Why Is It Half Percent Increments?

[marko]

Given it is interest-rate day, I thought I would just share something that has bothered me for a while...namely:

Why does the MPC make changes to the base-rate in quarter percentage point increments? What with all their legions of economists, advisors, reams and reams of analysis etc. etc., shouldn't they be able to select a more 'fine-grain' approach...

i.e. "we the MPC have thought long and hard about the best base rate for UK PLC, and have decided to increase it from 4.5% to 4.782%. So there."

I understand a sensible upper-bound (0.25% seems reasonable) to the change per month is a good idea to prevent shocks to the economy. I also understand that as a committee they must restrict the number of options that are debated, but even so, couldn't they be a bit more surgical? "Sod it, I haven't got a f**king clue, let's toss a coin!?!?! Wahay!! Up 0.25%!!"

Why not up 0.433%? (personally I want up 5% but that is another story!)

I would have thought base-rate manipulation was already a crude-enough tool for influencing the economy without making it even more crude and unweildy by restricting movements to a choice between 0.25% either way or nothing at all.

Can anyone explain? Maybe there is a historical reason.

p.s. edited to changed 0.5 to 0.25%. Jeez, wot a dumbar5e.

Edited November 10, 2005 by marko

[London Landlady]

Given it is interest-rate day, I thought I would just share something that has bothered me for a while...namely:

Why does the MPC make changes to the base-rate in half percentage point increments? What with all their legions of economists, advisors, reams and reams of analysis etc. etc., shouldn't they be able to select a more 'fine-grain' approach...

i.e. "we the MPC have thought long and hard about the best base rate for UK PLC, and have decided to increase it from 4.5% to 4.782%. So there."

I understand a sensible upper-bound (0.5% seems reasonable) to the change per month is a good idea to prevent shocks to the economy. I also understand that as a committee they must restrict the number of options that are debated, but even so, couldn't they be a bit more surgical? "Sod it, I haven't got a f**king clue, let's toss a coin!?!?! Wahay!! Up 0.5%!!"

Why not up 0.433%? (personally I want up 5% but that is another story!)

I would have thought base-rate manipulation was already a crude-enough tool for influencing the economy without making it even more crude and unweildy by restricting movements to a choice between 0.5% either way or nothing at all.

Can anyone explain? Maybe there is a historical reason.

Isn't it 1/4 percent normally? 0.25%

But heaven knows why as you say.

[marko]

Isn't it 1/4 percent normally? 0.25%

But heaven knows why as you say.

Ooops, of course....0.25% increments! Not sure what got me thinking it was 0.5%....but yes, regardless of the increment, it does seem rather arbitrary and blunt.

[Fancypants]

Ooops, of course....0.25% increments! Not sure what got me thinking it was 0.5%....but yes, regardless of the increment, it does seem rather arbitrary and blunt.

yes, but then again, so is the frequency of the meetings. Why every month? you might ask.

you have to set some sort of increment at some point. Even if you threw it to the free market lions, they still quote only to a certain number of decimal places.

[marko]

yes, but then again, so is the frequency of the meetings. Why every month? you might ask.

you have to set some sort of increment at some point. Even if you threw it to the free market lions, they still quote only to a certain number of decimal places.

You're quite right...the monthly meeting is also arbitrary. However, given that it is a committee who must meet once a month to decide, then why can't they decide on a more finely tuned decision?

I understand some sort of increment is needed...but 1/4 percentage points seem quite clunky...maybe an analyst works out that a tiny tweak upwards is what is needed (0.05% or something), or maybe a considerable tweak (0.6%) is required...is there the facility to do this?

[Fancypants]

You're quite right...the monthly meeting is also arbitrary. However, given that it is a committee who must meet once a month to decide, then why can't they decide on a more finely tuned decision?

I understand some sort of increment is needed...but 1/4 percentage points seem quite clunky...maybe an analyst works out that a tiny tweak upwards is what is needed (0.05% or something), or maybe a considerable tweak (0.6%) is required...is there the facility to do this?

I just think it would make the whole thing less transparent and give more scope for skullduggery.

Plus it is far easier for a committee of 9 to agree on a course of action where there are (more or less) three stark alternatives. What you suggest would effectively create an infinite number of possibilities. Would they each have their own analyst? Would they decide on the average of all 9 recommendations? If so, there's no need for a committee then... just 9 analysts.

That might then undermine the analysing industry when they find that there is such a huge amount of inconsistency amongst a supposedly scientific community

I guess we just have to accept that there is no such thing as the "perfect" interest rate. Unless you let the market set it... in which case it would be too bloody volatile

[erd]

Part of the problem must come from the communication of new rates, for all products that must occur. IE if you change by a very small amount, very often, everybody has to be written to with their new payments. My guess is they feel that 0.25% change is the minimum that banks would bother sending out messages for. Some banks may wait for a significant movement before applying the change, or apply a bigger one in anticipation of further moves.

[Sledgehead]

yes, but then again, so is the frequency of the meetings. Why every month? you might ask.

I enjoyed that Fp. More please.

[Tempest]

Central banks used to do it in half point and full point increases (and multiple point increases) but that has changed over the years as the volatiity in inflation has decreased.

The two sides are that old style larger increment movements acted more quickly as brakes on inflation etc but also on general economic performance. Danger is that now when the economy moves up or down quickly the smaller 0.25% blips are not enough to do the job sometimes.

[Time to raise the rents.]

Given it is interest-rate day, I thought I would just share something that has bothered me for a while...namely:

Why does the MPC make changes to the base-rate in quarter percentage point increments? What with all their legions of economists, advisors, reams and reams of analysis etc. etc., shouldn't they be able to select a more 'fine-grain' approach...

i.e. "we the MPC have thought long and hard about the best base rate for UK PLC, and have decided to increase it from 4.5% to 4.782%. So there."

I understand a sensible upper-bound (0.25% seems reasonable) to the change per month is a good idea to prevent shocks to the economy. I also understand that as a committee they must restrict the number of options that are debated, but even so, couldn't they be a bit more surgical? "Sod it, I haven't got a f**king clue, let's toss a coin!?!?! Wahay!! Up 0.25%!!"

Why not up 0.433%? (personally I want up 5% but that is another story!)

I would have thought base-rate manipulation was already a crude-enough tool for influencing the economy without making it even more crude and unweildy by restricting movements to a choice between 0.25% either way or nothing at all.

Can anyone explain? Maybe there is a historical reason.

p.s. edited to changed 0.5 to 0.25%. Jeez, wot a dumbar5e.

And along those lines, why do HP's go up in tens of thousands, why not hundreds of thousands? It's got me baffled.....