Wednesday, Nov 14, 2007
What?!?
BBC: Bank 'signals' interest rate fall
Interest rates could fall in coming months, the Bank of England has signalled on Wednesday.
In its quarterly Inflation Report, the Bank has predicted that inflation will meet its 2% target next year even if rates fall by half a percentage point.
Is this wishful thinking or the ideas of lunatics?
Posted by tyrellcorporation @ 10:29 AM (2077 views) Add Comment
31 Comments
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1. cornishman said...
The BBC TV news last night said that higher food and oil prices were being offset by falling house prices. It doesn't need a great imagination to see that house prices will be in the CPI soon, inflation will be falling next year and so will interest rates.
2. O2bsure said...
to signal rate cuts they must know that things are going to turn very fugly...very soon.
3. sovietuk said...
Sterling is already close to a 5 year low against the Euro. Stand by for real inflation of about 20% and "official" inflation running at 2%. The increase in corruption is following an exponential trend.
4. denzil said...
I can't see a fall in IR's at all. Record oil prices will ensure factory gate inflation will be passed on to the punter. Obviously we can all now see the cost of fuel at the pump. Food suppliers are pushing increases 10% plus to food retailers. Insurance claims over the last few years are putting strong upward pressure on insurance premiums. Cheap goods from China are increasing too.
Considering CPI & RPI have just increased it's quite staggering and foolish that the BoE are stating that rates can fall 0.5. However, the BoE have been very wrong over the last few years regarding where rates were going. This is emphasised by the fact that the gov of the BoE was writing a letter to the chancellor explaining why CPI was >3% when the BoE had in fact predicted that CPI would be <2.0% during the same period.
5. paul said...
This is an extraordinary attempt by the BBC to influence public perceptions and put pressure on the Bank of England to combat falling house prices. I would doubt that Mervyn King would listen. It can hardly be seen to be attempting to influence asset prices.
Especially when the rise in asset prices was deliberately created by the Bank of England in the first place!
6. Tara747 said...
The BBC is a joke.
I watched Merv on the news, he actually forecast rising inflation and falling growth - STAGFLATION.
Woo hoo!
7. Robh said...
Mervyn may be offered 'early retirement' of course
8. Mark said...
thats the way, combat inflation with lowering interest rates just to keep house prices high..., wow what a clever idea... knobs...
9. Yoss said...
Yeah, Including housing costs in the CPI figure was muted by Merv some months back. I bet they get included some time very soon.
10. Addsj said...
In the past banks have made more profit from selling debt than from interest on the debt itself. This spawned the market that resulted in the credit crunch. Now the profits that the banks make from debt has reduced. (its not just exposure thats reduced share prices in the banking sector, its questions over future growth)
The BOE may well reduce the Base Rate. But will this result in cost reduction at the point of sale (IE The Highstreet Bank)?
Of course existing base rate linked mortgages will benefit. But, as the banks try to stabilise diminishing profits in this area, the cost of new credit can only up (whether thats higher rates or disguised by higher fees).
You can bet your bottom dollar that the BOE will not reduce rates until after Christmas, probably Feb.
11. fahrenheit451 said...
So what they are saying is that the only inflationary pressure is from fuel price increases, and since they caused them by adding an extra 2p it is irrelevant.
What a load of rubbish, and fuel prices are extortionately high anyway, everyone should be greener, yeh, but why pay the Taxman so much so he can waste it on badly run Schools, Hospitals, Local Government and Olympics ... whinge, gripe, etc.
www.PetrolPrices.com: Fuel Tax
12. shipbuilder said...
"But the Bank also expects inflation to rise in the short-term as higher energy prices begin to bite. "
In the short-term? Do they really expect energy prices to fall again? Or goods from China? Or food? These things are on a long-term rise as far as I can see. Surely mortgage payments would be included, rather than house prices, and unless these are actually falling, they can't offset the rises.
Even with an interest rate cut, I can't see the banks following suit to any great degree - aren't they going to want to claw their money bank from the people who can actually pay their mortgages?
In short, unless i'm missing something, the only effects an IR cut will have are negative.
It looks increasingly likely that the policy is to inflate away the UK's debt and house prices while fiddling the figures to stop any panic.
13. shipbuilder said...
Say the government could inflate away debt and make exports more competitive with a weak pound, whilst fiddling CPI/RPI to stay on target - what would be the downside for them? It looks like win-win for them on the face of it - house prices would stay high and people would still have their jobs, so I couldn't see the average joe being bothered.
14. cornishman said...
Denzil, I think you may have missed the point. Of course everything you need to live will be going up in price dramatically next year - except house prices. The bank tracks CPI. By manipulating the extent to which house prices (or anything that is falling in price - bank charges etc) are in the index, the CPI can be kept at 2% indefinitely regardless of what happens on the ground. We will be told that the basket of goods has been changed to better reflect conditions or some such cr@p. Which, sadly, a lot of people will go along with.
Shipbuilder - CPI will rise in the short term - until house prices can be included in January...
15. paul said...
Ahh, that could be it. While Mervyn King did make noises about including house prices in the CPI, nothing was done about it.
Now that house prices are set to fall like a brick in a millpond, we could well see it included in the CPI.
Cooking the books? Yes. Corrupt? Almost certainly? Fair? Almost certainly not. Feasible? Almost certainly.
16. tyrellcorporation said...
If they pull off the coup of suddenly announcing house prices are in the CPI we can all go home and forget HPC. The did exactly the same thing with utility bills so why not house prices? SHiiiite!!!
17. Taffee said...
house prices will still fall......japan interest rates are 0.5%..and houseprices have been falling for 17 years!
Also...if houseprices are put in the cpi then we have japanese deflation
18. shipbuilder said...
Surely the idea that the CPI basket can be changed AT ALL, immediately makes the inflation figure utterly useless? You can't compare it with past figures and by reducing an items 'influence' you are potentially allowing it to reach an unaffordable level, when surely a major point of the metric is to measure changes in affordability.
With the current system you could easily keep the metric at 2% over the course of a year, while every item in the basket could increase by 20% in price - which is exactly what has happened.
This is nothing less than corruption.
19. taffee said...
if they put houseprices in the cpi then expect japanese style deflation
20. fahrenheit451 said...
This is good enough for a conspiracy theory ...
I wouldn't trust them to even have a sensible haggle across the floor !!!
21. Will said...
Most people are homeowners, so of course they would go along (with its inclusion in CPI) if the perceived wisdom was falling prices. I severely doubt that will happen though, it just makes no sense (although clearly I could be shocked) as it would seemingly fix the current real house price rate as "normal".
There is also a huge lag between interest rate changes and their effect on the economy. If anything, a proposed cut, in the future, suggests that the economy is looking dodgy a year or so down the line, something everyone on this site seems to believe already (mountain of debt comments, rants about Labour misleading everyone in regards the economy etc).
So surely this just shows that the BoE agree with you? You don't signal cuts if the economy is looking rosy.
No, it is a huge mistake apparently.
Inflation is hardly going to rise if no one is buying anything. And, given the prevailing conditions 12 months down the line, the BoE is ascertaining demand will be limp.
Now, they surely would be incompetent if they waited for the doles queues to form around the block before they thought about moving rates?
22. Ill_handle_it said...
Oh thank heavens then ! Okay, it's all right to go and get a mortgage as everything is just fine and absolutely nothing to worry our silly little heads about... Go shopping ! Spend some money ! Buy a car ! Yippeeeee !! Interest rate are going down and the nasty horrible inflation monster has gone away. Phewwww !
23. wiltshire said...
Interestingly the headline on this news item has changed a couple of times during the past couple of hours. When it was first published it was the headline we currently see, then it changed to a more pessimistic headline regarding shares and the global stock markets and now it's been changed back to the sheeple friendly version again.
I imagine most bankers, economists, financial commentators etc are all running round like headless chickens at present..........
24. Ellipse said...
although we all know the BoE's remit is to keep inflation under control, it will be secondary when the credit squeeze bites in on these shores - maybe this is why it is worth considering a rate cut as a possible option... thoughts?
25. Rep013 said...
Have any of you read the actual BoE document? I see in it no comment about dropping rates by 0.5%.
All this inflation talk too, I don't understand that. If CPi is to stay at 2% (ish) then where will the inflation come from to erode debt, are employers going to give huge pay rises to people when the "official rate" is only 2%? Also with just 2% CPi (and low wage rises) this will just help towards stagflation (higher prices and lower wages).
As for banks and mortgages .. The IR can go whatever way the BoE sets it but banks will not be dropping their rates in a hurry anytime soon. HPC is coming, banks are tightening their belts and the consumer will have to follow.
Lastly house prices in CPi, I can't see that either. I know rules can be changed but the argument has always been to be more in-line with Europe and that house prices can't effectively fit into the CPi metrics. With Gordo intent on us joining the Euro he's not going to hurry to change our new accounting practices to make us even further away from that goal.
26. jack c said...
US GDP is approximately 70% consumer spending closely followed by the UK at approximately 65% - both governments need to keep the respective economies going so the Fed cuts rates to be followed by BOE and all is well with inflation because housings costs (now falling) come into the CPI ? – good to know we are all in very safe hands !!
27. New User 2007 said...
This is not really new news. Two cuts of 25 basis points have been priced in for 2008 for a couple of months. The BOE does admit that there is a risk of inflation in 2008, and its interest rate moves in 2008 will be taken based on having an eye on inflation in 2009. Also, the high inflation in many months of 2007 means that there will be base effects working against high inflation for many months in 2008.
The issue is how far China will now be exporting inflation (it had a lot to do with the benign official inflation of the last years). I just hope that the BOE does not do a Greenspan put, whereby they said they did not want to set interest rates based (directly) on house prices being too high i.e. unless it had an impact on prices and the economy, but now they reduce rates over fears that house prices will fall.
My call, however, is that inflation is not going to die away. It is no longer possible to grow company profits through outsourcing or cost cutting, so the only thing left to maintain profits is to raise prices (input costs have been rising for a long time, but were absorbed in the past through the aforementioned China/outsourcing etc). At the same time, food prices will remain high.
28. paul said...
Hmmmm.
It would be an extremely shortsighted move by the bank, proving them to be hucksters who prefer to paint over their turds rather than clean them up, but not beyond the realms of possibility.
But lets just think whether this would have any effect on house prices. Would it actually stop the decline? I don't think so. The consumer has finished their bull run on property - the money is spent and the banks want it back - regardless of what the retail bank rate is set at (which will be lower on the back of fake inflation figures), the LIBOR rate won't be affected much, so most retail banks won't be able to extend credit further to consumers ...non?
29. Young_mark said...
From the breakdown of the Bretton Woods system in the late 1960s until the early 1990s, all UK governments struggled and mostly failed to control inflation. Various policies were tried including a prices and incomes policy (Heath, Wilson, Callaghan), monetary targeting (Thatcher first term), ERM-light (Thatcher second term), ERM (Major). All failed. Ejection from the ERM in 1992, brought a hastily cobbled together attempt at inflation targeting. The targeting mechanism Gordon Brown inherited from the Conservatives was dramatically strengthened in 1997 when, as chancellor, he introduced the current arrangements. The system has been an astonishing success for a variety of reasons, the most important of which is the MPC’s focussed remit. The control of CPI inflation takes precedence over all other considerations – growth, employment and certainly the housing market. There isn’t the slightest possibility of confidence in it being undermined though the manipulation of the CPI – or any other means.
It’s also disingenuous to suggest that housing costs have ever been used for inflation targeting purposes. Before the advent of CPI, the present government and its predecessor used RPIX. The “X” stands for “excluding mortgage interest payments”. The reason for this is very simple. The only weapon the MPC possesses to fight inflation is the interest rate. It would be perverse in the extreme for the inflation target to include the one item which was most directly affected by interest rate rises.
Some people posting also seem to getting confused between housing costs and house prices. Housing costs (mortgage interest payments) are included in the RPI figures. House prices aren’t. So for the vast majority of people (those who don’t move house) housing costs will remain unaffected by falling house prices.
Finally, the reason for changing the CPI basket of goods is to reflect changing spending patterns. This is why it includes petrol, but doesn’t include horse fodder.
By the way, the reason I’m making this post is to inject some realism into the debate. My own view is that the boom is over. Whether it will be followed by a crash or a prolonged period of stagnation is anybody’s guess. Ridiculous conspiracy theories will not enlighten anyone.
30. Mikeh said...
What a lot of lies, inflation of 2%, more like 20%
31. shipbuilder said...
Young_Mark - do you work for the ONS? Perhaps you can answer all our nagging questions on CPI? - how do you explain the % of energy costs being upped in the basket just as those costs start to go down? Can you explain CPI dropping by 0.5% when petrol drops by 1p, but we can have rises of 10 times that without an upward effect? Do you really believe that the basket reflects what people buy? Does it reflect what you buy, what your friends and family buy on a daily basis? Is your personal inflation 2%? Are the stories about food rises of 20%, the rise in Chinese goods, unprecedented rises in metals, commodities and natural resources all fantasy? What about the money supply at 10+ %?
When you talk of 'manipulation' and the 'focused remit of the MPC', how come interest rates were dropped with the sole intention of avoiding a recession, as admitted? Would they have done that if inflation was their sole remit and they were truly independant?