Wednesday, 11 November 2009

No hyperinflation then?


The Bank of England has come out today (see chart above) and said that as the economy is recovering a bit quicker than expected, that inflation may increase more than it had previously predicted; All very well couched, as usual.

However, it seems to think inflation is unlikely to go to much more than 2% by 2012 and that interest rates will head to the same level by then.

The BOE has been spectacularly wrong during this recession, keeping interests rates too high; might they have gone gone the other way now?

It is not likely, the high chance of a renewed recession next year is discounted, even when a cursory glance at the banks, quantitative easing and government deficit suggest a very bumpy 2011.

As such UK rates will remain low; don't go rushing to fix your mortgages just yet.

22 comments:

measured said...

Still in deflation mode; that is ominous. I would have thought we would have hit the inflation wall by now. Yes, so many are living on borrowed time.

What can be done if Government will not make spending cuts and in the process is making it worse for us for longer, even if interest rates are low? Still at least the roads are getting fixed while there is money about. That doesn't mean a rocky road doesn't lie ahead though.

Mark Wadsworth said...

I never really believed the hytp-inflation scare stories any more than the deflation scare stories, it all cancels out.

However, am pleased to advise that NS&I now offer just under 4% for a one-year fixed term cash investment. It'd be nice if my interest income beat inflation for a change.

Mark Wadsworth said...

"Hyper" not "hytp", obviously.

It's a good job I didn't mention the fact that you spelled it "hyperinlfation" :)

Bill Quango MP said...

NSI growth bond at 4% MW.
Interesting is that this was paying just 1% in September and was hopelessly out of step with everyone else.
Also, interestingly if you consider the government commitment to send work to the Post Offices,this product has been withdrawn from over the counter sales on the day the rates changed. It is Online only.

Got the internet granddad? No? Not for you then.

CityUnslicker said...

MW - my spelelling errors are legendary! Glad you always pont them out.

electro-kevin said...

This should all time out just as my ten year fix comes to an end.

So that I miss out on low interest and MISS OUT on the protection from high interest that I've paid so much for for so bloody long.

EXQUISITE !

Watch what I do - then do the exactly the opposite.

(I'm looking to upsize my house next)

Mark Wadsworth said...

BQ, the monthly interest, interest access account went down from 4% to 1% between 08 and 09, and has now gone up to 2% again. The 4% is only for one-year fixed.

Budgie said...

Those on small incomes like myself know that inflation has never gone away. I have no mortgage (so don't gain from the lower bank rate); vastly reduced interest on my small savings and food inflation is currently 9 per cent. Inflation will spike again when VAT goes back up to 17.5 per cent. Browned off? - you bet.

measured said...

Food inflation - 9%. I believe it. Btw what's your sauce? sorry..source?

Sackerson said...

I heard garbage years ago from some civil servant about "an envelope of points" as illustrated in that graph. It's arrogance to assume that you know all the possibilities that lie ahead.

Nick Drew said...

Sackers - I believe they get the 'fan' spread using the implied volatility from prices in the options markets, around the appropriate forward curve

(that's certainly true of several of their graphs)

so they are reporting on the 'facts' of the derivatives markets at a given point in time (based on whatever option-procing model they select) rather than forecasting

which is just as well because forecasting is bunk

CityUnslicker said...

I am a fan of the fan too - much better to give ideas of a range than a straight line prediction.

Particularly with the BOE's form on such forecasting.

Kaiser Chiefs said...

I predict a riot

Budgie said...

Measured - Food price inflation: I will try to find the reference. I think it was an article measuring a basket of food shopping in a magazine or newspaper.

Sackerson said...

Nick - what did the envelope look like in mid 2008?

measured said...

@Budgie

I just thought there might be a widely recognised index on this which I didn't know about. The supermarkets are giving less for your money without a doubt. Maybe the BofE will end up eating its words; I feel false markets and real interest rates will be on the menu next year.

Nick Drew said...

Sackers I will try to check but it will be tomorrow pm earliest

Guido Fawkes said...

Yo dude - where's the deflation?

Anonymous said...

Can anyone explain why 2% inflation is regarded as a good thing?

Being a pensioner, I would really prefer it if my fixed income remained fixed, and wasn't inflated away - even slowly - so as to benefit the indigent.

But I suppose that's too much to hope for. I wish I'd bought some gold when Broon was selling.

Anonymous said...

The first job of a central bank is to lie to the public.

You could say that that is one part of their job that they are good at.

Time will tell.

It is almost a cadaver.

Nick Drew said...

Sackers - the path that 'actual' CPI has followed since the Aug '08 BoE report has tracked the very bottom edge of the fan they were showing then - we've reached 2% a full 12 months earlier than they were projecting as their central case

see here, page 8

Monevator said...

Anonymous, the theory as I understand it is besides inflating away debt, a little bit of inflation is good because it encourages capital to be allocated towards more productive assets. Not useful if you're on fixed interest though, I appreciate. :(