Friday, Jun 08, 2007
Wait and See
Bloomberg: Bank of England May Need to Move Faster on `Sticky' Inflation
Article reflecting more concern on BOE's decision - noticed FTSE fell yesterday after holding at 5.5%, because markets and investors would have preffered a rise. Don't know what CPI report the BOE was reading but it doesn't matter this is based on old news. The future for inflation is high and Mervyns gang need to take a proactive stance else - ``The longer the Bank of England takes to get this burst of inflation under control, the worse the news will get,'' said Tim Congdon, a professor at Cardiff Business School and a former adviser to the U.K. government on monetary policy.
Posted by andy @ 07:23 AM (140 views) Add Comment
14 Comments
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1. Orwell said...
"The implied rate on the March interest-rate futures contract has risen 29 basis points in the past month to 6.20 percent at 8:30 a.m. in London, suggesting traders expect the Bank of England will have to raise its rate to 6 percent to curb inflation."
Oh dear, oh dear, oh dear, oh dear...
Looks like 0.5% in August then as I predicted...when the city and courts etc. are sleeping and on their hols....
2. paul said...
"King has so far rejected suggestions that inflation is slipping out of the bank's control."
Well, the last time he was accused of doing a bad job when inflation rose to over 3% even on their crooked measurements, he wrote a letter to his boss saying "there there now, take no notice, nothing to worry about here". The problem is, his boss replied by saying "Okay then".
When that happens in SE Asian countries, the western media usually calls it "corruption".
3. mrmickey said...
The BOE might be able to fool the public but they can't fool the markets, watch Sterling head south after that decision to hold rates.
4. talking rot said...
I am not convinced that interest rates will rise to 6%. What matters are a number of key indicators. Firstly, the forecast for the CPI 2-years from now. This produces a range at different levels of confidence. If the Median of this range is at 2%, then the Bank is doing it's job according to the rules it has been set by the Treasury. Reality does not matter here - the Bank does its job according to the rule set. Secondly, house-led spending is declining and this is a deaccelerant upon inflation. As house-led spending declines, so does the need for interest rate rises. Thirdly, the GBP. This is currently high and therefore acts as another deaccelerant upon inflation. Fourthly, wages are rising at the rate they were in Jan 07. Wage inflation has declined - this is another deaccelerant. Finally, the MPC itself. According to its own measures, the MPC has been rather accurate; the Treasury forecasts have also been accurate - remember the dire predictions of low growth and tax revenues which never came into being. According to their own measures, the MPC and Treasury have been accurate in their financial and monetary predictions. This causes high levels of confidence that they are right and that the markets are wrong.
This is why I believe UK interest rates will top out at 5.75% in 2007 with cuts in early 2008.
Eventually though, the market will be proved right - because it always will be! Will the Civil Servants and unelected officials of the elected representatives do the right thing and fall on their swords? No. They'll meerly state that there was an error in their models which did not take account of x, y and z because no one ever expected x, y, and z to occur at the same time. They'll report the error is rectified and it will be business as usual.
5. talking rot said...
Whoops
Missed out the words "no longer" in my fourth point.
It should read "Fourthly, wages are no longer rising at the rate they were in Jan 07."
Sorry all.
6. uncle tom said...
The lingering effects of house price inflation and stealth taxes undermines any hope of keeping service industry wage inflation anywhere near 2%, while import price deflation has now hit the buffers. What is left of the manufacturing sector has very little fat to shed.
The BOE and their political masters are on course for a difficult choice - let inflation rip and try to avoid a recession before the next election, or control inflation and go into the next election with high interest rates, high unemployment, and no economic growth.
Having nailed their colours to the mast over inflation makes the easy option problematic - they might attempt some smoke and mirrors to further conceal the inflation rate...
7. royston said...
tr,
I disagree with you on interest rates not going to 6%. Inflation has always proved a very difficult genie to get back in the bottle once out. Whose CPI forecast are you talking about anyway? the BoE's? That is not a forecast, it is an instrument for market control. The best to herd a market is a desired direction is to 'forecast' that direction as the natural path!
8. royston said...
Sorry, typo:
The best way to herd a market in a desired direction is to 'forecast' that direction as the natural path!
9. C'mon Correction said...
UT - the ONS must have used up all their stock of smoke and mirrors by now !!
10. paul said...
Hang on a minute. You're all wrong (he contends).
Your model and the bank's model would work, were in not for the mildly inconvenient fact that RPI and CPI are diverging at an alarming rate:
Yet again, sorry for posting this graph, yet again. If RPI continues upwards to 6, 7 or 8% then what will happen? The government can pull any measure they want out of a hat and use it to measure inflation. However the usefulness of interest rates to influence spending decisions and markets starts lessening the more unrealistic their inflation measures become. Imagine if RPI hits 8% but CPI goes down to 1.9%, and the government starts cutting rates. Investors will pile back into property, owners will have no money to spend and housing will become more affordable for investors and even less affordable for everyone else.
This won't happen though because the media will pounce if RPI continues upwards and CPI levels off - the MPC will come under increasing pressure and wage demands and pricing pressures will shoot up. This is what's happening right now.
11. paul said...
12. paul said...
Images don't work on this site any more.
http://www.statistics.gov.uk/cci/nugget.asp?id=19
13. uncle tom said...
Paul,
Don't think the Unions are blind to the difference - the posties have just voted to strike, and they probably won't be the only ones...
If the government thinks the public sector will meekly accept pay rises that track CPI instead of RPI, they're going to be in for a nasty surprise!
14. talking rot said...
Paul
Many thanks for the graph - I managed to view it on my 56K Dial-Up!
Does anyone know why the CPI and RPI are diverged over the period Jun 06 to Jan 07? Divergence appears to have stopped (or is it the way the graph is drawn) but there is a significant difference between the two measures.
What impact, if any, does the RPI have on the MPC discussions?