Letter From The Governor To The Chancellor

[Tired of Waiting]

17 May 2011 - Letter from the Governor to the Chancellor (10.30am)

LINK: http://www.bankofengland.co.uk/publications/news/2011/index.htm

Pathetic. Pitiful.

My old recurrent question pops up again: Stupidity/incompetence? Or lying?

I think he is spinning it. I think they want inflation to erode debt and real salaries and assets prices.

The question is if they will be able to keep inflation at this useful 4-5%, without letting it spiral out of control. Quite impressive if they manage that. The bleeding fecking b@stards.

[JaneTracy]

I spotted some analysis which pointed out that these numbers were not a surprise if you have Easter marked on your calendar and a clear weakness in the explanation of the Governor of the Bank of England.

When inflation is 1% higher than its official target the Governor has to write to the Chancellor to explain why. Today’s letter contains something of a gem.

"Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred, inflation would have been substantially lower and probably below the target."

Yes you have it, if prices had not risen inflation would be below target! Thanks for that insight Mervyn.

http://t.co/S8ZM4zJ

[Si1]

I spotted some analysis which pointed out that these numbers were not a surprise if you have Easter marked on your calendar and a clear weakness in the explanation of the Governor of the Bank of England.

http://t.co/S8ZM4zJ

the problem being that raising interest rates doesn't make a lot of difference to commodity prices, except by strengthening the pound and damaging exports by the same degree, so of no net benefit

[_w_]

"Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred, inflation would have been substantially lower and probably below the target."

I bet Merv and Osborne had a good chuckle when they wrote that one down.

[Reck B]

At its May meeting, the MPC judged it appropriate to maintain Bank Rate at 0.5% and the stock of asset

purchases at £200 billion, in order to meet the 2% CPI inflation target over the medium term. The

MPC judges that attempting to bring inflation back to the target quickly risks generating

undesirable volatility in output and would increase the chances of undershooting the target in the

medium term.

"Increase the chances of undershooting the (2%) target in the medium term."

Woe betide stuff gets more affordable ! Tell you what - why not just TRY AND HIT YOUR TARGET and see what happens instead of doing absolutely fúck all and letting it get out of control?

What is the medium term btw? is it 5000 years?

Fúcking useless pillock.

And have you seen the size of his signature? It takes up half a side of A4.

Edited May 17, 2011 by Reck B

[desertorchid]

the problem being that raising interest rates doesn't make a lot of difference to commodity prices, except by strengthening the pound and damaging exports by the same degree, so of no net benefit

Indeed commodity prices hinge on the monetary policy in the US and all the time the USD is getting devalued commodities will rise. However, if at any stage te US is forced to raise rates, the UK will have to follow too, the effect on sterling in currency markets would be horrible if they didnt. The trouble is there is absolutely no sign of US rate rises.

[Tired of Waiting]

the problem being that raising interest rates doesn't make a lot of difference to commodity prices, except by strengthening the pound and damaging exports by the same degree, so of no net benefit

Yes, rising IR would push sterling up and damage exports, but I don't know if the net effect would be negative, or neutral. It should be positive (economically, holding inflation down), though very very painful. Only a recession will bring inflation to target. But if we don't do it now, inflation will spiral, and we'll need an even stronger recession to control it in the future.

Unless... the Unions have agreed to restrain their wages demands, in return for low interests = mortgage costs. I remember some Union leaders accepting that logic, a few months ago, in public: That high wages demands will bring high interest rates and high mortgages costs. I was very surprised by that.

[ScrewsNutsandBolts]

"Increase the chances of undershooting the (2%) target in the medium term."

Woe betide stuff gets more affordable ! Tell you what - why not just TRY AND HIT YOUR TARGET and see what happens instead of doing absolutely fúck all and letting it get out of control?

What is the medium term btw? is it 5000 years?

Fúcking useless pillock.

And have you seen the size of his signature? It takes up half a side of A4.

Either that... or the letter was written on the back of a beer mat

[Constable]

If the inflation target is 2%, and the actual rate has been substantially above that for a long period, then surely they should now be targeting 0% to bring the average to 2% over the longer term.

I'm yet to hear a credible argument why a long term inflation target should be anything other than 0.

[billybong]

From the letter the picture's emerging of a governor completely out of his depth floundering about not really having a clue what to do except hoping for the best.

Of course that could just be part of the overall chicanery but amazingly there hasn't been a replacement just on the basis of incompetence. The signature is one of those squiggles that make the name almost illegible.

[Van]

So it looks like being "Temporary" for 4 years now.

Merv is an a$$hole.

[Killer Bunny]

the problem being that raising interest rates doesn't make a lot of difference to commodity prices, except by strengthening the pound and damaging exports by the same degree, so of no net benefit

Having a strong currency DOES NOT DAMAGE EXPORTS!!!!! Did a strong Mark over 4 decades hurt German exports? Or Yen and Japanese? Or Renmimbi and Chines exports to US?

[Tired of Waiting]

Having a strong currency DOES NOT DAMAGE EXPORTS!!!!! Did a strong Mark over 4 decades hurt German exports? Or Yen and Japanese? Or Renmimbi and Chines exports to US?

Sorry KB, but "cæteris paribus", it does.

Of course a country can compensate for that by increasing its productivity, as the Germans and Japanese have done, but it does take time, with investments in labour force education, and national infrastructure - including transport and properties. (Please see my sig., below, and think of German's low properties costs helping their international competitiveness.)

[_w_]

So it looks like being "Temporary" for 4 years now.

Merv is an a$hole.

You're making the same mistake so many make.

It is not that they are stupid, it is that you do not understand their motivations.

[R K]

If the inflation target is 2%, and the actual rate has been substantially above that for a long period, then surely they should now be targeting 0% to bring the average to 2% over the longer term.

I'm yet to hear a credible argument why a long term inflation target should be anything other than 0.

They apparently decided against price level targetting 'cause (apart from anything else) changing the methodology would simply add confusion into the mix.

But it's a good point - One which would lead to having a higher target level just about now to compensate for the lower levels during the 08/09 crash. On balance, assuming oil mean reverts and emerging market growth falls back the overall price level will be pretty much as you'd expect in the medium term notwithstanding all the mouth-frothers.

[Traktion]

If the inflation target is 2%, and the actual rate has been substantially above that for a long period, then surely they should now be targeting 0% to bring the average to 2% over the longer term.

I'm yet to hear a credible argument why a long term inflation target should be anything other than 0.

Sticky wages are the main one. You've seen all the fuss that the unions kick up over even a pay freeze - imagine if there was a pay cut!

They have a big problem with this in Rep. Ireland. Some with jobs are now on massive wages, while others are unable to get a job at all.

One idea would be to make a substantial of people's wages reflect both their performance and the company's profits. This way, if the latter was struggling, they would get a pay cut, but it would be part of the contract.

With all that said, I don't see how the cost of borrowing here will have a huge impact on the cost of goods we import. If the goods we import are driven by strong demand elsewhere, making borrowing more expensive here will make little difference.

Besides, wouldn't they want to sell off all that QE before they increased rates? Given the articles I have read recently, putting up rates before selling of QE could stoke inflation, rather than reduce it. It would probably be better to tighten by selling off the gilts bought with QE instead (i.e. shred the printed money). Not that I think tightening will help anyway (due to the above).

Edited May 17, 2011 by Traktion

[Georgia O'Keeffe]

Sticky wages are the main one. You've seen all the fuss that the unions kick up over even a pay freeze - imagine if there was a pay cut!

They have a big problem with this in Rep. Ireland. Some with jobs are now on massive wages, while others are unable to get a job at all.

One idea would be to make a substantial of people's wages reflect both their performance and the company's profits. This way, if the latter was struggling, they would get a pay cut, but it would be part of the contract.

This is exactly the reason bonuses were introduced, to stop the constant accrual on pensions when they were all final salary. Of course being people the bonus factor just gets bastardized and abused by those that can

Edited May 17, 2011 by georgia o'keeffe

[Blod]

I can't see an easy route forward for the BoE. With a 2-2.5% short fall between wage inflation and CPI-RPI plus the drop in HEW (formerly MEW) consumer confidence is going to collapse. That in turn will lead to GDP retracting so the economy will slip back back into recession. All that MK is doing is admitting that there's nowt he can do to help chancellor. The inevitability of a long drawn out slow HPC is now assured. People that remember that last few HPCs will see the slow motion crash lasting for the next five to ten years.

[Guest_flaps_*]

the problem being that raising interest rates doesn't make a lot of difference to commodity prices, except by strengthening the pound and damaging exports by the same degree, so of no net benefit

But as net importers of enegry and raw materials, these costs will fall to compensate, while everyone else benefits from reduced inflation.

[Democorruptcy]

Sorry KB, but "cæteris paribus", it does.

Of course a country can compensate for that by increasing its productivity, as the Germans and Japanese have done, but it does take time, with investments in labour force education, and national infrastructure - including transport and properties. (Please see my sig., below, and think of German's low properties costs helping their international competitiveness.)

Why would foreigners want to invest in a country with a weak currency?

Don't they have a sense of smell?

[General Congreve]

But as net importers of enegry and raw materials, these costs will fall to compensate, while everyone else benefits from reduced inflation.

Exactly, their is so much spin coming out of the BoE I'm dizzy.

Merv is keeping interest rates down for the following reasons:

- So the government can afford to pay its debts to its creditors (mainly the banks) and doesn't default on them.

- So Mortgage holders can afford to pay their debts to their creditors (the banks) and don't default on them.

- So the banks can perform a large carry trade on savers savings and try to rebuild their shattered balance sheets.

All paths lead to the banks and ensuring they don't collapse thanks to their bad lending decisions.

Merv and our politicians loyalties are to the banks and themselves, the country comes a poor third. The side effect of the three policies above will be devastating for the country and the value of people's wages and savings, but like I said, they don't care, as long as the banks are ok.

However, I'm not mad. Instead, I got even. Now every announcement of inflation, static interest rates, QE and bailouts just fills my heart with joy at the future riches I will enjoy for doing absolutely f4ck all. The bankers and politicians are now unwittingly working for me, not against me.

Edited May 17, 2011 by General Congreve

[mfp123]

a more truthful letter would be short and sweet.

weve printed lots of money, so money is being devalued.

speak again in 3 months.

merv xx

Edited May 17, 2011 by mfp123

[General Congreve]

You might be right, bearing in mind how dangerous Blair & Brown have been to this country, what would you do if in Kings shoes now?

You can put interest rates up which would strengthen the pound.

Savers would be happy but how many save in this society? Not alot and not the majority of this country.

This would reduce imported inflation but reduce our manufacturing advantage meaning we have to rely even more on innovation to gain an edge.

Households struggling under the burden of rising mortgage & other debt costs would increase reducing spending in the wider economy.

Repossions would increase adding further downward pressure on the cost of property.

UK Property collectively would devalue reducing on one front the countries ability to borrow at good rates.

Taxes would need to increase to rehouse those repossed families on the street.

Unrest and crime would escalate as more people become desperate.

Economy would slow more quickly than it already has done adding further pressure of slipping into a deflationary spiral.

In short, you have to look at the economy like a fire as an analogy. Interest rates are water, put rates up too much and you effectively have poured too much water on the fire and risk putting it out (deflationary spiral) which would be catastrophic for not only this country by the ramifications will ripple out globally causing social unrest and who knows what else.

Pour too little water on it and the fire gets out of control but can be bought under control more easily than the effort and subsequent costs to the country trying to restart the fire.

Personally I would rather pour too little water on the fire than pour too much even though I have no debts and am disadvantaged by the current situation, I still think King is doing the right thing. Its a balancing act and some of those points mentioned above are just some of the many many factors that affect this countries economy imo when considering interest rates plus they also have access to more data and computer modelling than you and I have access to.

Nonsense. Look at Iceland. Take the hit, default on the bad debt and start rebuilding a healthy low debt economy from scratch. Painful in the short term, but much better in the medium to long term. The longer this is put off the worse it will be for all. However, the banks won't fair well in this situation and powerful people out there are willing to do anything to stay on the gravy train..

As for their wonderful all-seeing computer models, fat lot of good they did in 2007/08.

Edited May 17, 2011 by General Congreve

[General Congreve]

Nonsense! Iceland is a small country with greater social cohesion of just 320,000 people.

Try doing the same with 60+million people with less social cohesion, a multitude of people from different backgrounds and see if you get away with it!

Lets not forget who works for who, ie Merv works for the Govt not the otherway round he does whats he's told and thats that.

Please explain your logic? How does the size of our population make throwing off the yoke of debt make our country any more susceptible to failure if we take the default route. With regards to public disorder, which will certainly be an issue (it was in Iceland), we have more people, ergo, more police and army to control them. Mind you, Greece have opted not to default but to take on debt peonage instead and I haven't seen a single riot there, so maybe you are right.

The other route 100% ends in disaster anyway, so debt repudiation, whatever issues it causes, will utimately be better by default (no pun intended!).

Edited May 17, 2011 by General Congreve

[General Congreve]

My logic is already explained above, you dont have to agree with it I'm not forcing you.

On the point of public disorder theres something like 150,000 people to one policeman or military personal in this country (assuming they are all back over here and not abroad).

Whats one policeman going to do against a baying mob of that many people even with guns? We are very reliant on intelligence in this country and nipping things in the bud before they become a problem, its cheaper from a policing point of view and cheaper from a military point of view.

I dont see the people rioting in Ireland about the debts they have taken on and they are paying more than the Greeks so where does that put your point now? http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100007444/it-pays-to-riot-in-europe/

Arent the greeks a little more hot headed at protecting their work ethic or lack of? "Thy doth protest too much"

Uh oh, there might be some riots, so let's print the pound into oblivion instead to save the banksters. Don't get me wrong, that path will probably benefit me personally more than debt repudiation. However, I'm sure it will prove to be much more destructive to the country and much more 'riotey' in the medium to long term.

Give the Irish time, they'll get there, their peaceful protests will turn violent as the screw tightens. You also have to remember that as a nation they are used to being oppressed, so it is easier for them to take it in their stride at this point. Then all of a sudden it's guns and mortars time!