Wednesday, May 19, 2010

Media finally waking up to the fact that they (and us) are being taken for simpletons each month

King under attack over attitude to inflation

I nicked this link from hpwatcher. I think the fact that IRs were 5.5% the last time inflation was this high is beginning to alarm the media and consumers. In their last monthly meeting, the Bank of England opted to leave interest rates unchanged at their emergency all-time historical low of 0.5% for the 15th month running.

Posted by paul @ 08:05 AM (2792 views)
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23 thoughts on “Media finally waking up to the fact that they (and us) are being taken for simpletons each month

  • Was the BOE ever independent ? Nope.It would be political suicide.

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  • I presume the outgoing Labour government appointed (and paid) Mervyn and his team. That should give Osborne some leverage.

    If I was Osborne, I’d get all the mess out in the open NOW. Do the nasty stuff (like tax rises and cuts) NOW – blame the outgoing government. If we lose our AAA status in 3 months time, Osborne will be blamed.

    Recaptcha: campaigning camilla

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  • little professor says:

    Article for those unable to access it:

    Mervyn King came under attack from economists on Tuesday after the Bank of England governor was forced to write to the chancellor to explain another unexpected rise in the rate of inflation.

    Annual inflation, measured by the consumer price index, rose to 3.7 per cent in April – up 0.3 percentage points from March and close to double the Bank of England’s 2 per cent target. On the retail price inflation measure, the annual rise in the cost of living jumped from 4.4 per cent in March to 5.3 per cent in April.

    In a letter to George Osborne, newly ensconced at the Treasury, Mr King again played down concerns, insisting that it was highly likely that the rise in inflation was temporary. He argued it was caused by one-off factors of sterling weakness, high oil prices and January’s rise in value added tax.

    But his soothing letter was met with increasing concern among economists that the Bank was too relaxed about its over-optimistic inflation forecasts.

    Simon Ward of Henderson Global Investors said: “The governor fails to acknowledge the scale of the Bank’s forecasting error.”
    He pointed out that last May, when sterling had already fallen to levels similar to now and the rise in VAT was known, the Bank expected inflation to be 0.7 per cent now. “Higher energy prices can account for only about 0.5 of a percentage point of the 3 point forecast miss,” Mr Ward said.

    Ben Broadbent of Goldman Sachs said the governor “should be a little more careful about how confident he is”.
    Danny Gabay of Fathom Consulting advised the governor to “send out a stronger message that the Bank is aware [of the potential inflation problem] and is concerned”.

    However, Mr King’s letter did betray some greater doubt about the temporary nature of the high inflation, unlike his letter in February, which did not suggest there was any chance of it persisting. “If the current period of above-target inflation causes inflation expectations to move up that may lead to some persistence in the current high level of inflation,” the governor wrote.

    In his response to the governor, Mr Osborne did not mention the downside risks to inflation detailed by the governor. Instead he urged the Bank to “remain vigilant towards any upside risks to inflation, including the risks to inflation expectations, of any prolonged period of above-target inflation”.

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  • Has King finally been tumbled. Guilty by association?

    Any self respecting man would have stepped down. That’s not to say that King isn’t a self respecting man which then begs the bottom line

    question of who he truley serves. You decide.

    I must admit Kings pay rise refusal was a master stroke but I soon snapped out of that one after some financial thinking.

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  • It’s a SOVEREIGN debt crisis now, they were only ever going to inflate it away (I say that in hindsight of course).

    I just wish I wasn’t so naive as to realise this would happen, lets face it, unless you bought a house in 2007, you’re probably better off now than any other time. Even if prices dropped a little, most of my friends have managed to pay big chunks off their mortages now that the interest rate has been almost zero for a year or so.

    I continue to maintain my position as the contrarian fool, sitting back waiting for a cheap house to buy with my big deposit.

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  • As soon as King is replaced, the better as far as I’m concerned.

    His record is terrible – almost as bad as Gordon Brown’s – so why should anyone listen to him?

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  • Sirmungo, at least you have a big deposit! Trying to save now is virtually impossible!

    hpw, Am i right in saying Mr King is given two tools QE / printing and interest rates. Is he even able to use / implement these without a vote from the other various members of the MPC? and I wonder what intimidation was coming out of No10?

    What other options has King had? (Not being sarcastic, genuine question)

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  • Ive writen to Mr King a few times regarding the unbalance of Inflation/savings rates [email protected]

    Mr King didnt reply personally but the reply I did get was:-

    Dear Mr xxxx

    Thank you for your email of 27 August 2009.

    I thought you might find it helpful if I explain our role in setting interest rates and what the Bank is trying to achieve. The MPC is tasked with setting monetary policy to meet the Government’s inflation target of 2% (as measured by the 12-month increase in the Consumer Prices Index). In doing so, the MPC has to judge the outlook for the economy and inflation, and to decide what level of interest rates and other monetary policy measures will ensure inflation moves towards the target of 2% in the medium term. MPC decisions involve difficult judgements about the direction of the economy, the state of overall demand and the pressure on prices. House price inflation is considered carefully by the MPC because housing wealth serves as collateral for borrowing. Changes in housing wealth may therefore affect consumption and aggregate demand, eventually impacting on inflation. However, it is essential to understand that the MPC does not have a target for house prices – its only remit being to target CPI inflation. Decisions taken by the MPC are always made in order to achieve that target.

    If the MPC thinks that demand looks weak and inflation will go below 2% (as has recently occurred), it will normally reduce interest rates. This makes borrowing by households and businesses cheaper and saving less rewarding, and so encourages more spending and raises inflation. The Bank does not want inflation to be so low that there is a risk of prices falling across the economy. Deflation can be very damaging as people cut spending and wait for prices to decline further. When demand falls like this, businesses cut back on production and employment and the economy can enter a recession. In this scenario, unemployment rises and companies can go out of business – we all suffer. It is for these reasons that the Monetary Policy Committee is committed to stimulating demand to bring inflation back to the target level.

    I know that it must seem hard to understand why prudent savers appear to be penalised, when they did not cause the current economic problems. Whilst it is true that we need to encourage more saving, in the short term the priority is to provide the necessary stimulus to bring inflation back to target. In doing so, we shall be moving to a position where savers, once again, receive more normal returns on their savings. As the Governor said earlier this year:

    ‘This is the paradox of policy at present – almost any policy measure that is desirable now appears diametrically opposite to the direction in which we need to go in the long term. Spending now supports the economy, but in the long run we need to save more and borrow less. Public borrowing sustains spending, but in the long run needs to fall. Banks are encouraged to run down their capital to enable them to absorb losses while continuing to lend, but in the long run they will need more capital. Interest rates have fallen to unprecedented levels, but in the long run will need to rise to more normal levels.’

    Thank you again for your letter. You might like to know that the Governor is made aware of all correspondence addressed to him.

    Kind regards,

    xxxxx xxxx

    Bank of England

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  • @4

    yep, agree. if you had known about rates being so low for so long it would have made sense to buy and pay off as much as you could afford.

    although, I think it’s best not to owe money to anyone as it’s a liability. when things do get rough, which will happen, you’ll need to be flexible and mobile. the one thing I don’t like about having equity in a house is the fact you can’t just pick up and go. if prices started dropping and you wanted to move somewhere else because the area was going downhill, you’re stuck. all that time you spent paying off the mortgage only to watch it fall in value and not being able to move…that’s not a good situation to be in, especially in the coming depression.

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  • 7. debtfree said…”all that time you spent paying off the mortgage only to watch it fall in value …that’s not a good situation to be in”

    Perhaps you can explain to Mark Wadsworth why the majority of the homeowning population think keeping house prices high is A GOOD THING.

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  • @ 7& 8

    Ironically, LVT would sort that problem as well, because the loss of land value would be reflected in a reduced tax. Your equity would be in the structure which would have a similar value regardless of location.

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  • vacuouspolitician says:

    “I fail to see what Merv has done that is so badly wrong”…!

    @4. Most of the people on this site are in EXACTLY the same position…living in cloud cuckoo land thinking that everything was going to fall into place, government/Penfold was going to standby and let the economy tank! Some people on here need to live in the real world, they talk about LVT etc, while paying high rents and sitting on devalued piles of sterling…LTV won’t happen anytime soon – not until a certain generation completely die out. Why pay high rents to the very same people you criticise? Why leave money in accounts paying 0.1% – 3% ? There are lots more things to buy than houses which hold their value. Buying overpriced houses really sucks. Buy a business. Be your own boss. Escape the rat race. Pick the hours/days you want to work. As for Penfold he is F’useless – part of the generation that needs to die out before real change can hopefully take place. Yes people don’t like to hear this…but then they just like to wallow in self-pity. Do something about it…

    ReCaptcha – Penfold Sucks

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  • mark wadsworth says:

    Yes, debtfree, as p.doff, suggests, can you run that past us again?

    If house prices were never allowed to rise to giddy levels, i.e. firmly capped at rebuild costs (by using LVT and so on), then there would never be negative equity either (except in occasional extreme circumstances). So if you want to stay flexible and mobile, you would jsut rent – you wouldn’t need to worry about missing the High House Price Bonanza as there wouldn’t be one.

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  • Jeremy Warner’s commentary today:

    http://blogs.telegraph.co.uk/finance/jeremywarner/100005749/does-the-inflation-target-actually-mean-anything-any-more/

    “RPI inflation is now higher than at any stage since the Lawson boom. Savers are in effect being milked to subsidise the profligate and allow them to escape their debts. If this is called rebalancing the economy way from debt fuelled consumption towards saving and investment, then I’m a banana.”

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  • mountain goat says:

    Central bankers are on a journey from hero to zero. Bernanke was Time Magazine’s man of the year 2009. But he like King will end up being criticised in future for trying to save us from a debt crisis by creating more debt. It has bought time, but have the bankers used this time to put their house in order (or did they just buy and create more junk debt), have the flaws in the financial system and Central Banking that caused the problems in the first place been addressed? I think we are going to find out fairly soon because the re-test has already started.

    IMO deflation resurfaced in November last year when the dollar started it’s march upward. The Eurozone are already in full bailout panic mode, and now banning some short trading. China is tightening credit fearing a property bubble and their stock market is in bear market (after a 20% decline). Inflation reports are backward looking. Commodities have turned down now, but the UK has the complication of currency devaluation, so pressure should intensify on King.

    Perhaps we debt free people are the suckers. But the small print usually reads, “past performance is no guarantee of future results”. Seems to me like this is the end game of the “borrowing from Peter to pay Paul” solution. I am still glad I chose to remain debt free.

    Full marks for my clichés don’t you think?

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  • a bit of advice please guys..

    i’m after a mortgage to buy a house second house (my current house has a market value of around £85,000, and there is no mortgage outstanding)

    Fearing continued inflation i have jumped in and arranged to buy a house, The house i am considering is for £130,000, i will require a mortgage of around £50,000..

    However my yearly income including money from rent from my house is around £10,000.. Can i get a mortgage by using that house as a guarantee? also what would type of mortgage (repayments or interest only) be best for me, if i aim to pay the mortgage of in lump sums after year 2??

    Hope you can help

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  • Decent summary MG. I think we turn down again as attempts to deal with debts by cuts leads to a deflationary shock ,we then start printing a loutrance and its time to turn to believe in inflation.

    That said I often wonder if everyone is trying to devalue/inflate is that not nil sum, ie the perfect non inflation scenario. Never seen anyone mention this.

    Excellent use of the cliche!

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  • sirmungo said…
    sitting back waiting for a cheap house to buy with my big deposit.

    Problem is with inflation at over 5%, your big deposit will be quickly erroded…..

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  • stillthinking says:

    King might be facing a nightmare, a deflationary environment with inflationary expectations.
    The hyperinflation in Germany was not due to a vast increase in the supply of money but a widespread loss of confidence leading to an increase in velocity. Truly people are losing confidence.
    I have found in the past that when I think of something, it generally means that a large number of people have already thought of the exact self same thing earlier. In the case of the election, I very nearly, but didn’t, buy myself a flat screen just in case the price rose. And I also noticed that washing machines at John Lewis rose in price twice in two weeks.

    If as sounds the case, King is losing control of expectations, then inflation will result as people bring purchases forward. This despite the obvious deflation we face. However, there is no deflation mentioned in the news and even if you search as I do nearly daily over the last few years there are no articles on UK deflation. So deflation expectations are effectively vanquished.

    If King has to increase interest rates, which will be rising in real terms anyway as the government and the population cut cut cut, then this is a big disaster which will worsen the deflation. He was trying to achieve the impossible, to stand on the fine line of stability in a time of unbelievable turbulence and this article and general complaints would seem to indicate he has fallen off.

    He is wobbling as a bicyclist loses control, over-steer followed by over-steer. If this inflation expectation catches hold, then he will react, because the velocity of money (or panic buying) is too terrible to contemplate, in which case the best of all worlds will be deflation, unemployment and crashing house prices, because at least that allows another throw of the dice later.

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  • tenyearstogetmymoneyback says:

    amjidk

    When I was on a company consultative committee regarding a company takeover we kept
    being reminded that we were not allowed to give Financial Advice. Not even the head of HR
    was allowed to. The only options are to consult an IFA or do your own research.

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  • tenyearstogetmymoneyback says:

    Stillthinking wrote “And I also noticed that washing machines at John Lewis rose in price twice in two weeks”

    and my Mums new washing machine was made in China. In the medium term the price will change with the value of the pound
    along with anything else not manufactured locally.

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  • stillthinking says:

    I hesitated to put that bit about washing machines but in fact I had to buy one and I did notice. That notwithstanding, I truly believe we are in a deflationary environment, honestly on my life there is no doubt for me personally, but at the same time I am bring purchases forward because of uncertainty.
    Bring forward purchases is inflationary, certainly. And even I do it. So King has a mountain to climb. He was a fool to ever do QE because he introduced the possibility of doing it again, when it should be a door that remains permanently closed. So on to the danger of panic buying, probably panic is the wrong word at the moment, but if you buy before necessary then that is a kind of panic.

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  • amjdk,

    In these uncertain times, I suggest that it is desirable to plan for poor economic conditions while seeking ways to develop your future prospects.

    With a stated income on £10K (?) it sounds as though taking on a £50,000 mortgage will stretch your finances somewhat which will leave you poorly placed to deal with any major repairs on either property.

    Property could be a long-term hedge against inflation but if inflation is your concern, there are other approaches e.g. Index-linked Savings Certificates.

    Regarding repayments, if you expect to be able to invest well enough to be able to repay the mortgage in lump sums starting in a couple of years why not just concentrate on those investments and forget about being a property mogul or do you want your own living space?

    Also, it might be useful to see how the newly proposed CGT taxes take shape before committing.

    I suspect that there’s a lot you haven’t said about your requirements and motivations. In the end, you have to take responsibility. Obviously, I am not qualified to give advice but I’m willing to make general comments.

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