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'no Compelling Case For A Rate Cut'

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There's also a great article in today's Torygraph by Ambrose Evans-Pritchard, the thrust of which is that inflation is far from dead.

Some highlights -

"Scan the globe, and prices are stirring almost everywhere. In Thailand - where the Asian crisis first began in 1997 - inflation has suddenly jumped from under 3pc to 6pc. The September figure was 7.8pc in Vietnam, 9.1pc in Indonesia, and 10.3pc in Argentina.

US headline inflation was 3.6pc in August year-on-year, but that masks the rate of acceleration. For the past six months, the CPI has been running at a 5pc clip. Mortgages have grown 14.2pc over the past year, as the property market continued to bubble. Suddenly alarmed, the US Federal Reserve has sent its governors fanning out across the country to preach monetary Hell and Damnation. "We cannot let the inflation virus infect the blood supply and poison the system,'' said Richard Fisher, the Dallas Fed chief.

Donald Kohn, head of the Philadelphia Fed, warned the emergence of China and India as producers of cheap goods would have less effect in capping global inflationary pressures than many assumed. Central banks faced swift "punishment" from the markets if they failed to nip inflation in the bud.

Diana Choyleva, global economist at Lombard Street Research, said the Federal Reserve had let the inflation genie out of the bottle. "We're in boom-bust territory, and we believe the Fed Fund rates will have to go to 5pc. They acted too late," she said."

And this is all apparently the fault of central banks.

"In all, the major industrial countries, real policy rates are more or less zero, and have been for some years," said chief economist (of the Bank of International Settlements) Bill White, in a recent interview. "A highly expansionary monetary policy is therefore a global phenomenon, and as such probably unprecedented. Some countries have been seeing rapid growth in credit since as far back as the mid-1990s. Could this lead to a rise in inflation? Certainly!"

"The US needs a tighter policy. The Fed has made a start, but, for fear of the consequences of the higher interest rates for the financial and housing markets, it can only proceed at a measured pace," he said.

My translation: the Fed has made a royal mess by holding interest rates at 1pc from 2001 to 2004, and is now going to do too little, too late. Washington will inflate, and damn the torpedoes.

Britain cannot escape, and, in any case, it faces home-grown price pressure from Gordon Brown's public sector spree. Mervyn King, Governor of the Bank of England, said on Tuesday that the MPC had been surprised by the latest rise in UK inflation to 2.4pc, the highest in eight years. He said the surge in energy prices was "boosting overall inflation, and some of that increase would probable pass through for a time into core inflation".

Mr King was too polite to mention that he had opposed the August rate cut to 4.5pc.

Rising inflation may be a surprise to some, but not to monetarists such as Professor Tim Congdon, who warned long ago that excess liquidity was building up in the British economy. Britain's M4 money supply has risen 10.2pc over the past year, signalling future trouble. Mr Congdon fears inflation could reach 5pc within a couple of years. Nobody can accuse Frankfurt of cutting rates too soon. Faced with the near-impossible task of managing policy for 12 countries, it has opted for total inaction. Rates have been held at 2pc since June 2003.

This is now below the euro zone inflation rate of 2.5pc, and rising. Frankfurt's monetary hawks are horrified, but have been constrained from acting for fear of tipping Italy into such a deep slump it could lead to break-up of EMU. Jean-Claude Trichet, the ECB's president, has at last said that enough is enough, warning last week that interest rates could rise "at any time".

Invoking that code-term "particular vigilance", he said the bank was ready to pounce if there was any sign that soaring energy costs were spreading into the rest of the eurozone economy.

But he also muttered darkly about Europe's house price boom, an admission of sorts that the real story behind euro zone inflation, as it is behind inflation worldwide, surging credit growth and excess liquidity, which gets to the nub of the issue."

IMO the oil-price inflationary blip is going to be higher and longer than the MPC thinks, and may actually serve to disguise inflation being imported from around the world, particularly the US, the net result of which will be a UK interest rate set to beat inflation which bears down on the economy generally and the housing market in particular. I'm still not ruling out recession.

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  • 301 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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