Monday, Feb 05, 2007
Bootle says rate should be 6pc
Telegraph: The temperature is rising fast over interest rates
Admittedly, the MPC does not have complete control over the monetary system. Finance now flows in from everywhere and bond yields are set internationally. But is that an argument for doing less or more? I would have interest rates at 6pc and I would make a start by raising them this week to 5.5pc.
Posted by monty @ 09:02 AM (137 views) Add Comment
9 Comments
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1. paul said...
A lot of housing bulls won't like it, but he's dead right.
I disagree that the MPC faces a complex task on this matter. They have a blunt but very effective weapon against inflation, but they've dilly-dallied for too long about using it and now the inflation beast has grown big and strong.
2. Davros said...
What a great article.
3. denzil said...
Another interest rate rise, lovely.
My cash isa linked to base rates is starting to be worth having.
4. Surfgatinho said...
"On past form, either asset prices will come down to meet consumer prices - or consumer prices will rise to meet asset prices - or some nasty combination of the two."
Inflation, deflation or stagflation - take your choice
5. P. O. O. R said...
Whilst I want another increase this week, I somehow feel we are going to have to wait until March. I also believe that by the end of the year we will be at 6.5 +/- 0.25. I will be watching the news on Thursday with interest.
6. sold 2 rent 1 said...
superb article
The storm is brewing.
Nice points about exchange rates, money supply, real interest rates, asset prices and inflation.
7. sold 2 rent 1 said...
denzil,
Real interest rates are still very low and will remain low.
When asset prices (stocks and property) start falling and real rates of interest remain low (inflation and IR both rising slowly) where will the money go?
GOLD and SILVER
8. Chilli said...
Something I don't get about his argument:
"CPI inflation may be set to fall in the second half of the year but it is currently 1pc above target; RPIX, which more people believe, is running at nearly 4pc; money supply is growing at 13pc; asset markets are rampant; and real interest rates are nugatory. And all this while the exchange rate is very strong. What more evidence do you need? Interest rates are simply too low."
The exchange rate is the odd one out here. If it gets stronger, local consumers will purchase in other markets, and foreign consumers will do likewise. Same goes for investors.
A strong pound should be favourable to keeping inflation down. Not so?
Also: how can the money supply not matter? Its basic, if you double the number of bills in circulation, then everything will cost twice as much. Unless the money being printed is building up somewhere. Like in a trade deficit or in bonds.
9. bidin'matime said...
Chilli - I thought exactly the same thing about the exchange rate comment.
Sold2rent1 - you may well be too young to remember the negative real interest rates of the 1970's. Don't assume that real interest rates have to be greater than zero - I fear that we shall see another era of negative interest rates before long. But you are right in your basic assertion - that non-cash assets are the safe haven when it gets like that - the problem (for the economy, but not for those waiting for HPC) is the point at which rates start to rise and people fail to pay their debts - then asset values can and will go haywire as a result. Of course, that is the point that we are all waiting for with regard to property, but the impact is by no means necessarily positive where other assets are concerned.