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King Warns Inflation Could Exceed 3%

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FT article about upside risks to inflation.

FT.com

the probability over the next two years, I’d say, was higher than that [50/50], because who knows what might happen,” said Mr King.

“It’s odds on we’ll have to write a letter in the next two years,” he [King] added.

If their remit is to control inflation and to look two years ahead, it seems like a rather open admission of failed policy: that rates should have been higher over the last year and the cut was a mistake.

Edited by DTMark

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FT article about upside risks to inflation.

FT.com

This is reassuring;

The Bank also said inflation would be further boosted by the inclusion into the CPI of tuition fees, which are expected to add 0.25 percentage points to the headline rate in October.

Some evidence of honesty at last...

They better start hiking the interest rates if this is really what they think;

“It’s odds on we’ll have to write a letter in the next two years,” he added.

Maybe he knows that they are going to have to put in a few hikes and quite soon. I guess monthly inflation figures will dictate. But as last weeks hike was unexpected it is a possibility that larger inflation figures in the months to come could also lead to further 'unexpected' rises in interest rates.

5.5% by year end?

Edited by munimula

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King warns inflation could exceed 3%
By Jamie Chisholm, Economics Reporter
Published: August 9 2006 13:05 | Last updated: August 9 2006 13:05
Bank of England governor Mervyn King said on Wednesday there was a “50/50” chance he would have to write a letter to Gordon Brown within the next six months explaining why inflation was significantly above target
.

Merv and Gordon obviously do not communicate other than by formal letters. Or is Merv saying, I want this in writing this time as Grodon does not like to listen?

I listened to the entire conference and concluded that Merv's frequesnt dodging of key questions on house prices and debt means that he is having to keep quiet on the REAL problems that are taking the Miracle Economy down.

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“It’s odds on we’ll have to write a letter in the next two years,” he [King] added.

err then keep raising IR's to contain inflation!!! :blink:

Edited by OzzMosiz

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The BoE are the only people who can prevent inflation reaching 3% by putting up interest rates, is this their way of saying they are not going to put up interest rates

and allow inflation to reach 3%?

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I suspect it's more that now it's too late to stop inflation breaching 3% (even on the fiddled figures) just by raising interest rates. Even if they increased rates to 10% they'd be lucky if the inflation built up in the economy didn't come back to bite them in the ass.

Either way I can't help but feel that a trained monkey could have done a better job of keeping inflation under control than the Bank of England have.

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King warns inflation could exceed 3%
By Jamie Chisholm, Economics Reporter
Published: August 9 2006 13:05 | Last updated: August 9 2006 13:05
Bank of England governor Mervyn King said on Wednesday there was a “50/50” chance he would have to write a letter to Gordon Brown within the next six months explaining why inflation was significantly above target
.

Merv and Gordon obviously do not communicate other than by formal letters. Or is Merv saying, I want this in writing this time as Grodon does not like to listen?

I listened to the entire conference and concluded that Merv's frequesnt dodging of key questions on house prices and debt means that he is having to keep quiet on the REAL problems that are taking the Miracle Economy down.

It's part of the MPC's remit to have to write an open letter to the Chancellor if they fail to meet their inflation target.

http://www.hm-treasury.gov.uk/documents/uk...n_mon_index.cfm

Or were you joking?

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Or maybe raising interest rates doesn't have much impact on energy demand and the BoE believe the current spikes are driven by supply problems and geopolitical risks that will ease in the future. So if raising interest rates won't keep inflation down and it'll sort itself out in the medium-term, why screw the rest of the economy with rate rises? Much better to just explain why they've missed their target in a letter to GB.

The 0.25% rise due to student top-up fees will also be a one-off spike as universities will then be constrained to raising those fees in line with inflation. Interest rate rises would have no impact on people about to start university as most of them don't have debts at the moment and they're already signed up to starting university.

Edited by IamSpartacus

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Or maybe raising interest rates doesn't have much impact on energy demand and the BoE believe the current spikes are driven by supply problems and geopolitical risks that will ease in the future.

Yeah, because the price of oil will drop back to $20.

Not.

As I said, a trained monkey could do better: 'Inflation up? Pull the lever to raise rates, have a peanut'.

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It's part of the MPC's remit to have to write an open letter to the Chancellor if they fail to meet their inflation target.

this is a complete farce.

GB is supposed to be concerned that inflation has gone above target and the BoE is in a fashion, publicly shamed by having to write a letter to him and yet he wants/needs interest rates not to rise.

'Mr King, you haven't done a very good job on keeping inflation down...but thanks awfully for not putting the interest rates up'

The 0.25% rise due to student top-up fees will also be a one-off spike as universities will then be constrained to raising those fees in line with inflation.

Won't it be a 12-month spike?

As CPI is an annual measure and tuition fees are being added to inflation measure?

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Yeah, because the price of oil will drop back to $20.

Not.

As I said, a trained monkey could do better: 'Inflation up? Pull the lever to raise rates, have a peanut'.

If oil dropped to $20 there would be massive deflation and Merv would be writing a letter explaining why he missed the target on the other side. Oil doesn't have to drop in price to stop impacting on inflation, it just has to stop rising so fast.

I think you need to train your monkeys better... :ph34r:

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If oil dropped to $20 there would be massive deflation and Merv would be writing a letter explaining why he missed the target on the other side. Oil doesn't have to drop in price to stop impacting on inflation, it just has to stop rising so fast.

I think you need to train your monkeys better... :ph34r:

Yes, and as you know it takes around two years for oil to feed through the system. So, Oil would need to fall to $45-50 for it to stop impacting on inflation over the next two years.

Edited by Jason

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I have a couple of points I'm not too clear on if anyone could help.

King says inflation could rise to up to 2.7% without a rate rise?

He then says it is odds on that 3.1% will be breached.

How are these two figures squared up?

If a rate rise stops CPI going over 2.7% then what circumstances are needed for 3.1%

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I have a couple of points I'm not too clear on if anyone could help.

King says inflation could rise to up to 2.7% without a rate rise?

in the short term

He then says it is odds on that 3.1% will be breached.

within the next 2 years

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I have a couple of points I'm not too clear on if anyone could help.

King says inflation could rise to up to 2.7% without a rate rise?

He then says it is odds on that 3.1% will be breached.

How are these two figures squared up?

If a rate rise stops CPI going over 2.7% then what circumstances are needed for 3.1%

It takes a long time for a rate change to feed through the economy. So basically if CPI goes over 3% they made a mistake two years before. I.e. The BoE cocked up in reducing rates in August 05 - much to the protest/complaints of HPCers.

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The significance of this is huge. This basically paves the way for a least a few rate rises, and it is an acknowledgment that the economy is not as rosy as things seem. The problem as I see it is that no one seems to be willing to publicly explore the possible effect on house prices; that would really put the cat amongst the pigeons and give ‘real’ people an area of inflation to worry about. Oil seems to be causing headaches, but no one is boycotting the pumps. When it comes to massive house prices, a boycott won’t be needed as borrowing capacity will force the hand.

Surely, it’s all coming to a head now. You can almost hear the creaking now – the negative stories are ever-building (although again, no one seems to want to link, say, rising unemployment, with a possible impact on house prices), and soon people will start to put two and two together.

Whether or not they get four is another matter.

OD

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It takes a long time for a rate change to feed through the economy. So basically if CPI goes over 3% they made a mistake two years before. I.e. The BoE cocked up in reducing rates in August 05 - much to the protest/complaints of HPCers.

Exactly. King is basicly saying he was right in August 2005 when he voted against the cut from 4.75 to 4.5%

Remember that it is the prospect for inflation that the bank targets. Just because CPI reaches 3% it doesn't mean to say that they will raise rates further if the BOE believe they have already done enough to bring it back down to target in months to come.

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King says that in the next six months it's 50/50 3.1% will be breached..

“In the next six months it’s about 50/50,” said Mr King, acknowledging that this would mean he would have to pen a letter to the Treasury

He says it's more than 50/50 over two years.

And the probability over the next two years, I’d say, was higher than that [50/50], because who knows what might happen,” said Mr King.

The Inflation report says an IR increase is needed to stop 2.7% CPI in the short term. Kings testimony gives the impression that 3.1% CPI is more likely than not in the medium term.

So is he saying that we need increases in IR to stop CPI rising but that he is not going to do this and the CPI limit will be passed?

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forgive my ignorance, but can't GB simply move the goalposts and change the target CPI to 3%? would cause a bit of a stir, but what's so bad aout 3% inflation? why was the CPI target 2% anyway? good economical reasons or plucked out of thin air?

maybe Kings need to write a letter was a hint to GB that 2% was no longer realistic without risking the housing market etc?

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Regarding King writing a letter, just a couple of things to note.

Having to write a letter because inflation breaches the 1-3% range shouldn't automatically be taken as an admission of failure and possible grounds for resignation etc (although up to you to judge in this case).

The Bank's legal mandate is to target inflation at the two year horizon. Because the two year horizon is always two years ahead, that means that it has effectively has no obligation to keep current inflation at 2%, although in practice this is what it would like to do.

But that means that it's impossible to actually hold the Bank to account on its mandate, since it's impossible to measure inflation two years ahead, and all we have to rely on are the Bank's own forecasts.

Could you hold the Bank responsible for current inflation instead? Well, that's what most of the press does, and most people on here, but it's not particularly useful.

Short term volatility in things like food prices, energy prices and other external shocks which are beyond the MPC's control, when coupled with the fact that monetary policy has a significant lag, mean that current inflation is impossible to control. Any attempt to respond on a month-by-month basis would see rates jumping up and down, with very little effect.

So the requirement to write a letter if inflation goes outside the target range is a mechanism for ensuring accountability without placing unreasonable demands on monetary policy.

If inflation breaches the target, say due to a spike in energy prices which could not have been seen when the MPC was setting rates 6 months before, the governor has to write a letter. In it, he must explain the steps he will take to bring inflation back to target at the two year level, ceteris paribus (all other things remaining the same).

So if inflation hits say 3.1%, as it might soon under the current forecast, but the Bank sees disinflationary forces coming up in the year ahead which would bring it back to target at the two-year mark, as in the current forecast, then the governor would write a letter explaining this, but not with any kind of mea culpa.

What the letter does ensure is that if inflation is high, and forecast to remain high out to two years, the governor has to explain in no uncertain terms why the bank hasn't acted sooner to bring the forecast down, and what steps it intends to take now.

Mervyn has said several times that he would welcome the opportunity to write a letter. No doubt he would prefer to write one under current conditions, where inflation is forecast to be back at 2% at the two year horizon, rather than under less favourable circumstances, as once the precedent is set it becomes much less of a big deal in the future.

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Merv sees inflation risks going forward, but the Bank of Japan is struggling to lift rates above 0.25%. The Japanese pay the same price for oil as everyone else yet it has had little impact on inflation in their economy. My take on this is that the Japanese are unable to shrug off the deflationary impact of of globalisation on their economy.

0.25% that's yer lot.

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It's part of the MPC's remit to have to write an open letter to the Chancellor if they fail to meet their inflation target.

http://www.hm-treasury.gov.uk/documents/uk...n_mon_index.cfm

Or were you joking?

I'm sure he'll claim he was! :lol:

But unintentional comedy aside:

Bank of England,

Threadneedle St.,

London

EC2R 8AH

Rt Hon Gordon Brown MP Chancellor of the Exchequer

11 Downing St

London

SW1A 2AB

Dear Gordon,

Mission accomplished: inflation is now above 3%. Nobody, apart from some freaks on a silly website suspect anything.

Regards, Merv

(PS : you will be making it to No10 soon I hope. I need not remind you that chancellors have no say in knighthoods.)

(PPS : Spearmint Rhino 8:00 pm Friday?)

Edited by Sledgehead

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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% +
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