Saturday, Jun 16, 2007
Silly CBI being over-optimistic
Sky News: Interest Rate Rise Predicted
The CBI's quarterly economic forecast predicts a quarter point increase to 5.75% this autumn (err... I thought everyone was agreed that a July rise was definite?.)
However, it does not see IRs reaching 6%, and says the Bank should have room to cut interest rates back down in 2008.
_____
From the press release:
Other key points of the economic forecast include:
-Favourable economic conditions
-Consumer spending will grow
-Manufacturing output is forecast to grow
-Unemployment will fall
Global economic growth remain benign with signs of a soft landing in the US
Cloud cuckoo land...
http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/9ed67ab6c0cc7bf08025729d0033de50
Posted by little professor @ 01:53 PM (145 views) Add Comment
10 Comments
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1. talking rot said...
The CBI have made predictions in the past but I have not tracked them. Are the CBI's predictions accurate? Does anyone know?
This is a bit too close to my own view, that the BoE will raise interest rates by a further 0.25% before cutting them in early 2008.
2. confused76 said...
"...the Bank should have room to cut interest rates back down in 2008"
if all economic outlooks are positive and benign, prices necessarily will be pushed up...
so how can CBI say that there is room for the bank to cut rates in 2008?
either growth slows to 1-1.5% in 2008 or no way BoE can cut rates (see US example, as soon as Fed understood growth this year will not fall below 1.8%, they said "we are not cutting s**t")
3. Theslump said...
Hello!
If the economic outlook is so benign where is the need to cut interest rates/
4. paul said...
Two words:
structural inflation.
But you can have some more:
Balance of trade
Overvalued currency
High asset prices
High bond yields
Chinese wage inflation
Japanese currency undervaluation
If any of this stuff slams into the MPC's pastiche of a forecast, their rosy spectacles will be knocked off their noses.
5. Davros said...
The CBI arn't impartial observers, this is group who are desparate for an interest rate cut.
6. Orwell said...
Paul,
How's Mrs. Flange?
7. talking rot said...
Paul
Sorry to ask some bone questions but:
1. Why would high asset prices cause inflation? If the price of expensive assets fall, should this result in declining inflation?
2. Why would high bond yields cause inflation? (Sorry, I'm ignorant of the effect of bonds on inflation.)
3. Is there evidence of Chinese wage inflation? I didn't know Chinese workers could negotiate wages!
Cheers
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10. Deepak said...
In response to Point #4.
Why do high asset prices cause inflation?
A) It can be best defined by what is happening in the economy. As house prices are valued higher and higher. People are withdrawing equity from their houses or selling up and scalling down. Hence giving them cash in hand to spend. As production can't scale up at the same pace there is more money chasing smaller goods. Which in turn leads to people paying more for the good Hence the increase in price. Which is called inflation.
If the price of expensive assets fall should this result in declining inflation?
A) It depends whose income is going to fall. If Richard Branson's assets fall maybe not then. But if the house prices fall then it will as less money is more number of people. You must also realise that if only asset value for a few went up the inflation might not go that high. as very few people might be chasing these goods.
Why would high bond rate cause inflation?
A) The US 10 yr bond are basically interest of Govt. borrowings. No this is a calming measure on inflation. They are giving high returns so that people rather than spending money should lock the money away and hence less inflation. This is a guide measure for interest rates. If this is rising then interest rates are likely to go up.
As US has had over $800 billion dollar per annum trade deficit they are printing a lot more money, Hence leading to a very high inflatinoary pressure. More money flowing around. Also this leads to a devaluation of the currency which you have seen recently. Measure the trade deficit against India 3rd world country of $135 billion over past 60 years. US has been over $800 billion per annum for more than a few years now.
Chinese wage inflation?
A) I have no idea. But I don't think there is any change in the manufacturing market. As prosperity is coming to more of a common man in China. They are also consuming more. And Hence need higher wages to pay for it. In the cities their is certainly a trend for rise in wages. Also UK inflation depends on the cost of purchase of goods from China which is higher irrespective of what gets paid to the man on the ground.
Hope this helps.