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Shadow Mpc Votes 5-4 To Cut Rates

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http://www.economicsuk.com/blog/000307.html

Shadow MPC votes 5-4 to cut rates

Posted by David Smith at 09:00 AM

Category: Independently-submitted research

The results of the latest Shadow Monetary Policy Committee (SMPC) e-mail poll for The Sunday Times are set out below. Members of the Institute for Economic Affairs’ (IEA) SMPC speak in a personal capacity and their contributions are arranged in alphabetical order.

The SMPC poll was carried out on Tuesday 28 February and the rate recommendations are with respect to the Monetary Policy Committee (MPC) rate decision to be announced on Thursday 9 March. On this occasion, five SMPC members voted to cut rates by ¼% in March, while four SMPC members voted to hold, although some of the holds had a bias to raise rates at a later date.

The wider economic background is discussed in more detail in the quarterly SMPC minutes. The last quarterly meeting was held on 17 January and the results were written up in our 6 February SMPC release. The next quarterly SMPC meeting will be held at the IEA on Thursday 20 April, and the minutes from this physical meeting will be released ahead of the 4 May rate decision.

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"indeed cutting earlier, rather than later, may provide the opportunity to raise rates further than would otherwise be the case later in the year."

Comment by Dr Andrew Lilico (Europe Economics)

WHY?

We have yet to see the full effect of rising utility bills on the CPI but, judging by last year’s increase in fuel prices, these are likely to hit consumer spending rather than trigger second-round increases in wages.

Professor Peter Spencer

YET!!!!!!!! for goodness sake - the BoE MPC are awaiting the full impact. Oh dear me. Another mentalist!

Peter J Warburton

There's a debt problem, so cutting rates will help the situation.

Jasus

Edited by gruffydd

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Rates are going NOWHERE in March! And upwards is the next move, IMO.

If the Shadow MPC were actually the real MPC then we should all be afraid, very afraid.

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NEW YORK (AFX) - Treasury prices closed lower Friday, sending yields higher, amid worries that interest rates in the US, Japan and the euro zone could all move higher at the same time.

The benchmark 10-year Treasury note closed down 13/32 at 98-18/32 with a yield of 4.683 pct, up from 4.637 pct in late trade Thursday.

Earlier the yield touched 4.69 pct, it highest level in nearly a year.

Overnight Japanese consumer-price data was higher than expected. The report intensified speculation that the Bank of Japan could back away from its quantitative easing policy sooner rather than later. The central bank meets next week.

"Whether the Bank of Japan policy board will lift quantitative easing on March 9 is a close call, but we now see a slightly better than even chance for it, given relatively subdued protests against such a move from the government," said analysts from Banc of America Securities.

On Thursday the European Central Bank lifted its key rate and Jean-Claude Trichet, the central bank's president, make hawkish remarks that were seen as suggesting more rates are in store in the euro zone.

In addition, a number of recent strong US data reports have left many investors convinced the Federal Reserve will continue lifting rates.

A stronger than expected report from the Institute of Supply Management on the services sector Friday further reinforced that view. The index's reading for February was 60.1 pct, up from 56.8 pct in January.

The Fed funds target now stands at 4.5 pct. The market has priced in at least one more quarter point hike to 4.75 pct and many investors expect a second increase to 5 pct by the end of the first half.

However, Lehman Brothers economists Friday forecast that overnight rates will increase four more times by late summer and push the target up to 5.5 pct.

Previously, Lehman was expecting the Fed to stop raising rates when it got to 5 pct, but it changed the forecast because the housing market is not cooling as quickly as expected and the economy remains strong.

Brant Carter, managing director of fixed income at Morgan Keegan, said it appears the market is driving US yields upward because international investors demand higher rates to keep buying US instruments.

The prospect of simultaneous economic strengthening and rising rates in the US, Japan and the euro zone has not been seen since the 1980s, according to Paul Podolsky, an analyst with Bridgewater Associates.

The combination could magnify the cyclical pressures on inflation around the globe, he said.

There was limited reaction to news that the University of Michigan's February survey of consumer sentiment was revised downward to 86.7 from 87.4, according to news reports. Economists polled by Marketwatch has forecast a stronger reading of 87.7.

The yield curve remained fully inverted Friday. The yield on the 2-year note stood at 4.754 pct, above the 4.683 pct yield on the 10-year note and the 4.660 pct yield on the 30-year bond.

Some economists are nervous about the inversion because they believe it signals a recession.

However, Federal Reserve Chairman Ben Bernanke thinks the inversion in the current environment results from strong foreign demand for US assets and does not reflect deteriorating fundamentals.

http://www.iii.co.uk/news/?type=afxnews&ar...&action=article

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They lowered all the way through the last crash / recession. They'll do it again I reckon, because rates need to go both ways at the same time, and 'down' seems to win.

(This isn't a good thing).

:o

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They lowered all the way through the last crash / recession.

At the start of the last recession, rates were around 12-15%, so lowering wasn't really a problem. It's a heck of a lot harder to justify lowering rates when we're near historical lows.

As for this lot, they're clearly morons if they think we can cut rates when the rest of the world is raising fast.

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The problem with the 'cutters' arguments is that they are too short term. Ok, so if rates are reduced, what happens in 3-6-9-12 months? We will be in exactly the same situation, and they will use the same arguments to cut again.

Where does this end up? Real inflation through the roof!

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The UK is all debted out. Lowering rates will increasingly suffer from the law of diminishing returns until it makes bugger all difference at all to encouraging new borrowing.

If (as seems likely from a common sense point of view) sterling falls, everything we import will get more expensive for everybody. Raise rates and hurt the debted, leave or lower them and hurt everyone. It'll become hobsons choice and whichever route they take will end up with more or less the same result. Recession.

When the levers stop working all we can do is grit our teeth and wait for the punishment.

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At the start of the last recession, rates were around 12-15%, so lowering wasn't really a problem. It's a heck of a lot harder to justify lowering rates when we're near historical lows.

As for this lot, they're clearly morons if they think we can cut rates when the rest of the world is raising fast.

It's because in the UK, we are in a House Price economy. We must protect house prices & by lowering rates we will do this. Because, in the present Uk economy, it is our only source of income....

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I may be talking rubbish here, just thinking out loud. Do you think they might want to devalue sterling/drop interest rates to take on the role that countries like Japan have been playing and continue the "carry trade" madness. That is: become a country that people borrow from on a massive scale in order to get some income to pay back our national debts?

What does this mean for us, well massive inflation but house prices rise as well (wash my mouth out I don't like saying it) so that means people on paper look like they are still solvent!

Feeling a bit ill so this might not make sense, just trying to think of scenarios where anyone could possibly think that lowering interest rates was a good idea.

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I may be talking rubbish here, just thinking out loud. Do you think they might want to devalue sterling/drop interest rates to take on the role that countries like Japan have been playing and continue the "carry trade" madness. That is: become a country that people borrow from on a massive scale in order to get some income to pay back our national debts?

What does this mean for us, well massive inflation but house prices rise as well (wash my mouth out I don't like saying it) so that means people on paper look like they are still solvent!

Feeling a bit ill so this might not make sense, just trying to think of scenarios where anyone could possibly think that lowering interest rates was a good idea.

We run a trade deficit and we are now a net importer of energy, if you devaluing sterling it will drag down peoples' standard of living and lead to inflation, they may be able to fudge this (they already do) but it would eventually become obvious and people would demand pay rises (again, this is why we have migration, off-shoring) which would lead to a wage-price spiral and higher rates to contain inflation... would would pop the bubble and then it's anyone's guess.

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We run a trade deficit and we are now a net importer of energy, if you devaluing sterling it will drag down peoples' standard of living and lead to inflation, they may be able to fudge this (they already do) but it would eventually become obvious and people would demand pay rises (again, this is why we have migration, off-shoring) which would lead to a wage-price spiral and higher rates to contain inflation... would would pop the bubble and then it's anyone's guess.

But would they do it? Government and the banks have already proved they don't care about large sections of the population (FTB) our futures' have been inflated away to nothing. Why not everyone else, who cares if the international money lending is paying off the government's debts?

The BOE haven't shifted rates when everyone else has, the longer they leave it the more likely this scenario is. If they drop interest rates to Japan's previous levels a massive mortgage is still "affordable" - the use of that word in this context makes me puke! (I am ill after all :-)

Edited by Foobar

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But would they do it? Government and the banks have already proved they don't care about large sections of the population (FTB) our futures' have been inflated away to nothing. Why not everyone else, who cares if the international money lending is paying off the government's debts?

The BOE haven't shifted rates when everyone else has, the longer they leave it the more likely this scenario is.

It's the old allowing a correction v. hyper-inflation argument, nobody would have the balls to do the former. We shall see.

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The BOE do not have a free hand to manage the economy. They can only act in response to changes in CPI. Not independent, just at sufficient arms length to take the flack. If they want to raise rates then they first have to wait for inflation to show up in CPI. Likewise if CPI falls then they may have to lower rates whether they think it's a good idea or not. Plus the MPC is stuffed with people of Gordon Clown's choosing.

Based on things he's said, what Merv thinks should happen, and what he is able to do are I think two very different things.

Has the specification for CPI changed at all? Is it possible to monitor such changes?

Is it just me or does it appear that RPI-X and CPI have pretty much moved together until January 2006 when they went in different directions?

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... hobsons choice and whichever route they take will end up with more or less the same result. Recession.

When the levers stop working all we can do is grit our teeth and wait for the punishment.

It's like I said on t'other thread, boys. Scapegoating this is going to become of paramount importance in all this.

Lowering rates can at least make it look like "we doing something to help you all", and the subsequent rise in price of imports can be spun away with a smokescreen of blame on the foreigners.

Look out World. You're in for it!

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It's the old allowing a correction v. hyper-inflation argument, nobody would have the balls to do the former. We shall see.

I worry about this, that they may cut rates [reason being that inflation is hurting consumers pockets, and HPI is about the only driver of UK GDP], watch the pound tumble, then spin the benefits of weak sterling boosting the export side of the economy, but blame any hardship on 'global forces'

There seems to be enough dozy 'economists' about who subscribe to this option, and Gordon Brown has strong track-record of taking the cowards way put of any political/economic situation.

This leaves 2 questions:

1. Would NuLab/BoE dare to let sterling plumet? since they are always reminding the electorate of the Tories mismanegent of the economy that resulted from ERM fallout,

2. Would it make sense to buy somewhere with a 10 year fixed mortgage, and let hyper-inflation reduce the real value of the mortgage.

Although this enonomic route would be an absolute disaster for UK, it would cause a massive surge in HPI, and the resulting crash [HPI and economic] would be postponed for several more years

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UK government bonds were marking time on Monday with the market waiting mainly for the Bank of England’s decision on interest rates later in the week.

All 40 City economists polled by Reuters predicted that the bank would hold rates at 4.5 per cent when the decision comes on Thursday.

Hopes of a cut in the near term have been damped by a string of data released in in the past couple of weeks showing strength in a number of areas of the UK economy.

http://news.ft.com/cms/s/6cfa22e4-ad08-11d...20abe49a01.html

Movement in interest rates unlikely until Bank's next inflation forecast

By Chris Giles,Economics Editor

Published: March 6 2006 02:00 | Last updated: March 6 2006 02:00

By the end of the month, the UK will have lower interest rates than the US for the first time since January 2001. That is the confident expectation of analysts and investors in money markets.

All 40 City economists polled by Reuters last week expect the Bank of England to keep interest rates unchanged at 4.5 per cent on Thursday.

In the US, futures markets show a 96 per cent probability that the Fed Funds rate will rise by a quarter point to 4.75 per cent on March 28, the first US interest rate-setting meeting to be chaired by Ben Bernanke, the new Fed chairman.

The European Central Bank raised its main interest rate to 2.5 per cent last week and even the Bank of Japan is on the verge of givingup its ultra-loose monetary policy.

In short, monetary conditions are getting tighter in all the main economies of the world, apart from the UK.

Most in the City - 25 of the 40 economists polled by Reuters - still believe the next move in rates is down.

Michael Saunders of Citigroup, for example, points out that the Bank has no need to join in the rush to raise rates because unlike most other leading economies, the UK did not fall into recession in the early years of the decade and had no need for the extremely loose monetary policies that were pursued by the Fed, the ECB and the BoJ.

http://news.ft.com/cms/s/66b36550-acb6-11d...20abe49a01.html

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If this continues i definatly need to get out of sterling...

Me too. Been threatening it for a while. I'll half and half my savings, one into Euro and one into Dollar

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Me too. Been threatening it for a while. I'll half and half my savings, one into Euro and one into Dollar

In the latter more like out of the frying pan and into the fire. Try Swiss Francs or something.

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I have just sold off pretty much all my shares. Was looking at sticking half into Swiss francs or something based on a non-£/$ currency. Whats the most expedient way to do this? Open a swiss bank account??

Apologies l have little knowledge of holding foreign currency, bar the 100 euro note l couldnt be arsed to exchange from my last holiday :)

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The easy way is to find a UK bank which does foreign currency accounts. Mine is with HSBC for Canadian dollars, but most banks seem to do Euro and US dollar accounts.

BTW, I see that the Canadian government is expected to raise rates again tomorrow: why the hell aren't we doing it too?

Oh, because our economy has been trashed by years of Labour government and housing is the only industry we have left. I forgot.

Edited by MarkG

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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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