Tuesday, Jan 19, 2010
BoE's ability to fight inflation impaired...
Telegraph: Neutral interest rate 'may be 2.5pc'
"In previous years economists and policy-makers assumed that when the Bank of England's benchmark rate was at around 5pc, it was neither pumping extra energy into the economy or constraining growth. However, Morgan Stanley said the future neutral rate may be closer to 2.5pc or 3pc. In a report on the UK's economic prospects, Melanie Baker and Charles Goodhart said that if banks continue to charge customers a higher premium to borrow, it will mean the Monetary Policy Committee cannot raise interest rates beyond a certain level without risking a consumer slump."
Posted by cat and canary @ 01:34 PM (1435 views) Add Comment
11 Comments
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1. general congreve said...
Yep, they've painted themselves into a corner. It's inflation time! Got gold?
2. mr g said...
Looks like HMG and BoE have nobbled the Telegraph into publishing their propaganda.
3. paul said...
In other words, like we said here many years ago, the MPC has shortsightedly painted itself into a corner by keeping interest rates too low for too long.
4. cat and canary said...
"In other words, like we said here many years ago, the MPC has shortsightedly painted itself into a corner by keeping interest rates too low for too long."
...hear hear. The BoE's margin for error is looking quite tight. This is one reason why I reakon there's a short, sharp house price correction coming. The recent house price rise screams of an "underdamped system." The BoE overcooked it by dropping interest rates to zero
5. cat and canary said...
...and underdamped systems always understoot the most!
..great news for house buyers:) Gordon and Merv will be our hero this time next year!! haha
6. matt_the_hat said...
Its up to savers to decide if they want to keep paying these ridiculous mortgages for properties they don't own.
7. mark wadsworth said...
As Congreve and Paul and others say, they have painted themselves into a corner. Home-Owner-Ists demand ever rising prices and ever falling interest rates, but what you do when house prices are still unaffordable, even at a base rate of 0.5%?
It is quite possible that even a rate as low as 3% or so will in future be enough to ensure a slow, drawn out recession lasting decades. So to keep house price bubble inflated the only way forward is to increase taxes to pay higher subsidies to mortgage borrowers and homeowners, thus leading to the traditional Home-Owner-Ist death spiral for Ye Olde Economye.
8. watching with amusement said...
Pfff...
"If this is a permanent feature," i.e. all supposition...
I really don't think that this article should be taken too seriously. Sounds like a couple of bankers trying to draw attention to themselves.
9. cat and canary said...
watching with amusement, house prices were crashing in summer 2007 at ~4.5% base rate, with unemployment at 5%
do you think it could go back to 4.5% today, with unemployment at 8%, (not to mention upcoming taxes rises, and household debt problems, falling household incomes)???
10. watching with amusement said...
Cat and Canary, the article is concerned about a long term shift in the "natural" interest rate (whatever that is supposed to mean). Hence, that although the rate going back to 4.5% today would be pretty catastrophic I don't think that this is really in line with the article - the article talks about a permanent change in the natural interest rate level. My issue with the article is that it seems to say that in two year's time interest rates won't be able to go back to 5%, I think that is just supposition.
If you look at the article, it does consider this change in natural interest rates to a sea-change in the markup banks are applying to mortgages. I, for one, can't fathom any reason why this markup wouldn't go back down again (yes, the banks want to keep the margins as large as possible, but margins do get eroded...)
11. fallingbuzzard said...
Margins get eroded when there is competition. The competitve environment has changed massively over the last 2 years so I wouldn't expect erosion back to (ab)normal levels.
Either way its all a bit theoretical because our real interest rates for the next few years are out of our control. They depend more on economic activity and demand in other countries as well as oil and other commodity prices.