Wednesday, October 11, 2006
That King speech in full
Posted by David Smith at 11:00 AM
Category: Thoughts and responses


Depending on which paper you read this morning, Mervyn King was either hinting at higher interest rates next month, or offering borrowers a reprieve. This despite the fact that he said he was not offering hints in either direction. Read the speech yourself - it is rather good.


mr smith why would us dollars holders be worried over the continuing current account deficit when the markets are willing to buy united states treasuries at a yield of 4.7%?

Posted by: richard at October 11, 2006 03:31 PM

They might not be - but the bigger the deficit, the more they'd be concerned that the dollar must at some stage fall, and these can be self-fulfilling prophecies. When the tide turns even very high interest rates don't stop currency crises. It may not happen for the dollar this time, as long as the deficit doesn't get much bigger. But it has happened on plenty of occasions in the past.

Posted by: David Smith at October 11, 2006 03:44 PM

It is interesting, however what surprised me (I know I am going to sound like a record stuck in a groove here) was the lack of any mention of the impact of public sector spending and wage settlements on inflation. I find this very strange as the public sector accounts for around 40% of GNP and directly employs over 20%.

Surely public sector policy and decisions must be a major factor, yet Mervyn King didn't mention ths once.

David, what's your opinion on this?

Posted by: HJHJ at October 12, 2006 09:27 AM

mr smith i am much obliged to you for the reply.

Posted by: richard at October 12, 2006 09:37 AM

On the public sector: I've debated this with the Bank before and received a long explanation about why they concentrate on the private sector, because it - the market sector of the economy - is the one influenced by monetary policy. But I agree with you that there are significant spillover and crowding-out effects from public to private sectors.

Posted by: David Smith at October 12, 2006 09:52 AM

Thanks David.

I understand why they concentrate on the effect on the private sector, because that's all they can influence with interest rates. But to not mention the public sector as an influence on inflation seems extraordinary.

It makes you wonder how independent the BoE really is (as Gordon Brown makes the key appointments). It would be career-limiting for Mervyn King to say "We have to put up interest rates to squeeze the private sector because of an inflationary effect caused by the public sector" wouldn't it?

Posted by: HJHJ at October 12, 2006 10:09 PM


Thanks for the link. As you say the speech is rather good. Open and candid, it is welcome to see a speech which has I suspect deliberately put in laymans terms to attract a wider audience.

A clear message that I have noticed emerging from the MPC, collectively and individually, is that we should not put down the last decade of stability entirely to the wizardry of the MPC - a lot of it was down to luck and forces outside of their control. The uncertainty of the unknown things we do not know, and the unlikelihood of being able to be consistently lucky, seems to me a message that they are keen to get across.

What was noticeable for me was the inclusion of the impacts of globalisation and migrant labour - what perhaps previously was seen as a factior is now being seen as one of the main factors in determining inflation. What was missing was any comment about house prices - which at a time when they appear to be taking off again was surprising.

My favourite theory of non linearity states that one rarely moves from a to b in a straight line. One tends to stay at point a for a prolonged period before events trigger a rapid adjustment (often characterised by a series of shocks/ events in rapid succession) to point b. The longer one stays at point a the greater the speed and size of the adjustment to point b. We have currently been at point a for a very long time!



Posted by: David at October 15, 2006 11:32 AM

Interesting. The alternative view is that stability breeds further stability. Economic agents expect any departures from the norm to be temporary and so do not act in a way that would amplify the initial disturbance.

My slight problem with all this is that the Bank has been crying wolf almost from the day it was granted independence, pointing out that the good fortune was unlikely to last. One day that will be right but not necessarily now.

Posted by: David Smith at October 15, 2006 08:51 PM
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