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Andrew Sentance Speaks..

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http://www.bankofengland.co.uk/publications/speeches/2011/speech500.pdf

Rather than dismissing the impact of global influences on domestic inflation, monetary authorities need to assess how far they pose a threat to price stability – either in the direction of persistent inflation or persistent deflation. In the UK, we took the view in late 2008 and 2009 that the threat of deflation was the biggest risk in the wake of the global financial crisis, and cut interest rates to historically low levels, supported by direct injections of money into the economy through the policy of Quantitative Easing.

But the world inflation climate has become much more inflationary now, both through the direct effect of rising energy and

commodity prices and through a turnaround in global demand. While the global demand environment remains buoyant, we should not regard energy and commodity price movements as one-off shocks, as the inflationary pressure from the world economy may well persist for quite a while. And persistent above-target inflation carries other risks for price stability in the UK – to the credibility of our policy framework and to expectations of future inflation.

Indeed, Chart 11 shows that UK services sector inflation has been running at around 4% for much of the past decade, and has not shifted downwards to offset rising goods prices. This raises the possibility that in the services sector, high inflation expectations have already become engrained. For these reasons, I have been arguing for the past year that the MPC should embark on a policy of gradual interest rate rises and that delaying this process exposes us to greater inflationary risks in the future – which

would not be good for economic growth in the medium term. Continuing to accommodate inflation makes it more likely that a future sharp policy correction will be needed, particularly if persistent high inflation becomes embedded in wage and price-setting. That not only poses a threat to the recovery further down the track, but it could erode the hard-earned credibility of the UK monetary policy framework – which would be very damaging for economic growth over the longer-term.

I hope that my colleagues on the MPC will not allow the UK economy to be blown too far off course by global inflationary winds before taking the necessary corrective monetary policy action, which is long overdue.

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Continuing to accommodate inflation makes it more likely that a future sharp policy correction will be needed, particularly if persistent high inflation becomes embedded in wage and price-setting. That not only poses a threat to the recovery further down the track, but it could erode the hard-earned credibility of the UK monetary policy framework – which would be very damaging for economic growth over the longer-term.

I hope that my colleagues on the MPC will not allow the UK economy to be blown too far off course by global inflationary winds before taking the necessary corrective monetary policy action, which is long overdue.

He's kidding himself on that. The so called "credibility of the UK monetary policy framework" is long gone.

If there isn't some action soon the UK is right back to its old days economics and likely even worse. It's probably too late already through government and BoE connivance.

Edited by billybong

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If there isn't some action soon the UK is right back to its old days economics and likely even worse.

But this is the problem. We ousted the last government that was ruinous with the economy, and we voted what we hoped would be a better one in.. and yet those who have their hands on the biggest levers (the MPC) are still in power.. there's no way we can change the political bias of those.

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But this is the problem. We ousted the last government that was ruinous with the economy, and we voted what we hoped would be a better one in.. and yet those who have their hands on the biggest levers (the MPC) are still in power.. there's no way we can change the political bias of those.

Osborne could take back control of interest rates tomorrow if he wanted.

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Too true - George 'rates lower for longer' Osborne.

He's always said the same thing pre and post election.

The whole object of policy going forward in this recovery should be to keep the fiscal reins tight so that interest rates can stay as low as possible for as long as possible

Negative real interest rates are now ingrained.

Edited by Redhat Sly

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Remind me how increasing the cost of overnight borrowing, decreases the price of imported goods again?

This "raised rates => lower inflation" argument seems pretty tired to me. At best, the currency will strengthen a bit (offsetting global price increases somewhat), but at worst it could weaken a lot if it causes the economy to tank.

Besides, if they were so serious about controlling inflation, why wouldn't they sell the QE gilts back to the market first, before raising rates?

Edited by Traktion

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Plus putting up interest rates will increase inflation as discussed on this thread from Feb. http://www.housepricecrash.co.uk/forum/index.php?showtopic=159994

There was also a thread saying that putting up rates when there has been a load of QE could increase the velocity of money too, making inflation worse. If I were head of the BoE and wanted to reduce inflation, I would shred the printed money before mucking about with the base rate again - the closer we can get back to 'normal' before changing the base rate, the better, as there are fewer unknowns.

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Remind me how increasing the cost of overnight borrowing, decreases the price of imported goods again?

This "raised rates => lower inflation" argument seems pretty tired to me. At best, the currency will strengthen a bit (offsetting global price increases somewhat), but at worst it could weaken a lot if it causes the economy to tank.

Besides, if they were so serious about controlling inflation, why wouldn't they sell the QE gilts back to the market first, before raising rates?

Higher interest rates curb inflation by curbing the purchasing power of consumers and companies.

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Higher interest rates curb inflation by curbing the purchasing power of consumers and companies.

Only if credit is expanding too quickly and it needs slowing. Credit isn't expanding quickly now (peak debt etc), so how will increasing rates help?

If anything, increasing rates will cause purchasing power to contract, which isn't good for an economy struggling with insolvency. In turn, this isn't good for banks or people with savings in them, which isn't going to encourage overseas investment, to spur demand for the currency.

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Only if credit is expanding too quickly and it needs slowing. Credit isn't expanding quickly now (peak debt etc), so how will increasing rates help?

If anything, increasing rates will cause purchasing power to contract, which isn't good for an economy struggling with insolvency. In turn, this isn't good for banks or people with savings in them, which isn't going to encourage overseas investment, to spur demand for the currency.

So, are you saying that raising rate should have been done years ago, when credit was expending? And since that hasn't happened, we are now between a rock and a hard place, so we should just leave it as it is?

Agree with torching the QE first though.

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So, are you saying that raising rate should have been done years ago, when credit was expending? And since that hasn't happened, we are now between a rock and a hard place, so we should just leave it as it is?

Put simply, yes. However, it wasn't that simple unfortunately, as cheap long term money was flooding in from overseas. Putting up short term rates would have been like pissing in the wind anyway.

IMO, the best thing they could have done, would have been capping wage multiples on the asset where the credit was flooding into - land/houses. It may not have stopped the bubble from growing (credit may have sprouted out from elsewhere), but a few road blocks sure would have slowed it down!

Agree with torching the QE first though.

Yes, getting closer to 'normal' before fiddling around with levers used in 'normal' times would certainly seem the right, and cautious, route to me.

Edited by Traktion

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Only if credit is expanding too quickly and it needs slowing. Credit isn't expanding quickly now (peak debt etc), so how will increasing rates help?

If anything, increasing rates will cause purchasing power to contract, (...)

That is exactly what I said.

which isn't good for an economy struggling with insolvency. In turn, this isn't good for banks or people with savings in them, which isn't going to encourage overseas investment, to spur demand for the currency.

Yes, higher IR do slow down the economy. Alas, there is no other way to curb inflation.

The only way out of our mess is to reduce internal consumption, unfortunately.

When we say "we were living beyond our means", we mean it.

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That is exactly what I said.

No - I'm not talking about slowing the growth of money (as I assume you are), but the contraction of it. These are very different things. The former you may want to do if the economy is overheating, but it is unusual to ever want the latter (due to the pain of defaults which come with it).

Yes, higher IR do slow down the economy. Alas, there is no other way to curb inflation.

The only way out of our mess is to reduce internal consumption, unfortunately.

When we say "we were living beyond our means", we mean it.

They slow down an overheating economy. Why would you want it to go in reverse?

We are not suffering from inflation due to an overheating economy - far from it! We are suffering inflation due to increasing (global) demand for resources, along with money printing to fight a deflationary collapse.

If the economy ever finds enough growth to look like it's overheating, then sure, shred some printed cash. I see little sign of strong growth though, do you?

Edited by Traktion

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Yes, higher IR do slow down the economy. Alas, there is no other way to curb inflation.

The only way out of our mess is to reduce internal consumption, unfortunately.

Look at the reality. Inflation is caused by under capacity, if there is a lack of capacity then demand is greater than supply and prices will increase. Now we have surplus capacity due to lack of demand. How is suppressing demand even further going to help?

The mantra higher interest rates curb inflation doesn't apply to our present situation.

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Put simply, yes. However, it wasn't that simple unfortunately, as cheap long term money was flooding in from overseas. Putting up short term rates would have been like pissing in the wind anyway.

Surely better than nothing though? That said, I guess buying houses in place of pensions, due to uncertainty following Brown's raids on them probably had significant effect, so I might agree with the sentiment... I guess.

IMO, the best thing they could have done, would have been capping wage multiples on the asset where the credit was flooding into - land/houses. It may not have stopped the bubble from growing (credit may have sprouted out from elsewhere), but a few road blocks sure would have slowed it down!

That would be price fixing though right... or are you talking about lending multiples? WRT the above, and people using housing as pension plans (BTL) price fixing would have meant more people buying multiple houses though, stifling supply even more?

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Surely better than nothing though? That said, I guess buying houses in place of pensions, due to uncertainty following Brown's raids on them probably had significant effect, so I might agree with the sentiment... I guess.

Maybe it would have helped a bit, but I think the tide of cheap credit was just too big. Why borrow short for more, when you can borrow long for less?

That would be price fixing though right... or are you talking about lending multiples? WRT the above, and people using housing as pension plans (BTL) price fixing would have meant more people buying multiple houses though, stifling supply even more?

Yes, I meant lending multiples, to keep the degree of leverage down. While I think the market doesn't care whether leverage is high or low, savers (and therefore the government, due to deposit insurance) do. If we're going to have a regulated financial sector, then this is the sort of thing they should have been doing. As it was, they did very little to prevent the credit boom.

Like I said, I'm not sure if capping lending multiples would have worked - the credit may have squirted out elsewhere - but it would have been a simple change, which would have protected many a saver and borrower.

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No - I'm not talking about slowing the growth of money (as I assume you are), but the contraction of it. These are very different things. The former you may want to do if the economy is overheating, but it is unusual to ever want the latter (due to the pain of defaults which come with it).

They are not different things re. inflation. If you are having price inflation is because your currency lost purchasing power.

(BTW, inflation is not really all products, by coincidence, going all up at the same time. It is the currency that is going down.)

The only way to increase this currency's purchasing power is to reduce the availability of it.

Yes it will be painful, very painful. But there is no other solution. Either we do it now, or inflation will entrench via salary and prices expectations (read Sentance), and it will be much more difficult to curb it later.

They slow down an overheating economy. Why would you want it to go in reverse?

We are not suffering from inflation due to an overheating economy - far from it! We are suffering inflation due to increasing (global) demand for resources, along with money printing to fight a deflationary collapse.

China didn't start growing last year, right?

Again, it is not really all commodities going up at the same time. It is the main currencies that are falling. This distinction is essential to understand what inflation really is.

We have no choice. We are having stagflation, with growth at around 1% and inflation around 5%. But this is not sustainable. If we try to keep growth at 1% inflation will go up. And if we try to keep inflation at 5% growth will have to be reduced or even reversed. Sorry.

If the economy ever finds enough growth to look like it's overheating, then sure, shred some printed cash. I see little sign of strong growth though, do you?

"Overheating"? I don't know what standard model you are using, but it sounds like one designed for a closed economy, and in normal times.

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They are not different things re. inflation. If you are having price inflation is because your currency lost purchasing power.

(BTW, inflation is not really all products, by coincidence, going all up at the same time. It is the currency that is going down.)

The only way to increase this currency's purchasing power is to reduce the availability of it.

Yes it will be painful, very painful. But there is no other solution. Either we do it now, or inflation will entrench via salary and prices expectations (read Sentance), and it will be much more difficult to curb it later.

This is flawed and it's obvious if you just take a moment to think about it - if the quantity of something is dwindling, you're going to have more money chasing the same goods. The obvious commodity is oil - the price of energy, off which all else pivots.

There are now more cars than ever before. Developing countries are junking their push bikes and demanding petrol power. However, the supply of oil is not infinitely elastic and it has been going up steadily over the last decades. We are no longer the only drivers for oil demand, which has a knock on affect on just about everything we buy.

No amount of pain is going to change this. Just as when you have a bad harvest, making money more expensive to borrow, will not feed hungry mouths.

China didn't start growing last year, right?

Oil has been creeping up for many years. Rapid growth in China is fuelling this problem.

Again, it is not really all commodities going up at the same time. It is the main currencies that are falling. This distinction is essential to understand what inflation really is.

I didn't say that the fall in currency strength had no affect. I'm arguing that increasing rates won't strengthen it again.

We have a huge trade deficit, funded through borrowing, keeping the price of our currency artificially high (or the Chinese keeping theirs artificially low). These are real structural problems which hiking rates just isn't going to fix.

We have no choice. We are having stagflation, with growth at around 1% and inflation around 5%. But this is not sustainable. If we try to keep growth at 1% inflation will go up. And if we try to keep inflation at 5% growth will have to be reduced or even reversed. Sorry.

I tell you what, give King Canute a call and ask him to stop the tide coming in while you're at it.

"Overheating"? I don't know what standard model you are using, but it sounds like one designed for a closed economy, and in normal times.

Overheating = rapid credit growth. It isn't happening, which is unsurprising as we appear to be somewhere near peak credit (for today's levels of liquidity).

Edited by Traktion

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  • 284 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% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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