Wednesday, 14 January 2015
Only a fool would raise rates now...so 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.