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Andrew Sentance Warns Bank Of England On Inflation

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http://www.bbc.co.uk/news/business-13196307

Andrew Sentance warns Bank of England on inflation

The Bank of England may be risking its inflation credibility by not raising rates, a member of the Bank's interest rate committee has said.

Andrew Sentance, one of the nine members of the Monetary Policy Committee (MPC) that sets borrowing levels, said its failure to raise rates may suggest it was soft on inflation.

Mr Sentance is the hardest-line member on the MPC on inflation.

In recent months he has called for interest rates to rise from 0.5% to 1%.

'Upward drift'

Mr Sentance has spent almost five years sitting on the MPC and will have completed his term with the committee next month.

During a speech to Manchester business leaders, he said: "I do worry that the MPC's credibility and commitment to the inflation target may already have been eroded by not adjusting policy settings soon enough.

"It may be that indicators of an upward drift in inflation expectations are only flashing amber at present. But if the MPC waits until they are flashing red... the Committee could face a very difficult situation later this year or next."

Consumer Prices Index inflation is currently running at 4%, double the Bank's target.

Mr Sentance said the rate had been 3% or higher for most of his time on the MPC, and he has been voting for higher rates since the middle of last year.

Although two other members also think interest rates should rise to curb inflation, the counter argument runs that it is too soon to increase borrowing costs as the economy is too fragile to withstand it.

On Wednesday, the latest figures on UK economic growth will be released.

They are expected to show that UK gross domestic product grew at about 0.5% in the first three months of the year.

However, Mr Sentance warned against putting too much emphasis on the figures, saying that his experience as an economist suggested that first estimates were often too low.

MPC 'strength'

Despite his fears about inflation, Mr Sentance praised the democratic way the MPC worked.

"A great strength of the MPC is that its members can honestly express differences of view in an open and transparent way, and that means we are not forced to agree and minority opinions are respected," he said.

He concluded his speech by saying he hoped his remarks during his time there had made an impression on his fellow members.

"While I have not been in agreement with the majority view on the Committee over the past year, I hope that the arguments I have made have not been in vain."

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We can count on Merv and the Muppet Policy Committee to remain "vigilant." Indeed thats what worries me! :unsure:

Edited by Sir John Steed

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The longer that they wait to start raising rates the swifter that they'll have to rise. Its that that seems to be spooking the doves on the MPC. Their problem is that they are now beginning to appear that they too scared to move and he's right to be warning of that though I think that that its too late already.

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Guest sillybear2

"Mr Sentance is the hardest-line member on the MPC on inflation.

In recent months he has called for interest rates to rise from 0.5% to 1%."

Ohh, a crippling 1%, how hardline, if that's the range of views on the committee no wonder their outlook is often so wrong. I'm guessing they'll do absolutely nothing until they're compelled to by external forces. They'll probably do a series of panicked rises after gilt yields start spiking and gold hits $5000 in a year or two, after which they'll retire or resign to take up lucrative positions at the very same institutions they were spraying all that QE money at.

I can see what they're trying to do, they just want to bury their head in the sand until the previous inflation drops out of the YoY indexes and they can pretend everything is moderating. Unfortunately oil and a range of other committees have doubled in price over the last year so yet more rises are in the pipeline. Things are going to get worse for them, and persistently high inflation will start compounding on itself.

The sheer naivety of their latest MPC minutes is breathtaking, apparently trashing the pound with QE 'moderating the level of sterling' doesn't suddenly make factories spring out of the ground overnight and balance our trade deficit, nor does it magically reconstruct destroyed skill bases, nor create a vibrant SME and engineering sector.

The financial services industry was all for creative destruction and capitalism when it came to our industrial base, but not so much when the same forces visited them, they caught the protectionist and bailout bug. They're special, you see, and if they take away their free money they will lobby and cry. Nobody wants to invest in an economy that has been captured by one industry, unless you happen to be in that industry of course and are looking for a bunch of mugs to pay for your mistakes.

Edited by sillybear2

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It would be pointless to raise rates. I really cannot understand the logic.

At best, it would cause the pound to rise, but tbh, I doubt it would do that. Even if it did, how would it help to reduce the trade deficit?

Additionally, what exuberance would they even be trying to cool, by raising rates? Unemployment is still high, with many public sector workers yet to face the axe.

Borrowing growth is still weak and/or falling too:

http://www.bankofengland.co.uk/publications/other/monetary/TrendsApril11.pdf

It seems that some just want to raise rates to be seen as 'doing something', to stop the price index target from becoming a joke. IMO, it is already a joke - it just doest't work. It didn't stop the boom (for numerous reasons, discussed here and elsewhere), which is the purpose of an increased base rate.

http://www.iod.com/mainwebsite/resources/document/iod_pulse_1103.pdf

If borrowing is low due to the majority being tapped out, but the money supply is large due to previous borrowing, then it is those hoarding money who need to be kept an eye on. As these have been shown to be corporates, the only reason to increase rates would be to pay them yet more in order to discourage them from spending it. Ofc, them not spending it, will not lead to investment and/or growth either, so again, what is the point? They should have stopped the credit growth in the first place, not do little, then attempt to stop it being spent again.

It just doesn't make sense to me. The simple 'rule' that 'raising rates reduces inflation' just doesn't stand up to scrutiny, when the inflation is coming from rising commodity prices. I doubt it would even strengthen sterling, as growth would hardly be helped by this - stagnation doesn't attract investment in the UK.

If anyone can explain the reasoning why raising rates would help, I'm all ears. However, I just can't see the supporting evidence, other than an old rule of thumb, based on a flawed price index target.

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If anyone can explain the reasoning why raising rates would help, I'm all ears. However, I just can't see the supporting evidence, other than an old rule of thumb, based on a flawed price index target.

Which do you prefer those in debt borrowing more or those with savings spending interest income?

I know lots of people reliant on the income from their savings who have pulled the drawbridge up on spending. While interest rates are low they feel they need to save more!

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Guest sillybear2

It would be pointless to raise rates. I really cannot understand the logic.

At best, it would cause the pound to rise, but tbh, I doubt it would do that. Even if it did, how would it help to reduce the trade deficit?

Even 1% is still very low, negative in real terms. The real problem with speculation and hot money is due to QE now the multiplier on all that magic money is taking effect. I agree the BoE is at best a mini-me in all this, the real problems are caused by the Fed playing a game of chicken with the Chinese.

We could put up with importing lots of inflation if it was driving exports and balancing our trade deficit, but the thing is this isn't really happening. I guess Merv could spread the blame further on "external policy factors outside of our control" in his next love letter to Osborne.

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It would be pointless to raise rates. I really cannot understand the logic.

At best, it would cause the pound to rise, but tbh, I doubt it would do that. Even if it did, how would it help to reduce the trade deficit?

Additionally, what exuberance would they even be trying to cool, by raising rates? Unemployment is still high, with many public sector workers yet to face the axe.

Borrowing growth is still weak and/or falling too:

http://www.bankofeng...endsApril11.pdf

It seems that some just want to raise rates to be seen as 'doing something', to stop the price index target from becoming a joke. IMO, it is already a joke - it just doest't work. It didn't stop the boom (for numerous reasons, discussed here and elsewhere), which is the purpose of an increased base rate.

http://www.iod.com/m..._pulse_1103.pdf

If borrowing is low due to the majority being tapped out, but the money supply is large due to previous borrowing, then it is those hoarding money who need to be kept an eye on. As these have been shown to be corporates, the only reason to increase rates would be to pay them yet more in order to discourage them from spending it. Ofc, them not spending it, will not lead to investment and/or growth either, so again, what is the point? They should have stopped the credit growth in the first place, not do little, then attempt to stop it being spent again.

It just doesn't make sense to me. The simple 'rule' that 'raising rates reduces inflation' just doesn't stand up to scrutiny, when the inflation is coming from rising commodity prices. I doubt it would even strengthen sterling, as growth would hardly be helped by this - stagnation doesn't attract investment in the UK.

If anyone can explain the reasoning why raising rates would help, I'm all ears. However, I just can't see the supporting evidence, other than an old rule of thumb, based on a flawed price index target.

lowering them to .5% hasnt fixed the trade deficit, inflation or the economy.

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lowering them to .5% hasnt fixed the trade deficit, inflation or the economy.

It's paid for the bank bonuses though

British savers are estimated to have lost a total of £22 billion as a result of sharp cuts in the Bank of England base rate.

The typical saver with £10,000 in a deposit account will receive £300 less interest annually, according to the study.

If interest rates are cut again by 0.5 percentage points by the Bank of England's Monetary Policy Committee, as expected, the typical saver will earn just £37 in interest this year.

The figures have been seized upon by the Conservatives who are demanding that Gordon Brown introduce immediate help for savers.

http://www.telegraph.co.uk/finance/personalfinance/savings/4142362/Savers-have-lost-22-billion-in-wake-of-interest-rate-cuts.html

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Has anybody seen the article on this subject by the BBC's Stephanie Flanders?

Not content with telling us for the past couple of years that there is no inflation and that there are no signs of it in sight Stephanie Flanders now tells us.

There's not much sign that the Bank's reputation for curbing inflation has been permanently hit

I guess there isnt if you are safely within the BBC's inflation-linked pension scheme...

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lowering them to .5% hasnt fixed the trade deficit, inflation or the economy.

How much higher would unemployment be if rates were higher?

How many more firms would be out of business if rates were higher?

How many more homes would be repossessed if rates were higher?

The inflation we are suffering from now is not due to under capacity, increasing interest rates would not miraculously improve the economy at all. It might help the banks improve their profits and increase their ability to pay even higher bonuses. Is that what you interest rate hawks want?

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Guest sillybear2

Has anybody seen the article on this subject by the BBC's Stephanie Flanders?

Not content with telling us for the past couple of years that there is no inflation and that there are no signs of it in sight Stephanie Flanders now tells us.

I guess there isnt if you are safely within the BBC's inflation-linked pension scheme...

Thankfully the licence fee is now fixed for some years, so this sea of non-inflation shouldn't bother them in the slightest. Maybe Steph is just doing her part in "managing expectations" to ensure they "remain well anchored", which is a nice way of saying people should be happy to take price rises up the ass with income falling in real terms. They can lead the way B)

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How much higher would unemployment be if rates were higher?

How many more firms would be out of business if rates were higher?

How many more homes would be repossessed if rates were higher?

The inflation we are suffering from now is not due to under capacity, increasing interest rates would not miraculously improve the economy at all. It might help the banks improve their profits and increase their ability to pay even higher bonuses. Is that what you interest rate hawks want?

what rates are businesses paying?...not BoE

what rates are homeowners paying?..Not BoE....rates are rsising without the BoE helping out..BUT:

Increasing rates will raise the £, lower oil prices and therefore our own productivity...Merv himself confirmed this to be the case...its not home grown inflation he is worried about.

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Thankfully the licence fee is now fixed for some years, so this sea of non-inflation shouldn't bother them in the slightest. Maybe Steph is just doing her part in "managing expectations" to ensure they "remain well anchored", which is a nice way of saying people should be happy to take price rises up the ass with income falling in real terms. They can lead the way B)

The Biased Broadcasting Corporation have a one sided view about inflation. It doesn't exist.

Think how many MPC interest rate decisions have been announced on a Thursday and it never gets a mention on Question Time. Even on weeks where the headline inflation figure was also in the news.

We recently had a Panorama program that was pure propaganda about how people with mortgages cannot even cope now, so any rise in interest rates would be evil.

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How much higher would unemployment be if rates were higher?

How many more firms would be out of business if rates were higher?

How many more homes would be repossessed if rates were higher?

The inflation we are suffering from now is not due to under capacity, increasing interest rates would not miraculously improve the economy at all. It might help the banks improve their profits and increase their ability to pay even higher bonuses. Is that what you interest rate hawks want?

How much higher would unemployment be if inflation was higher?

How many more firms would be out of business if inflation was higher?

How many more homes would be repossessed if inflation was higher?

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Guest sillybear2

I couldn't care less about them or their litigious cuckolded reporters, I don't watch. Try it.

As for Merv, he just wants to get to 2013 so he can retire and pass this mess on to someone else, the same way Eddie George admitted he offloaded an unsustainable bubble. It's pretty obvious what they're trying to do, they want to reduce the real value of the debt. The global monetary system is a ship of fools and "it's inflate or die" innit, their only problem is pretending to care about some arbitrary bull$hit target, their machinations are getting a bit fraught.

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Which do you prefer those in debt borrowing more or those with savings spending interest income?

I know lots of people reliant on the income from their savings who have pulled the drawbridge up on spending. While interest rates are low they feel they need to save more!

Savers have a very poor track record of spending money. Best to leave the money with the borrowers who know how to spend. ;)

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Martin Wolf

Waffle and blowing hot air/smokescreens on what they are NOT going to do to reign in Banker rip-offs!

See his interview on Hardtalk

http://www.bbc.co.uk/iplayer/episode/b010pxkk/HARDtalk_Martin_Wolf_Independent_Commission_on_Banking/

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Has anybody seen the article on this subject by the BBC's Stephanie Flanders?

Not content with telling us for the past couple of years that there is no inflation and that there are no signs of it in sight Stephanie Flanders now tells us.

I guess there isnt if you are safely within the BBC's inflation-linked pension scheme...

The BBC Pension Scheme is not inflation-linked whilst you are still working - you only get 1%pa rises.

BBC Removes Gold Plate from Pensions

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Which do you prefer those in debt borrowing more or those with savings spending interest income?

I know lots of people reliant on the income from their savings who have pulled the drawbridge up on spending. While interest rates are low they feel they need to save more!

In order to regain balance, you need those with money to spend some. Savers spending interest on top of their capital isn't going to help here. Regardless, said interest must have come from debtors - where else would it come from? As debtors are tapped out, this isn't an option*.

Without balance, you're going to be forever driving a wedge between rich and poor. This divide cannot continue to expand indefinitely. This is likely why interest rates have been tending to zero, without even the BoE (or other central banks) interfering.

Incidentally, this is a similar issue to the trade deficit, just on a national scale.

EDIT: * Unless your plan is to bankrupt them and go down a liquidationist path. However, this erosion of the asset side of the balance sheet will inevitably have a negative affect on the liability side. In short, it will put pressure on the banks to stay solvent and their 'savings' accounts whole. Therefore, money will still go from those with savings to those with debt, with either option; you then have to decide which is best (causes least pain, the least waste etc). However, it seems that many savers don't want to consider this eventuality either.

Edited by Traktion

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How much higher would unemployment be if inflation was higher?

How many more firms would be out of business if inflation was higher?

How many more homes would be repossessed if inflation was higher?

You're implying that higher short term interest rates will reduce price index inflation. Can you explain how any why?

edit: typo

Edited by Traktion

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Martin Wolf

Waffle and blowing hot air/smokescreens on what they are NOT going to do to reign in Banker rip-offs!

See his interview on Hardtalk

http://www.bbc.co.uk/iplayer/episode/b010pxkk/HARDtalk_Martin_Wolf_Independent_Commission_on_Banking/

Thanks for the interesting link. A higher capital requirement and stronger divides between investment and retail banking. Some sensible steps there.

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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