Tuesday, June 17, 2008

A mismanaged economy, getting deeper into trouble

Mervyn King's inflation letter signals interest rates will flatline this year

''.....With the consumer price index hitting an 11-year high of 3.3pc and Mervyn King warning that inflation will rise above 4pc, your initial assumption might be that this will mean higher interest rates. However, the letter from Mr King to the Chancellor this morning has, on the contrary, allayed such worries, and if anything seems to rule out any further interest rate hikes....''

Posted by hpwatcher @ 09:55 PM (847 views)
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2 thoughts on “A mismanaged economy, getting deeper into trouble

  • scandinavian pessimist says:

    The markets may have overreacted with expectations of 3-4 rate hikes this year, but to conclude from this letter that rates will remain stable throughout 2008 is optimistic at best. I can’t help thinking that this letter was purposely phrased to calm the markets. BOE does not want the market to set the rates for them. There is no chance that a wage spiral can be avoided, in particular since peoples’ expectation of inflation is running near an all-time high. There will be rate hikes this year but BOE prefer the rates to go up later rather than sooner, hence today’s dovish letter.

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  • My dear Darling,

    This whole “BoE independence” thing is a bit of a joke. First we’re supposed to be simply targeting inflation but when things get tough the BoE is expected to look not just at inflation but also at the economy in the round. But that’s the government’s job isn’t it? At least the Fed comes out with it and says, hey, we’re trying to look after the economy as a whole – you know, jobs an’ all, we’re not just trying to keep inflation under control. Right now prices are going up but the economy’s going down, so what can the BoE do? One signal says higher rates, the other signal says lower rates. My head hurts. I think I’ll lie down. If the economy goes down that should hold prices down a bit. Let’s keep things as they are and by the time I get up again maybe they will have sorted themselves out.
    Yours etc
    Merv

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