Monday 22 December 2014

So no rate rises in 2015 after all then

It is quite a thing the Zombie economy created by the crash of 2008 and the crazed Blair government of the early naughties.

On the one hand we seem to have £100 billion in excessive government spending on welfare and the NHS which seems unbridgeable with much lower growth baked into the economy along with long-terms constraints on pay due to productivity being lower and immigration meaning there is an over-supply of labour.

Then there is the impact on the monetary economy. When the Banks were short of liquidity - and the economy to, the UK splurged £350 billion in quantitative easing and dropped interest rates to 0.5%. This should have driven up inflation, but the sheer destruction of money caused by the losses on financial assets seems to have prevented this.

So, with oil prices and commodity prices falling there is every chance the UK may experience deflation early next year rather than inflation.

Since 2010 analysts have always said the first inflation rises are six months away. Typical analysts really when it comes to forecasting the future, all agreeing about some fuzzy movable point in the future.

At the end of 2014, fully 4 years after rates were to have risen and indeed 'normalised', we are further away than ever from rates going up. In fact, it is hard to make any case at all to raise rates next year - potentially to cool a housing bubble, but that would be a very blunt tool for that job.

It seems there will be no interest rate before or indeed after the election. We will have record low rates for the meantime with all the benefits and problems that it causes. The Zombie economy will continue as the UK follows the 1990's and early 2000's path of Japan to a pancake economy with ever rising public debt.


Demetrius said...

Pancake Economy, I like that one. But what happens when it is time to flip the pancake?

Timbo614 said...

There are lots of broken (nest) eggs lying around and if all the doomers are to be believed there will shortly be more tossed on the heap.

P.S. my tossed pancakes normally end up half in and half out of the pan, so half of the economy will be in the frying pan and half in the fire.

Remember: you can't make a pancake without breaking some eggs!

dearieme said...

Pancakes? Easy peasy lemon squeezy.

Budgie said...

CU, I like your analysis. But I think that QE was needed also because of a reduction in the velocity of money, not just the loss of "wealth".

Oil and commodity prices (costs) will have some knock on effect in lowering retail prices, but often materials are only a relatively small contributor. Some prices will therefore fall (petrol) but others will hardly be affected (electricity).

This is not deflation, which by definition is a diminution in the money supply, but will create a feelgood factor. Just in time for the election. Though I very much doubt Osberon had any hand in it at all.

Nick Drew said...

Budgie, the leccy price is set to fall as well, because gas and coal are falling with oil

except in countries like Germany where the wholesale price has more or less bcome independent of reality / fundamentals, and the retail price is stacked with 'green' imposts to a remarkable extent

Budgie said...

ND, let's see shall we? Since electricity wholesale prices are effectively set by government, and the government is in thrall to the green blob, I doubt if electricity retail prices will fall as much as petrol.

I was in any case making a completely different point - that the fall in oil (and other commodity) prices will not result in across the board, identical, retail price drops. I just picked petrol (because it has dropped significantly already) and electricity (which hasn't), as examples for future price changes.

BE said...

Housing bubble? Seems unlikely given the recent stats.

I agree with you CU, there doesn't seem to be much price inflation in the pipeline to cause a rise in interest rates, although it seems unnecessary to point out that falling inflation and a steady bank rate means that real rates are already rising of their own accord.

To avoid being Japan, we have to ignore the siren calls of the Krugmans et al. to keeping building more roads and rails with printed money.

The state must be shrunk before we can get wealthier.