Wednesday 14 January 2015

Only a fool would raise rates that is what the Bank of England are thinking about!

I have seen a lot of counter-deflation stories written as UK official inflation falls to 0.5% and the Eurozone teeters on deflation.

Deflation is not a great situation for the Country when we have such high public and personal debts; it means we have to pay them back. And in reality, no one likes to do that - they would rather have them inflate away over time. The net change is the same, but that's humanity for you as Hobbes nearly said.

Some commentators, including a chump called Ian Mcafferty who is on the Bank of England (BOE)Monetary policy committee, are trying to say raise interest rates now.

After all goes the argument, we have a zombie economy and people are too used to low, artificial, rates. Raising now they could cope with and we could put our economy onto a more sustainable footing plus ward off problems caused by wage inflation now that unemployment is a lot lower.

Oh dear, why can't economists ever change from their deeply held views when the facts change. When inflation for 4% and interest rates 1%, they had a point. When inflation is dropping and likely to fall further they world is a different place. There has a a huge inflation negative external shock from the drop in oil and other commodity prices.

There will be no inflation for months, maybe the whole year. Wage inflation is low, because companies are not doing well as demand has not recovered from the 2008 bubble pop. Neither exports or consumer demand is getting better. Debt is starting to rise because it is cheap and this is helping boost the economy a bit.

Raising rates now would stop the only growth there is dead, the EU could easily end up back in recession at the end of 2015. This will pull the UK down further and to below trend rate growth. Also we already have QE, we could try to unwind some of that first anyway which the BOE conveniently ignore, hoping it will be forgotten by everyone and then monetised at some distant point in the future.

I really hope the BOE improves under Mark Carney as the place was a totally car crash after Eddie George handed over Mervyn King who oversaw the worst ever crisis in 300 years, whilst never taking any of the blame at all! There is much to do though as they can't even seem to do basic analysis properly from their Ivory towers.


BE said...

Agree, as usual.

As Peston points out, we are also likely to import (proper) deflation from the Eurozone, as the Eurozone deflates and even if it reflates. Either way the Euro is likely to fall against the Pound and Eurozone industry will try to dump their products on the rest of the EU market.

So if anything we ought to be doing more QE now, to get the Pound down pre-emptively.

I have got interested in NGDP targeting, and more learned people than I seem to suggest that after a long period of stagnant NGDP it would be a good idea to have a few years of above-trend NGDP growth. The UK is finally hitting the supposed 5% sweetspot, so it would seem very Japanese to try and nudge that back down again just as we are getting going.

It is much much better for inflation to get to 3% than it is to fall to -1%.

hovis said...

Ian Mcafferty is obvious taking over "the one size fits all, we must raise rates because I don't have a clue" mantle from Andrew Sentance, a moron who has been proved wrong over and over again.

Budgie said...

Up to a point, Lord Cu.

A lot depends how fast the reduced inflation disappears from the annual figure. For example, petrol prices started on the current downward trend in August 2014, so some of it will cease to appear from September 2015. It is true that many other prices have yet to figure in, so "deflation" is a possibility. It is finely balanced.

Whilst the halving of the oil price is supply and demand driven, there is an unhealthy dose of political manoeuvering added. And this could change overnight, upsetting all our assessments.

In the meantime the knock on effect will boost the economy (UK, not Scotland's) by putting more money in people's pockets. This will tend to be spent, rather than saved due to current low savings rates. Extra demand on a still fragile UK economy will tend to increase prices (and imports).

There is a delay but a 9% annual increase (estimated from graph) of the M1 money supply over two years has to go somewhere. Extra demand and increased money supply lead to inflation. And strictly, from a monetarist perspective, a downward trend in the price of oil per se, though it uniquely has a wide knock-on impact on the whole economy, is not deflation.

BE said...

Focus on one money measure is soooo 1980s..!

As inflation falls, real rates rise. Even at their rockiest bottom, mortgage rates of 1-2.5% are a big multiple of the rate of inflation. (BEMarketWatch: a 50% LTV might get you a 1% mortgage rate if you are very lucky, 2.5% is quite common for BTL and FTB mortgages at the moment.)

Jan said...

They always seem to be behind the curve and could hsve raised rates earlier whereas now as you say is not a good time.

Do you really think they are planning on paying back the QE?..I don't. I think they are quietly hoping it will get forgotten about.

By the way Merv and his cronies are sitting pretty on their RPI increasing pensions so they are happy.

I suppose the one good thing about the present scenario is that the debt interest we pay as a country is much lower than it would have been with bonds at the level they are. I've no idea what the figures for this are and as you say there is the temptation to borrow even more which would not be a good thing.

hovis said...

Jan: no they don't intend to pay QE back.

As I recall using a measure of Money is ok as a backward looking indicator, but as a forward policy tool it didnt/doesn't really work.

BE: agreed, excellent point@real rates.

More generally:
Actually read the Mcafferty link now, he really has been drinking the Koolaid as ou US cousins might say - he actually believes its a glorious recovery.

Look up the Bradbury pound and the current desire by some to bring it back. I don't like the idea that a govt monopoly on money creation is some how better than a private one (both corporate entities), but the Positive Money campaign, have some valid points about essentially a broken system.

Steven_L said...

They won't raise rates until after the USA do.

Don't ask me when the USA wil as I haven't the scoobiest.

Budgie said...

BE, Soooooo what? Date phobia is not a valid argument. We have had just one set of low inflation figures, and that for a specific market price reason, so it is a bit too soon to panic about deflation. We may well see classic deflation in the eurozone, but it is less likely in the UK because of the strong growth in M1.

Silver surfer said...

Banks are in a difficult position.

1. Employees want wads of cash for making the same judgment errors as economists.

2. They are sitting on wodges of distressed debt built up from 1.

3. They are their limit for mortgages as no-one is building enough.

4. They need to increase yields on 2 so the can pass them onto the new pensioner victims that will suddenly have all this cash which they need to place somewhere.

5. See 1

Anonymous said...

I think Cu is 37

Silver surfer said...

"If you dont we'll you'll have your throats cut"

New banking terms and conditions for late payment of debt.

But you have a point. Why I am wealthy just because I bought a house and lived longer than you?

CityUnslicker said...

You lost me my thruthful name? You think interest rates should go up as theat will help repay debts?

Or that taxes should (fine, they will whoever wins)?

How is that related to the BOE being run by a bunch of fuzzy headed nincompoops?

Jer said...

In fairness, there's never a bad time to introduce terms like "Uber-bum-fuckery", and never a bad time to exhort for LVT.

Weekend Yachtsman said...

Low inflation?

You mean our savings won't be stealthily siphoned off by the State, and people who've borrowed too much (including governments) might actually have to pay it back?

Well excuse me while I wipe away these crocodile tears.

MyCuttingName said...

CU said - "You lost me my thruthful name? You think interest rates should go up as that will help repay debts?"

Yes I think rates should rise. These debts are unpayable by the holders even if held to maturity, moreso now in a deflationary environment.

"Or that taxes should [go up] (fine, they will whoever wins)?"
Taxes on assets, on earned income (paye) they should be be reduced to as near zero as possible.

"How is that related to the BOE being run by a bunch of fuzzy headed nincompoops?"

Silver Surfer said -
"But you have a point. Why I am wealthy just because I bought a house and lived longer than you?"
Indeed. The real issue is do you want private wealth in your old age, or public wealth (infrastructure, health care, etc..)
Which has more value? To you personally, its probably personal wealth, but for the benefit ofthe country its got to be public wealth.
Thus, private wealth ('assets') must be taxed, and heavily, for the good of the whole nation, else we are cutting our own throats.