I Wrote An Email Of Complaint To The Boe

[jpidding]

My email:

I was under the impression that interest rate setting by the BOE what to target inflation and inflation only.

Over the past 10 years it has happily ignored house prices on the grounds that CPI (at totally non-representative measure of the cost of living) was tame. Now that house prices wobble the BOE steps in and makes an IR cut debasing the savings of all financially responsible people.

When is the BOE going to grasp the nettle, do its job, reign in inflation and stop bowing to pressure from vested interest parties to keep the money supply ever accelerating? This was why the BOE was given independance to control interest rates in the first place.

JP.

Their reply:

Dear Mr P,

Thank you for your e-mail of 6 December concerning the Monetary Policy Committee (MPC) decision to reduce the official Bank Rate to 5.5%. Your email has been passed to me to reply.

As you are aware the MPC’s task is to set interest rates to meet the Government’s inflation target of 2% (as measured by the 12-month increase in the Consumer Prices Index). Only by keeping inflation low can we avoid the cycles of high inflation, high interest rates and recession which characterised previous decades. In setting the official Bank rate, the MPC has to judge the outlook for the economy and inflation, and to decide what level of interest rates will ensure inflation remains low and in line with the target of 2%. The MPC’s decisions involve difficult judgements about the direction of the economy, the state of overall demand and the pressure on prices. There is inevitable uncertainty about the future. At any time, there will be some factors that may in themselves point to higher interest rates, while others suggest lower rates, or no change.

Typically, it takes around eighteen months to two years for changes in interest rates to work through fully to inflation, and so MPC decisions are based on the Committee’s expectations of inflation, and not on the current rate of CPI inflation.

In the news release announcing the recent cut in the official Bank Rate on 6 December, the MPC said:

“Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.”

In coming to its decision on 6th December, each of the 9 members of the MPC voted independently on the level of the official Bank Rate, having considered all of the available evidence. The minutes of that meeting will be published by the Bank on 19 December.

The Bank has viewed the rate of increase in house prices over recent years as unsustainable and appreciates the impact this has had on some people, particularly on first-time buyers, and those trying to move up the housing ladder. House price inflation is considered carefully by the MPC because housing wealth serves as collateral for borrowing and directly impacts on consumer spending. As housing wealth grows, consumption and aggregate demand may grow faster and eventually lead to higher inflation. However, it is essential to understand that the MPC does not have a target for house prices, its only remit being to target consumer price inflation. Decisions taken by the MPC, which are often finely balanced, are always made in order to achieve this target.

Turning now to consider inflation. Utility prices, and the cost of some other essential items including travel costs, may have grown faster than the prices of some non-essential items. But the CPI is based on the basket of goods and services bought by a typical household. That is why an individual’s perception of inflation may differ from the official CPI figures because the CPI is the average rate of inflation experienced by a representative household.

Thank you once again for writing to the Bank. I hope that the above goes some way towards explaining why the MPC felt it was appropriate to reduce Bank rate at this time.

Yours sincerely

Roger Beaton

Public Information & Enquiries Group

Bank of England

Threadneedle Street

London

EC2R 8AH

Predictable reply, but at least they bothered. I guess most of it is just a cut and paste job to give a standard asnwer.

[Jason]

Nice one; but predictable reply.

"Only by keeping inflation low can we avoid the cycles of high inflation, high interest rates and recession which characterised previous decades"

I like this quote. So from the typical business cycle over the last century, we have evolved into a 'pump everyone with lots of debt by focusing on irrelevant measure of prices, if it faults pump more and more debt in until there is a serious depression.'

Seriously, do these people really believe this? How can they not see that focusing on consumer prices is a temporary solution, while we have deflation from Asia, that will ultimately result in higher interest rates when debt levels are at there highest. If they ignore inflation from Asia (as they appear to be doing) it will ultimately lead to a depression.

Success at it's finest eh.

[crashmonitor]

At least they bothered to give a detailed reply.But how can you win when they hide behind the 18 months to take effect every time.Just like the last 18 months of mainly over-target CPI was meant to deliver 2% now.Except this months may well come in at 2.6% and that is just for starters .

[lordofcolchester]

Remarkably similar to the reply I received, below. Obviously a 'one size fits all reply'.

"Thank you for your e-mail of 6 December concerning the Monetary Policy Committee (MPC) decision to reduce the official Bank Rate to 5.5%. Your email has been passed to me to reply.

As you are aware the MPC's task is to set interest rates to meet the Government's inflation target of 2% (as measured by the 12-month increase in the Consumer Prices Index). Only by keeping inflation low can we avoid the cycles of high inflation, high interest rates and recession which characterised previous decades. In setting the official Bank rate, the MPC has to judge the outlook for the economy and inflation, and to decide what level of interest rates will ensure inflation remains low and in line with the target of 2%. The MPC's decisions involve difficult judgements about the direction of the economy, the state of overall demand and the pressure on prices. There is inevitable uncertainty about the future. At any time, there will be some factors that may in themselves point to higher interest rates, while others suggest lower rates, or no change.

Typically, it takes around eighteen months to two years for changes in interest rates to work through fully to inflation, and so MPC decisions are based on the Committee's expectations of inflation, and not on the current rate of CPI inflation.

In the news release announcing the recent cut in the official Bank Rate on 6 December, the MPC said:

"Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term."

In coming to its decision on 6th December, each of the 9 members of the MPC voted independently on the level of the official Bank Rate, having considered all of the available evidence. The minutes of that meeting will be published by the Bank on 19 December.

The Bank has viewed the rate of increase in house prices over recent years as unsustainable and appreciates the impact this has had on some people, particularly on first-time buyers, and those trying to move up the housing ladder. House price inflation is considered carefully by the MPC because housing wealth serves as collateral for borrowing and directly impacts on consumer spending. As housing wealth grows, consumption and aggregate demand may grow faster and eventually lead to higher inflation. However, it is essential to understand that the MPC does not have a target for house prices, its only remit being to target consumer price inflation. Decisions taken by the MPC, which are often finely balanced, are always made in order to achieve this target.

Thank you once again for writing to the Bank. I hope that the above goes some way towards explaining why the MPC felt it was appropriate to reduce Bank rate at this time."

[davidhpc]

Can they really seriously target inflation 18months - 2 years away? It seems bizarre when you take into consideration all the zillions of things that could happen in the meantime.

I suppose it gives them a nice 'catch all' excuse to do whatever they like for whatever reasons they like.