Mpc Voted 7-2 To Hold Rates

[Tonester]

http://news.bbc.co.uk/1/hi/business/7521032.stm

Tim Besley voted for a rise, we know the other non-conformist

[thecrashingisles]

http://news.bbc.co.uk/1/hi/business/7521032.stm

Tim Besley voted for a rise, we know the other non-conformist

Could we get a 3-3-3 split decision at some point?

[symo]

Tim Besley voted for a rise, we know the other non-conformist

A new HPC hero is born! He knows what we need and why we need it. Stop listening to blanchflower people and get raising.

[Thucydides]

A new HPC hero is born! He knows what we need and why we need it. Stop listening to blanchflower people and get raising.

It depends on what people value. If they value over-priced housing stock propping up a flagging economy, then they will vote for cuts, if they think controlling runaway inflation is more important they will vote for rises. As it happens, I think that if oil continues to drop then we will get another rate hold in August, amending my previous prediction of a rise.

[Nationalist]

The MPC have hit upon the clever technique of lowering inflation by simply waiting until the price hikes in oil etc drop out of the numbers in a year's time.

Of course that locks in a lower standard of living for all of us forever, but at least that doesn't show up in the CPI statistics.

[Extradry Martini]

Could we get a 3-3-3 split decision at some point?

Nice idea, but no - the governor gets the casting vote. In fact, when Eddie George was governor, he didn't bother voting unless there was a tie, which if you think about it was just a ruse to avoid being out-voted on any decision...

[frozen_out]

Nice idea, but no - the governor gets the casting vote. In fact, when Eddie George was governor, he didn't bother voting unless there was a tie, which if you think about it was just a ruse to avoid being out-voted on any decision...

Isn't this just standard practice for the chair to have the casting vote?

[Sebastian]

Could we get a 3-3-3 split decision at some point?

August's vote could be the most interesting of the year. They want to hike, if just for the sake of saying they did not sit on their hands when inflation jumped to 4%. My guess is we will have 2 votes for a hike - throw in Sentence. If the economic activity indicators show further deterioration over the next fortnight and oil prices are contained, we could potentially have a second vote for a cut, though it is unlikely.

The economy needs them to cut, but the Committee won't opt for that while most members are fixated on current inflation. If oil and other commodity prices follow the very recent trend and tumble while the economy continues to flirt with disaster, then this MPC will have a lot to answer for.

[campervanman]

August's vote could be the most interesting of the year. They want to hike, if just for the sake of saying they did not sit on their hands when inflation jumped to 4%. My guess is we will have 2 votes for a hike - throw in Sentence. If the economic activity indicators show further deterioration over the next fortnight and oil prices are contained, we could potentially have a second vote for a cut, though it is unlikely.

The economy needs them to cut, but the Committee won't opt for that while most members are fixated on current inflation. If oil and other commodity prices follow the very recent trend and tumble while the economy continues to flirt with disaster, then this MPC will have a lot to answer for.

If they cut rates before the ECB then the pound will continue to slide against the Euro thereby increasing the cost of imports. Not a good idea if your mandate is to control inflation. Having said that, they have caused inflation by cutting from 5.75% to 5% when at the same time the eurozone have increased to 4.25%. But of course imported inflation is out of our control.

['Bart']

we know the other non-conformist

Be fair. David's probably still upset about his wife running off with another women.

Never gets old.

[Sebastian]

If they cut rates before the ECB then the pound will continue to slide against the Euro thereby increasing the cost of imports. Not a good idea if your mandate is to control inflation. Having said that, they have caused inflation by cutting from 5.75% to 5% when at the same time the eurozone have increased to 4.25%. But of course imported inflation is out of our control.

The Bank of England also has a mandate to oversee growth in the economy, which the ECB does not. The current inflation rate would be much the same, whether the Bank of England cut rates or not. Core inflation has hardly budged this year, while headline inflation grew thanks to commodity prices.

Today's minutes content was also leaked to certain elements of the market long before the minutes were officially published, which is another debate.

[angrypirate]

Quote from minutes found here

http://www.bankofengland.co.uk/publication...008/mpc0807.pdf

35. For another member, the news on the month had reinforced the case for an immediate reduction

in Bank Rate in order to avoid inflation undershooting the target in the medium term. The activity data

had been uniformly gloomy and broad-based and activity now seemed likely to contract sharply in the

near term, possibly for several quarters. Long-term inflation expectations remained contained and

domestically generated inflation remained low. As a result, there was little or no likelihood of a rise in

wage growth. So it continued to be important to look through the short-term spike in inflation.

Can someone explain to me, how in gods earth is inflation going to undershoot in the mid to long term? Surely inflation typically goes with a recession which realistically looks like it is here to stay with us for 2 - 3 years. Have i missed something. Unless this guy is a complete genius and can foresee something no one else can, then hes a muppet.

[Sebastian]

Quote from minutes found here

http://www.bankofengland.co.uk/publication...008/mpc0807.pdf

35. For another member, the news on the month had reinforced the case for an immediate reduction

in Bank Rate in order to avoid inflation undershooting the target in the medium term. The activity data

had been uniformly gloomy and broad-based and activity now seemed likely to contract sharply in the

near term, possibly for several quarters. Long-term inflation expectations remained contained and

domestically generated inflation remained low. As a result, there was little or no likelihood of a rise in

wage growth. So it continued to be important to look through the short-term spike in inflation.

Can someone explain to me, how in gods earth is inflation going to undershoot in the mid to long term? Surely inflation typically goes with a recession which realistically looks like it is here to stay with us for 2 - 3 years. Have i missed something. Unless this guy is a complete genius and can foresee something no one else can, then hes a muppet.

Inflation is expected to moderate during a slowdown because 1) demand falls as people spend less, 2) retailers etc. are competing for a dwindling market and are less likely to raise prices and 3) With lower demand comes lower production and job losses. When jobs are being shed workers are far less likely to be able to get wage rises.

Inflation could seriously undershoot in the medium to long term if oil and commodity prices collapse. This would remove the causal effect of the high inflation we see today. When we get to next January or thereafter, when we are comparing year on year inflation rates, we might be comparing months in 2009 with oil prices of $80 a barrel against months in 2008 when oil was at $130. If the slowdown is very dramatic and there is zero domestic inflation pressure, you could actually enter a period of deflation. Deflation is a nightmare prospect for a Central Bank. This is what happened in Japan.

[abharrisson]

A new HPC hero is born! He knows what we need and why we need it. Stop listening to blanchflower people and get raising.

Personally I think a raise (if as you say you want it for HPC reasons) isn't going to make that much difference... prices are clearly on their way down.. and a 0.25% difference won't change much on that score I should think... however I do think it will have a bigger impact on risks for recession etc which is surely in no ones interests !... or is HPC the sole motivator.... personally I think prices will fall as far as they are going to with rates at 5.00%... and in any event mortgage rates don't have so much to do with BOE anymore since Libor became somewhat detatched.

[campervanman]

The current inflation rate would be much the same, whether the Bank of England cut rates or not.

Are you serious!! The pound has fallen by 15% against the euro in the past year due primarily to the differential between investing in euros against pounds falling from 2% to 0.75% - a direct result of BOE rate cutting. So by your economic theory, a 15% fall agaist the currency of our major trading partners has no effect on inflation. Can I have some of whatever you are on

[Sebastian]

Are you serious!! The pound has fallen by 15% against the euro in the past year due primarily to the differential between investing in euros against pounds falling from 2% to 0.75% - a direct result of BOE rate cutting. So by your economic theory, a 15% fall agaist the currency of our major trading partners has no effect on inflation. Can I have some of whatever you are on

Inflation in the euro area had risen to an annualised 4% against 3.8% in the UK, even with the currency appreciation. Core inflation is contained below 2% in both jurisdictions and the headline rate has jumped almost exclusively because of imported oil and commodities, priced in dollars and not in euros.

Inflation rose dramatically everywhere between August last year and June this year because oil doubled in price over this period. The euro rose 12% against the dollar during this time but even that did little to offset against the rise in imported inflation.

The pound has not fallen all of 15% against the euro because of rate cuts by the Bank of England. It may have been a significant contributory factor, but it is only one of many.

[Fairies Wear Boots]

Personally I think a raise (if as you say you want it for HPC reasons) isn't going to make that much difference... prices are clearly on their way down.. and a 0.25% difference won't change much on that score I should think... however I do think it will have a bigger impact on risks for recession etc which is surely in no ones interests !... or is HPC the sole motivator.... personally I think prices will fall as far as they are going to with rates at 5.00%... and in any event mortgage rates don't have so much to do with BOE anymore since Libor became somewhat detatched.

But doesn't what they do with interest rates have a big impact on what form the crash will take? If they cut 2 percent, we get rampant inflation and big real falls but small nominal falls. Deal with inflation and and raise rates and we get big nominal falls.

[Patfig]

For what it's worth, NZ cut their base rate this morning by 0.25%.

[Sebastian]

For what it's worth, NZ cut their base rate this morning by 0.25%.

New Zealand may already be in a recession and hats off to Bollard & Co. for cutting rates even while global inflation rates are rising. Central Banks should be focused on where inflation will be in 2 years and not reacting to spikes in oil prices, like the BoE and the ECB.

[campervanman]

For what it's worth, NZ cut their base rate this morning by 0.25%.

Unless we import vast quantities of NZ lamb the it's worth diddly squat. It's the euro base rate that counts not mickey mouse currencies like the NZ dollar. The NZ dollar has specific problems related to speculation and any decision made by their CB should be taken with a pinch of salt.

Edited July 24, 2008 by campervanman

[Sebastian]

Unless we import vast quantities of NZ lamb the it's worth diddly squat. It's the euro base rate that counts not mickey mouse currencies like the NZ dollar. The NZ dollar has specific problems related to speculation and any decision made by their CB should be taken with a pinch of salt.

It may be a small economy but the New Zealand dollar is a very important in currency markets, as it is the highest yielding of all the key carry currency pairs (EUR/JPY, GBP/JPY, AUD/JPY and NZD/JPY) and any Central Bank moves that directly affects one of the key carry pairs, has ramifications for them all.

Also, the fact that a Central Bank of one of the developed economies has cut interest rates at a time when inflation is on the rise is important for Central Bank thinking at the moment. There are two camps 1) those that believe slowing growth will see inflation moderate in the medium to longer term and thus preclude the need for higher interest rates now - US, Canada, New Zealand and 2) those that believe current high inflation needs to be nipped in the bud either by threatening higher interest rates or by actually raising rates - ECB and the UK being the principals. All are on the verge of a recession, so only one of these two Central Bank groupings is correct in its policy thinking.

Edited July 24, 2008 by Sebastian

[campervanman]

It may be a small economy but the New Zealand dollar is a very important in currency markets, as it is the highest yielding of all the key carry currency pairs (EUR/JPY, GBP/JPY, AUD/JPY and NZD/JPY) and any Central Bank moves that directly affects one of the key carry pairs, has ramifications for them all.

Also, the fact that a Central Bank of one of the developed economies has cut interest rates at a time when inflation is on the rise is important for Central Bank thinking at the moment. There are two camps 1) those that believe slowing growth will see inflation moderate in the medium to longer term and thus preclude the need for higher interest rates now - US, Canada, New Zealand and 2) those that believe current high inflation needs to be nipped in the bud either by threatening higher interest rates or by actually raising rates - ECB and the UK being the principals. All are on the verge of a recession, so only one of these two Central Bank groupings is correct in its policy thinking.

And we are about to find out which camp is correct in it's thinking. Judging by the US (stagflating economy), I know which camp I would prefer to be in.

[Sebastian]

And we are about to find out which camp is correct in it's thinking. Judging by the US (stagflating economy), I know which camp I would prefer to be in.

With lower interest rates the US will climb out of the slump much quicker than the UK or euro area, if Bernanke is correct in his theory on moderating inflation going forward. The Fed has much greater experience than the ECB or the Bank of England when it comes to handling downturns, so we need to bear that in mind.

Both the UK and euro economies are also in stagflation right now, just not to the same extent based on official figures to date. In reality they may be in a worse situation because the data over the past couple of months suggests growth is slowing at a faster pace in the UK and the euro area, than in the US.

[campervanman]

In reality they may be in a worse situation because the data over the past couple of months suggests growth is slowing at a faster pace in the UK and the euro area, than in the US.

Hardly surprising considering the US has cut rates so aggresively, but as you pointed out earlier they now have higher inflation and are having to come to terms with the prospect of raising rates earlier than they ideally would want. So we have the scenario whereby aggresive cuts in IR's have not removed the threat of recession but have certainly caused the prospect of ongoing inflation going forward. Back to my earlier point that we will soon find out which camp has the most sustainable approach to controlling inflation.

[Sebastian]

Hardly surprising considering the US has cut rates so aggresively, but as you pointed out earlier they now have higher inflation and are having to come to terms with the prospect of raising rates earlier than they ideally would want. So we have the scenario whereby aggresive cuts in IR's have not removed the threat of recession but have certainly caused the prospect of ongoing inflation going forward. Back to my earlier point that we will soon find out which camp has the most sustainable approach to controlling inflation.

Well, if it is the case that the curent spike in oil prices is driven by fear and speculation more than real demand, then it will not last and what goes up will come down. Inflation will in this case moderate. This is what the Fed believe and in fairness they should probably know because oil prices doubled in price in the 9 months during which they cut interest rates by 325 basis points. It is not a coincidence that oil prices shot up at the same time as the Fed was aggressively easing monetary policy. They provided the space for the bubble to grow and are the ones who are really to blame for the current levels of global inflation. They are probably the only ones with the real power to ***** the bubble and for that reason it would be dangerous to bet against them.