducing inflation target
    (4) A new Govenor of the Bank of England and MPC

    1. Ian Jones
      February 19, 2010

      Take a read of the letter Mervyn King sent to Darling this month. In it he clearly states that QE increased asset prices leading to increased nominal spending in the economy as expected.

      The whole economic model is built on rising house prices.

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