Wednesday, 9 January 2008
UK Interest rate decision
Now it is not often that Iain Dale beats us to a profound statement about the economy and interest rates...but he did this week.
Iain asked the question of what is the real interest rate. This is indeed a hoary old topic, old enough to have been my first decent post on this blog.
The fact is that the Labour government had to change the old RPIX rate to the Euro standard CPI rate as ordered by our European masters. This has helped us in early years of the naughties to be able to lower interest rates and stave off a real dot-com bust. However this fuelled an asset bubble, experienced by most people in the form of housing and a huge increase in mortgage debt. It has also allowed banks to release lots of money into the economic system in a bid to maintain or grow their returns in a low interest environment.
These chickens are coming home to roost in 2008 and the Government may well be make matters worse by persisting in a flawed inflation measure.
When the Bank of England meets tomorrow it will see a set of figures suggesting we have a low interest rate and decreasing economic activity. Just as Alistair Darling effectively asked for in his press conference on Monday, the MPC committee will likely vote to cut rates.
This will be a personal relief, given my indebted mortgage status and its help to drive the gold price higher for my investments....or will it?
Food prices according to the ONS are 10% up on a year ago, Npower, provider of leccy and gas to chez Slicker, have just put up prices 27%. Hmmm...seems like quite high inflation to me...almost as if corporates feel they have strong pricing power. Now to keep a lid on this the idea is generally that a government reduces the flow of money to try and encourage saving over spending, which in turn forces retailers to lower prices to drive sales (as is happening on the high street, but not elsewhere in the economy). Yes there are other drivers and reasons, but I don't want to bore forever here...
We are caught in a vicious trap of rising prices in many areas which will drive inflation - out current CPI measure discounts big chunks of this and relies on a near random and politically influenced basket of goods, not really very clever stuff in 2007 in a world of super computers on people's desktops. The ONS has admitted its data could be better last year. But headline inflation is low and Brown and Badger are hardly going to advocate a change to make it reflect its true rate!
So the Bank of England may well vote for a cut in rates which may or may not be a good idea; the issue I have is that it is working on a false mandate from Government, which belies the idea that it is independent at all.
Posted by CityUnslicker