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Good Reply From The Boe

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I don't agree with every aspect of this BOE reply to my enquiry but am impressed with the detail they went into this response which is clearly not a form letter given it addressed my specific points.

Dear Sir / Madam,

I am interested to know how it is the Bank of England is able to maintain its inflation targeting credibility when it appears to be the only central bank of the major economies that does not feel it is currently necessary to raise interest rates.

It seems clear that increased input prices, particularly from energy, are going to feed through into general and wage inflation if left unchecked. A recent article in the BBC suggests inflation will be 0.3% above the 2% target. While this may only be a small deviation from target my worry is that once inflation is back in the minds of the general public, which it has not been for close to a decade, preventing it from escalating will be impossible.

Furthermore I am concerned that as $US interest rates have overtaken UK rates and with Euro, Canadian and Yen rates all on the rise there is going to be pressure on sterling. Given that inflation has been kept so low partly due to the availability of cheap imports will not rising interest rates across the world with no action on the part of the Bank of England lead to importation of further inflation?

I thank you for your time.

BBC Article : http://news.bbc.co.uk/1/hi/business/4871150.stm

Thank you for your e-mail about interest rates to which I have been asked to respond.

Before turning to your specific questions, I thought that it would be useful to consider the Bank’s role in setting interest rates and what we are trying to achieve.

The MPC here at the Bank has the responsibility for setting interest rates to meet the Government's inflation target of 2%, as measured by the 12- month increase in the Consumer Prices Index (CPI). But in setting rates, the Bank cannot look at one part of the community alone. We have to look at the nation and the economy as a whole and identify the right rate of interest that will enable us to meet the inflation target. I can assure you that the decisions made by the MPC are made solely to meet the inflation target and are not made in order to benefit or disadvantage any one sector of the economy or community.

The Committee has to set interest rates to ensure that the overall level of demand in the economy is consistent with what the economy can produce - its productive capacity - thereby containing inflation at a low and stable level. I am sure that you can appreciate that judgements on interest rates are always difficult and are only taken after very detailed and exhaustive analysis of the state of the economy and the prospects for inflation. When the Committee meets each month they look at a wide range of data and information from many sources such as house price inflation, consumer spending and borrowing, investment, exports, employment, wages and other costs and prices before making decisions about interest rates. There are some factors that may in themselves point to higher interest rates, while others suggest lower rates or no change. I must stress again that it is a balance of all factors and the overall outlook for inflation that the MPC has to judge.

Evidence shows that it takes about two years for changes in interest rates to have their full impact on inflation. Therefore, decisions taken now by the MPC reflects their view of whether the target will be met over a longer period. The MPC will continue to look at what is happening in the economy month by month and will make any adjustments needed in order to continue to meet the inflation target. As you may be aware, inflation is currently 1.8%, 0.2% below target.

Turning now to the relationship between interest rates in the UK and those in the euro area and US, I feel that I must first dispel your belief that UK rates can be compared directly with euro area and US rates. What is important to understand is that interest rates will reflect the prevailing economic conditions of the various countries economies. This is why UK rates are currently above ECB rates and are slightly below US rates. In particular, over recent years the UK economy has shown more activity than those of the euro area and the US where rates have been kept low to stimulate these economies.

Given that activity within the UK has been buoyant the economy is likely therefore, to be operating closer to full capacity with potential upward pressure on inflation, as demand grows faster than supply. Therefore to contain inflation, interest rates have been higher in the UK than in Europe and the US.

Changes in interest rates may well, as you suggest, affect the strength of sterling, but this is only one of many factors considered by the MPC when they set rates and they are aware of it’s effect on inflation through import costs. Import prices are a central part of the MPC’s consideration of the inflation outlook and you will find reference to this factor in the latest MPC minutes at http://www.bankofengland.co.uk/publication...005/mpc0512.pdf

The level of the inflation target is set based on long-run fundamentals for the UK economy, of which the terms of trade (comparing import and export prices) would be one part.

Finally, as you may now know, at yesterday’s meeting of the MPC, they elected to keep rates on hold at 4.5% for the next month. The minutes of the meeting will be available to view on our website at: www.bankofengland.co.uk in two weeks time.

Thank you once again for writing to the Bank, I hope that I have been of some assistance to you.

Yours sincerely

Roger Beaton

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A bit wishy washy in my opinion. Ok, that is their remit. But what about financial stability? How can the BoE allow money growth to be in double digits and not effect the financial stability of the economy?

Oh, and their reply echo's the reply I had a while ago.

Might write to them again about money growth. I best go and get a Stella!

Edited by Jason

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Evidence shows that it takes about two years for changes in interest rates to have their full impact on inflation.

Hi,

There is also pretty irrefutable evidence that large, above trend increases in the broad money supply measures lead to increased inflation within a two year time scale. Hence why the ECB has been more stringent in raising rates more quickly and more sharply than the UK. The treaury and the BoE dismiss the link between broad money supply and longer term inflation. The ECB and FED do not. UK M4 money aggregates are pretty much out of control. We shall see.

Boomer

Edited by boom_and_bust

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How do you write to the BOE? I'd like to ask them whether they themselves believe that the CPI is a realistic measure of the change in real living costs.

Billy Shears

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How do you write to the BOE? I'd like to ask them whether they themselves believe that the CPI is a realistic measure of the change in real living costs.

They would not necessarily reply yes, because that is not what the CPI measures. For example, if the government put VAT from 17.5% to 30% CPI would not change.

Oh, and I found their email on their site somewhere.

Edited by padders

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UK M4 money aggregates are pretty much out of control.

Is there a good graph available anywhere?

Hi,

Here is a general commentary on the last release of the BoE monthly and annual figures last month in the Telegraph :

http://www.telegraph.co.uk/money/main.jhtm.../20/ixcity.html

Sterling soars after Bank dashes hopes of rate cut

By Ambrose Evans-Pritchard (Filed: 20/04/2006)

In Britain, the Bank of England said the M4 money supply had surged 12pc in the year to February, while house prices "continued to rise quite strongly in the first quarter".

The official figures are compiled by the Bank of England itself. If you go to ;

www.bankofengland.co.uk/

and follow the statistics link, you can download spreadsheet figures and graphs in a variety of formats. Gordon 'miracle' Brown hijacked a partial monetary-inflation targeting policy from the Conservative think tanks in the early ninetees but didn't digest the whole policy document, concentrating on his 'doctored' RPI headline figures and the narrow money supply measure M0. This was only a partial interpretation of the approach. Miracle my ****. It is a good old fashioned expansion of the money supply and public spending, no miracle at all, no new approaches to economic stability whatsoever.

Boomer

Edited by boom_and_bust

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Boomer,

Agreeed and the BOE played right along with this political policy whilst maintaining the veil of it being a strict inflation targetting moneytary policy, which it is most patently is not. Even more intersting are the times when rate hikes are mentioned, all too frequently when does this occur? - when there are signs of wage inflation. Talk about about screwing a population, dumping m,oney on them through the banks, allowing the banks to make a killing on debt (in the short term), in the meantime screwing the economy that has to trade competitively with the rest of the world.

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A reply not dissimilar to that which might be received from Ginsters should a rubber glove be found in one of their pasties.

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The MPC can't be truly independent when half the board are Brown's place men, that includes the deputy governor. The fact they also rely on the ONS for their data, which is a HM Treasury department, is highly dubious.

Brown apoints whomever he likes, including apointing Sir John Gieve from the home office as deputy and head of financial stability. Brown gets to choose the inflation measure and the targets, Brown directly controls the office responsible for producing the data in the first place and Brown then totally undermines their monetary policy with his fiscal policy of generating record public debts to match record personal debt.

I actually feel sorry for the BoE, they have been set up as a political get out of jail free card, when the shit starts flying the blame will be misdirected in their direction rather than that of their puppet master; for a while at least.

Also, if the rest of the banks are raising yet gold is still flying... what does that say? You can't fool all of the people all of the time.

Oh yeah, guess who sold our remaining bullion at $260 an ounce...

Edited by BuyingBear

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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
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      • up 5%



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