Bank Allays Fear Of Rate Rise As It Says Inflation Hike Is 'temporary'

[Guest wrongmove]

This may explain why £ dropped a cent against the euro, even though rates went up?

Bank allays fear of rate rise as it says inflation hike is 'temporary'

" Fears of a new year increase in interest rates receded yesterday after the Bank of England said the recent rise in inflation was temporary.

The Bank's monetary policy committee (MPC) raised the base rate by a quarter-point to 5.0 per cent, a five-year high, as had been widely predicted in the City.

The pound fell after the decision as analysts said that the statement issued by the Bank showed fewer worries about inflation than had been expected.

"It is likely that inflation will rise further above the target in the near term, but then fall back as energy and import-price inflation abate," it said.

It also flagged up the recent rise in unemployment and surprised analysts by not mentioning the risk of a surge in wage deals in the new year on the back of the recent rise in inflation.

"There appears to be little to suggest they feel further aggressive tightening is required," said James Knightley, a UK economist at ING Financial Markets. "We are yet to be convinced of the need [for it].".........."

[sign_of_the_times]

This may explain why £ dropped a cent against the euro, even though rates went up?

Bank allays fear of rate rise as it says inflation hike is 'temporary'

" Fears of a new year increase in interest rates receded yesterday after the Bank of England said the recent rise in inflation was temporary.

The Bank's monetary policy committee (MPC) raised the base rate by a quarter-point to 5.0 per cent, a five-year high, as had been widely predicted in the City.

The pound fell after the decision as analysts said that the statement issued by the Bank showed fewer worries about inflation than had been expected.

"It is likely that inflation will rise further above the target in the near term, but then fall back as energy and import-price inflation abate," it said.

It also flagged up the recent rise in unemployment and surprised analysts by not mentioning the risk of a surge in wage deals in the new year on the back of the recent rise in inflation.

"There appears to be little to suggest they feel further aggressive tightening is required," said James Knightley, a UK economist at ING Financial Markets. "We are yet to be convinced of the need [for it].".........."

you wish

"it" said......yeah, right (as if bank's can talk?)

wait for the minutes like everyone else and stop posting shite

[Jason]

"...energy and import-price inflation abate"

Two big massive presumptions.

Edited November 10, 2006 by Jason

[dipstick]

That was what struck me, Jason.

Why would they think these two things would abate?

Their logical thought behind this please?

[Guest wrongmove]

you wish

"it" said......yeah, right (as if bank's can talk?)

wait for the minutes like everyone else and stop posting shite

Wrong side of the bed this morning?

I am buying euro at the moment, so I personally want a strong pound for now. I also have sterling savings, so high IRs benefit me.

What I posted was an article from the Independent, rather than my own view, though I agree that the if the bank made dovish noises yesterday, it would explain the drop in sterling.

[Guest Charlie The Tramp]

I believe it will be a very long time before we see Global rates go down to the levels we have seen the past 5 years. The CBs have witnessed the frenzy which takes place when all that nearly free money is thrown into the ring. If lessons have not be learnt now then the future will bring more severe economic turbulence.

[Selling up]

If lessons have not be learnt now then the future will bring more severe economic turbulence.

Seems to me there's damn little evidence of any lessons having been learnt so far...

[PropertyGuru]

income tax was also 'temporary'

[bajista]

How long is temporary?

Asking 'cos when I was at school we were in "temporary" classrooms........ that had been there over 20 years

[Jason]

That was what struck me, Jason.

Why would they think these two things would abate?

Their logical thought behind this please?

Wild optimism?

I guess it's because oil has fallen in recent months, so there logic is it won't increase at the rates it did over the past couple of years.

The import inflation is a puzzling one. We all know the deflationary era of asia is coming to an end. Maybe they are not refering to this, rather energy (gas, oil) which has shot up and stabilised in recent months.

Either way, I see both import inflation rising and energy prices rising long term.

[OnlyMe]

I'll believe that if the M4 and the M3 figures decline in proportion to stated levels of CPI. If they don't then it will be all smoke and mirrors and testiculating.

Watch commodities for the answer to how many people believe it.

Edited November 10, 2006 by OnlyMe

[Fancypants]

the MPC are simply trying to keep their options open and remind people that further hikes are not guaranteed (although they are highly likely).

And as for the drop in sterling, I think that is more likely to reflect the fact that some traders were betting on a 50bp rise in IRs yesterday.

[I Told You So]

This is probabbly exactly what the FED and the Bank of Aus thought 6 months ago and then "oh shit inflation it just won't stop we're goner have to put rates up again"

They are hugely underestimating future wage demands and the now new inflationary pressures from China.

The last 5 years was a one off, maybe a once in a century freak experience, not in our lifetimes will there be a situation when a huge % of our goods are getting cheaper for 5 years.

6.25% Dec 07 here we come.

[whitemice]

Buy on the rumour and sell on the news.

IMO: The Pound rose against the Euro beforehand because the interest rate rise was a dead certainty, with all the traders cashing in their free money after the event. Perhaps dovish noises from the bank designed to calm the market before a planed rate rise after Christmas/in the spring?

[Guest Charlie The Tramp]

This is probabbly exactly what the FED and the Bank of Aus thought 6 months ago and then "oh shit inflation it just won't stop we're goner have to put rates up again"

The RBA issued this warning in September 2005.

RBA warning of 'meltdown'

David Uren, Economics correspondent

27sep05

FURTHER rises in oil prices, the collapse of a major bank or an unexpected jump in inflation could be all it takes to send the increasingly fragile global financial system into meltdown.

The Reserve Bank of Australia warned yesterday that the current calm in financial markets could be the prelude to a storm that could wreak havoc in the world economy.

The RBA believes the boom in markets for shares, bonds and housing in many countries is unsustainable.

The warning came as share prices in Australia reached a new high point, while a rush to invest in Australian bonds is pushing down long-term interest rates.

"The preconditions are in place for quite abrupt swings in sentiment and a disruptive snap-back in pricing," the central bank says in its latest review of the health of the financial system.

The Australian share market soared yesterday, with the benchmark All Ordinaries index rising 51.3 points to a record 4565.3.

The share market has risen by more than 12.5per cent in the past four months.

And the RBA says a key measure of all the world's share markets is now 62per cent higher than its 2003 nadir, with the biggest gains made in the riskiest markets. The bank says that financial markets have been acting on a belief that there will be no sharp changes in interest rates around the world. This has resulted in huge investments in government bonds.

In Australia, the long-term interest rate, which is set by the 10-year government bond rate, has been below the cash rate set by the RBA since March.

The belief that rates will remain stable has made investors more willing to borrow to buy shares and bonds. And with long-term interest rates at historically low levels, investors in international financial markets -- such as insurance companies, banks and superannuation funds -- have been seeking out riskier assets that pay higher returns.

The trend for people to borrow more heavily than before has extended to housing markets, which are still booming in many countries around the world.

"The concern is that the increase in prices and leverage across a range of asset markets might be sowing the seeds for future problems," the RBA says.

"In many markets, there seems to be considerably more scope for asset prices to fall than to increase."

The Reserve Bank says the sooner the correction occurs, the better, as the magnitude of the shock is likely to increase if the boom continues for a few more years. It says world markets could be sent plunging by a general reassessment of risk in world financial markets.

The possible triggers for such a reassessment include a further increase in oil prices, which hit a record above $US70 a barrel this month, the default of a big borrower such as a bank, or an unexpected rise in inflation.

The RBA believes the risks of Australia's housing downturn triggering a recession have receded, although it warns that the risks have not entirely disappeared.

"The high levels of household debt make the household sector vulnerable to a change in the generally favourable economic and financial climate," the bank says.

Although housing prices levelled out over the past year, it says, home owners are still increasing their debts.

Household interest payments are now equivalent to a record 9.8per cent of household disposable income.

"Those with the highest debt-servicing burdens, or the smallest buffers on which to fall back in adverse circumstances, are often those that have taken out loans only recently, as well as lower-income households and investors," the bank says.

[crashmonitor]

the MPC are simply trying to keep their options open and remind people that further hikes are not guaranteed (although they are highly likely).

Don't think the Bank should be talking Doveish in view of the 1.7% increase in house prices last month.This sends out the wrong signal to house buyers.I can't understand it,why should they raise rates then negate the impact by allaying borrowers fears.

Edited November 10, 2006 by crashmonitor

[I Told You So]

The bottom line is that they are terrified of whats coming, but sadly for them there's nothing they can do as inflation won't stop until they get to 5.5% - 6.0% but they know the side effect of this will be a property crash.

They've seen the States and to a lesser extent Aus and know our bubble is far bigger and the resulting crash could be catastrophic.

What that old saying "you make your bed etc etc"

5 years from now what the central banks of the US, Europe and UK did re ridiculously low base rates will be viewed as complete and utter maddness. A lesson in how not to manage world economies.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

Hardly 'News' - they've been saying that for many many months.

[Fancypants]

Don't think the Bank should be talking Doveish in view of the 1.7% increase in house prices last month.This sends out the wrong signal to house buyers.I can't understand it,why should they raise rates then negate the impact by allaying borrowers fears.

of course, but as we often say when the debt slaves start squealing because rates go up - the MPC do not set rates with only the housing market in mind, far from it.

[Guest Charlie The Tramp]

The bottom line is that they are terrified of whats coming, but sadly for them there's nothing they can do as inflation won't stop until they get to 5.5% - 6.0% but they know the side effect of this will be a property crash.

Wipe out inflation

The return of wipe-out inflation: what are the central banks doing?

For the world’s governments and their friends at the central banks, hyper-inflation is the stuff of nightmares. That is why they want stable prices above all other things. It is their job to keep the inflation monster in its cage – even while they feed it, just a little each day, by growing the supply of money.

Take the Bank of England (BoE). While warning us about runaway property prices and the dangers in taking on too much personal debt, it has let the money supply grow by 10% per year since spring 2005. That’s faster than Europe, America and Japan – faster than any major economy bar China.

But it isn’t just the BoE. Most of the central banks are guilty of flooding the world with too much money. And at least the British Government admits to how much extra cash is being pumped into the economy through the money supply. In the US, the Federal Reserve stopped reporting the growth in the money supply, or M3, earlier this year. M3 may look like an obscure piece of data, but it measured the rate of growth in “broad money” in the world’s largest economy – notes, coins, cash on deposit, short-term loans and bonds.

The decision to stop reporting the growth in US dollars, said one commentator, was like General Motors not saying how many cars it sells. And you don’t need to be paranoid about government conspiracies to guess why this happened. In 2005, the US Federal Reserve said that M3 was growing at a rate of 7.5% per year. By contrast, the narrower measure of just notes and coins, M2, rose by only 4%. The Fed continues to publish its M2 data. But few serious analysts are fooled.

Here in London, Crispin Odey – the leading investment fund manager – says global interest rates should now be around 8%. The threat of inflation posed by the oversupply of money needs to be challenged. Higher interest rates would slow the growth in lending and debt that has fuelled so much of the bubble in money. “Central bankers are starting to get frightened at what they see, and want to raise interest rates,” says Odey. “[but] the fears of over-indebted Western economies being skittled over by rising interest rates will only ensure that monetary policy remains accommodating.”

[flatnose]

income tax was also 'temporary'

Well said!

[Doom Lord]

I can't understand it,why should they raise rates then negate the impact by allaying borrowers fears.

Don't listen to what people say, look at what they do and then draw your own conclusions.

[Charlie Don't Surf]

This prediction is no doubt based on the fact energy prices have gone down. Well, we'll see what happens now the US mid-terms are over!

[subsidiser]

I'll believe that if the M4 and the M3 figures decline in proportion to stated levels of CPI. If they don't then it will be all smoke and mirrors and testiculating.

Watch commodities for the answer to how many people believe it.

testiculating?

Animated waving of the testicles?

I'm going to leave the country if that happens.

Edited November 10, 2006 by subsidiser