Tuesday, 16 September 2008

Will the BOE cut rates?

Logic would suggest, that faced with a collapse in the credit markets and also in the money markets the right decision to be made would be to cut interest rates. Maybe not by 1% at once, but certainly by a 0.5% by the year end.

Yet in Mervyn King's letter to Alistair Darling today, it appears that the Bank of England has become more hawkish about inflation. Hedging its bet by saying that inflation will soon peak at 5%, but also noting how high above target this is.

There seems to be a determination to keep inflation down, even as we enter a recession. Good news for savers, less good for borrowers. A high risk move, but I do trust the BOE members intelligence and integrity; let's hope they are lucky too.


Old BE said...

One of the "lessons" we need to learn is that inflation-only targeting isn't ideal. Perhaps we can devise some system which includes overall stability and not allowing bubbles to develop. The central banks got the low-inflation era wrong, let's hope they don't get the correction wrong as well.

Time for the chancellor to make some quick changes to the regime?

CityUnslicker said...

What you mean Labour do something other than in-fighting...it seems doubtful at the moment BE.

Old BE said...

Maybe Mr King could do something to precipitate things then, such as cutting rates?

patently said...

I don't care whether they have any intelligence or integrity.

So long as they have luck.

Bill Quango MP said...

Inflation was pushed up by the energy price rises of 35 - 40 % for most households and businesses last month. Mr King must know this?
Those rises are very unlikely to be repeated next month [ thank the stars].

The retail numbers are declining and only the mid-lower market supermarkets are doing well enough to warrant a windfall tax.

Poundland / ideal shopping /French connection / John Lewis / Dunelm Mill/ Debenhams all reported in the last few weeks. All down trading, but as yet not disastrous.

A boost for the economy is needed and needed soon, or some of the "hanging on's" will fall off.

Bill Quango MP said...

O/T But how is the government allowed to just sack people from positions? Without a hearing,a representative, a disciplinary hearing by a non interested party, a court case,a presentation of evidence, a mitigation hearing, a discriminatory screening interview, a compensation tribunal, union representation, discussions with an employment lawyer etc?
You can't just go around chucking out forestry commissioners because you don't what they say.

Haven't the PLP heard of the EU?
Social Chapter, employment rights, unfair dismissal? Come on Gordon, you only signed it a few months ago in Lisbon, you must remember.

It takes at least a year to dismiss anyone from anything no matter how useless they are.
Surely that's the real reason Mr Brown is still there?

Man in a Shed said...

Interest rates, especially when income tax is added, are neutral to negative now. Drop them and its savings destruction time.

Back to the 70s !

AntiCitizenOne said...

Blue Eyes.

The regulator needs to increase reserve ratios in response to credit creation and interest rates in response to credit demand.

We don't currently do the first.

Anonymous said...

LIBOR is at 6.5% so why the hell would they reduce interest rates at the BoE? The BoE is now redundant. The market has de-coupled itself from central interest rate setting and is finding its own level, taking your own mortgage with it. Fact is that the banks need to put interest rates at about 10% to get a decent return on their investments without forcing ever more debt onto third parties - because they CAN'T froce more debt on third parties.

The only thing the BoE would achieve by lowering interest rates at the lender of last resort would be to act as a source of incredibly cheap finance for the banks with huge holes in their balance sheet while they themselves are charging huge rates of interest on their loans. But even that won't work because the banks will merely be moving their debt arond and their balance sheets will still be shot to pieces.

A lot of people are going to lose their homes. A lot of people are going to lose their jobs. Forget about what you have known about finance over the last 30 years. We are in an entirely different game now. The macro-economy is going to take a huge stick and beat us with it for the next five years and there is absolutely nothing anyone can do about it.

Glum, yes, but it's the truth.

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