Wednesday, October 25, 2006

Still looking good for November…

Inflation warning signals a probable rate rise

GLOBALISATION will make it harder for central banks to quell inflation, forcing them to act more aggressively to do so and making it more crucial that they act quickly to stem any sustained pick-up in price pressures, the Bank of England’s chief economist said last night. In a speech that will harden expectations that another interest rate rise next month is near-certain, Charles Bean set out a series of effects from globalisation that meant that inflation was now less affected by changes in the domestic economy’s growth rate

Posted by tyrellcorporation @ 09:16 AM (692 views)
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12 thoughts on “Still looking good for November…

  • And what was the MPCs decision last month to pre-empt this rising inflation threat?

    “No change”

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  • a month hardly matters in the scheme of things. Give them a break they have made good decisions so far.

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  • For those of us wondering why the UK hasn’t yet hit the buffers, I recently came across an interesting (and lengthy) article by economist Gary Dorsh. The following is an extract that helps shed light on our apparent affluence and why it will be short lived.

    Start quote:

    The Bank of England’s Radical Monetary policy

    The Bank of England has tried to cap the British pound at $1.90, by keeping its base rate exactly where it was at the start of 2005. The BoE also tolerates an explosion of the British money supply that is more characteristic of emerging economies in China and India. The UK’s M4 money supply surged to a 14.5% annualized growth rate in September, its fastest rate in 16-years, setting-off alarm bells in London.

    But time seems to be running out for the BoE’s ultra easy money policy. The UK economy grew by 0.7% in the July-September period, lifting the annual rate of expansion to 2.8%, the fastest pace since the third quarter of 2004. That seems to cement the case for a quarter-point BOE rate hike to 5.00% on November 9th. BoE chief Mervyn King warned on October 10th, “That decision will be taken only in November, and much can change between now and then.”

    From 1997 through 2003, the Bank of England closely monitored its benchmark M4 money supply, adjusting its base rate higher to counter strong M4 growth, and lowered rates when the money supply slowed. However, the BoE abandoned the discipline of monetarism over the past two years, and has lost control of the money supply, which now threatens the UK economy with an inflationary surge.

    British interest rates are far too low to curb borrowing or the velocity of the money supply. Net mortgage lending rose by 6.2 billion pounds in August, up from the monthly average rise of 5.4 billion over the previous six months, and beating the last record set in April 2004, when it increased by 6 billion pounds. Asking prices for UK homes in the four weeks through October 7th rose to 338,000 pounds, or 11.5% higher from a year earlier, the biggest annual gain in two years

    The BoE’s Andrew Sentance said inflation could slip in the short term because of lower energy prices, but rising wages present a problem. “In terms of inflation, there is the risk if we have continuing inflation above target that it does begin to feed into wage increases. That’s a significant worry,” said Sentance. UK wages including bonuses grew an annual 4.4% in the quarter through July.

    Quizzed on the importance of M4’s 14.5% expansion, “The recent growth in M4 could ultimately have an impact on the economy. I view this as an issue of concern about the future path of inflation,” said BOE member Timothy Besley. Sentance said the 14.5% M4 growth rate, the fastest since 1990, was an “amber light”.

    End quote.

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  • sold 2 rent 1 says:

    Good article and my thoughts exactly.

    As inflation rises in the Asian economies (wage inflation was 42% in Vietnam before EU restricted shoe imports) the B of E will have to raise IR.

    This will make the pound stronger, hit exporters and borrowers hard and tip the economy into recession.

    The real issue is that once a recession starts the B of E would want to reduce IR to help the economy. The inflation coming from Asia will not be affected by UK IR and if the pound falls due to falling UK IR the Asian imports will keep getting more expensive (imported inflation).

    Does this mean we will enter a period of stagflation similar to the 1970’s?

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  • There is some evidence (see recent Fed comments suggesting further IR rises) that the US, which is 12 to 18 months ahead of UK in the cycle, is entering a stagflationary period.

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  • Isn’t the concern here that because M4 money has been high for a while, effectively the worth of our savings has already been depleted.

    If we enter a period of inflation, those that are deep in debt effectively have their debts reduced by inflation – assuming they can ‘hang on’ if interest rates rise.

    Borrowers have already been given an unfair advantage. How do we get our own back?

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  • inbreda,

    If inflation is very high, and when the banks see this, they won’t hold back, because the last thing they want is for debts to get wiped out from inflation.
    And if your a saver, and banks do attack inflation, then you benefit, and thats were you get your own back. Because while there attacking inflation your savings are getting a nice bonus at the same time, because the banks will need to increase rates much higher than inflation to combat it.

    Rember the 90’s, and that’s when the goverment had control, the banks mainly have control now, can you see them saying, oh forget that £1.3Trillion+ lets lose lots of money so that the ecomomy don’t get hurt.

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  • Well looks like another 0.25% increase why not 0.00000001% we want to be carefull don’t we…
    The thing is IR increases could be dramatic next year if they do not get a handle on this, Wage increases in China and India are going through the roof.

    At the end of the day BOE will have to move faster and higherdue to International demands….

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  • Exactly I wonder now if the main stream media such as DE and the BEEB will now say how Globalization is a bad thing….

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  • “Professor Bean said this concern suggested that “it is better to err on the side of caution by preventing any sustained pick-up in inflation in the first place.”

    With inflation consistently above the government’s target, it’s good to see the MPC practice what they preach.. or maybe not

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  • I think there should be a lot more scrutiny of why the MPC decided to abandon M4 growth 2 years ago, and just let it run.

    It also adds weight to my assertion that the MPC members should be summarily fired when inflation tops 3%.

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  • Um wages in china are not going through the roof.

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