Sunday, December 02, 2007
Shadow MPC votes to cut - and some members demand drastic action
Posted by David Smith at 08:59 AM
Category: Independently-submitted research

The outcome of the latest Shadow Monetary Policy Committee (SMPC) monthly E-Mail Poll (in conjunction with the Sunday Times) is set out below. The rate recommendations are made with respect to the Monetary Policy Committee’s (MPC’s) Bank Rate decision to be announced on Thursday 6 December.

On this occasion, four SMPC members voted to leave Bank Rate unchanged on 6 December, while five members voted for a reduction. Somewhat unusually, the rate cutters were split, however, with three wanting a reduction of ½%, but one wanting a cut of ¼%, and another a more aggressive cut of ¾%. It could be argued therefore that the SMPC had voted for a ½% reduction with a five/four majority, on average, although this oversimplifies the more nuanced debate set out below.

All of the SMPC members concerned were aware of the uncertainties created by the global credit crunch and the associated danger that this could lead to a sudden cracking of the robust UK economic conditions reported for the third quarter of this year, when much of the official data expires.

Comment by Tim Congdon
(London School of Economics)
Vote: Cut by ½%
Bias: Wait and see

Long-run money/income relationships are difficult to interpret given the current short-run uncertainties. The November 2007 Financial Statistics came in the post this morning and I thought I would check how much the crisis had affected the size of the sterling inter-bank market. The answer is that UK banks’ sterling inter-bank assets fell from £639.7bn at the end of August to £248.6bn at the end of September. No doubt much of this was the cancellation of off-setting lines, but banks that have traditionally been net recipients of inter-bank funding are being squeezed savagely. There is so much to say, but the restoration of banking ‘normality’ is essential.

My verdict is that – at current interest rates – the stock of UK bank lending to non-banks, and hence the level of bank deposits and the M4 money measures, might even fall for a month or two at some point in the next six months. The Bank of England and the Financial Services Authority (FSA) plainly don’t know what has hit them. I am in favour of a ½% cut in base rates. (Incidentally, my forecasts that this cycle would end with rates of 6% or above has been correct, in terms of inter-bank rates, although I could never have dreamt the precise circumstances. For those who are interested, UK banks’ balances with the Bank of England jumped from £16.8bn at end-August to £24.1bn, which would imply a surge in M0 if it were still being calculated. To me that simply shows the irrelevance of M0, but no doubt there are other views.)

The main reservation here is that a ½% cut in base rates might trigger a 5% or so fall in sterling. That is why it would be better for the Bank of England to restore the normal working of the inter-bank market by supportive money market operations, but my verdict is that the relevant officials are reluctant for the Bank of England to appear particularly active in the money markets. Major improvements to the 1998 Bank of England Act are needed.

Comment by John Greenwood
(Invesco Asset Management)
Vote: Cut by ¼%
Bias: Cut more if economic conditions deteriorate further

The credit crunch of the past few months has dramatically changed the economic outlook. With house prices now clearly falling, CPI inflation close to target at 2.1% in October (and recently below target), retail sales declining by 0.1% in October, real GDP growth slowing to 0.7% quarter-on-quarter in 2007 Q3, and business investment flat in the same quarter (albeit up 4.6% on the year), the economy is much closer to a tipping point than in any period in the last few years. These data on activity and inflation are supplemented by weakening money and credit data. In October, sterling M4 broad money rose only 0.1% over the month, and slowed to 11.8% on the year, while total lending also slowed sharply.

Meantime, in November short-term money market rates have risen again to new peaks with three-month sterling London Inter-Bank Offer Rate (LIBOR) above 6.5% and 2-year credit swap spreads (the difference between inter-bank lending rates and equivalent maturity Treasuries – a measure of risk aversion) rising above 110 basis points compared with normal levels of 30 basis points. These signs of stress in the money and credit markets imply further weakness ahead both for economic activity and inflation. As yet there is room for doubt as to the certainty of economic weakening because symptoms of the preceding euphoria still persist – for example in some of the commodity markets. Nevertheless the Bank of England needs to move now to get ahead of the markets by lowering rates. I would cut rates by 25 basis points, with a bias to cut more if economic conditions deteriorate further.

Comment by Ruth Lea
(Arbuthnot Banking Group and Global Vision)
Vote: Hold
Bias: Towards cuts

Much was made in the media about the recent marginal downward revision to the GDP data for the third quarter. Instead of a 0.8% quarterly increase, as originally estimated, GDP growth was estimated to be “only” 0.7%. But this number was still strong and hardly suggested that the economy was suffering from any serious effects of the credit squeeze, which developed in August, during that period. The increase in domestic demand was over 1.0%.

The recent economic news has, however, been much less comforting. Most survey evidence, including that from the Bank of England’s regional agents, has been negative. The housing market is beginning to look very ugly. The British Bankers’ Asociation (BBA) mortgage approvals data for October slumped. But the progressive introduction of the excessively bureaucratic Home Information Packs (HIPs) has probably had a negative impact on the market, though at this stage it is impossible to judge just how significant the impact has been.

In addition, the equity markets have been extremely volatile and look expensive in the current economic climate. It can fairly safely be said that the bull market is over. The inter-bank market remains far from normal and, given the Bank of England’s apparent reluctance to “normalise” it, there will surely be further turns in the credit squeeze on households and businesses – especially on high risk households and on smaller and riskier businesses. These domestic developments, along with the undoubted slowdown in the US (the UK’s most important individual trading partner), clearly threaten Britain’s growth prospects. But the speed and the extent of these negative impacts on economic growth are unusually uncertain.

There are, however, not just growth risks. There are also inflation risks, which present the Bank of England with a dilemma. Producer prices inflation has recently picked up, not least of all reflecting the rapid increase in oil prices. CPI inflation has also risen. Under these circumstances, I vote, on balance, for no change in December – but with a strong bias towards easing.

Comment by Andrew Lilico
(Europe Economics)
Vote: Hold
Bias: Neutral

I believe that this is a moment for masterful inaction. I can understand the temptation to cut in the face of a building second hump in three-month interbank rates indicating a second phase to the credit squeeze, and other data indicating broad money growth slowing very rapidly. But the MPC's mandate is to meet its inflation target - all other matters are secondary. Perhaps they should not be, but that is a policy matter for another time. And inflation is currently above target, is projected to go further above target over the next few months and to stay there for a whole year, and presents a risk of going above the 3% threshold early next year. It would be potentially disastrous to combine a significant squeeze with further lost credibility from going above 3% and to face a scenario of raising rates materially at the same time as broad money growth collapsed, house prices fell, and GDP slowed.

Further, although the credit squeeze is clearly having an effect on financial markets, and may well feed through into lending for investment as well as private consumption, it is still far from clear what negative real impact this reduced willingness to lend will have. It has been thought for some time that consumers had over-borrowed, and some degree of retrenchment may well be economically positive. That is not to say that one should let matters run out of hand - I'm not proposing an Andrew Mellon strategy. But I think that a panicky response is as likely to damage confidence as to underpin it. For now, as far as we know, all there is is retrenchment and a temporary stalling in credit, and at the same time we must have a concern about above-target inflation for the near- to medium-term. Unless matters go spectacularly badly - say, large stock market falls, or a large fall in oil prices - I would urge that rates be held at least until February, when we can think again with clearer heads and more data.

Comment by Patrick Minford
(Cardiff Business School, Cardiff University)
Vote: Cut by ¾%
Bias: Cut by a further ¾% in early 2008

It is difficult to understand why the Bank is proving so slow to respond to a situation that has been eminently predictable since September at least. It is obvious that the interest rate the Bank should be trying to fix under their 'interest-rate policy' is the market rate for the private sector, roughly speaking the inter-bank rate. (It can hardly wish to target the government borrowing rate!) Well, this rate has gone up since August from 5.75% to around 6.5%, equivalent to a 75 basis point rise in Bank Rate. Yet the Bank which never intended this to happen in August has sat idly by.

It is true that third quarter growth was strong; but that reflected history before the banking crisis and this accompanying rise in rates. The rumblings and gnashing of the credit crunch have been loudly audible since then. For Mervyn King to tell us suddenly, in the week of the Inflation Report, that growth looks 'threatened', with strong consequent downward pressure on inflation makes the Bank look like fools. It had been obvious weeks ago.

I regard the Bank's behaviour as highly irresponsible, just as I regard its behaviour during August and September as both irresponsible and neglectful of a century of monetary teaching from Bagehot on. It is time for some sense to prevail. Rates need to be cut by 75 basis points at once to stabilise a fast-deteriorating situation. This, by the way, would just get us to where the Fed has already moved, in offset to the unintended rise in market rates. From then on rates will need to be cut further; I would like to see market rates at 5% quite soon in 2008. That implies, with the interbank risk premium at present levels, another 75 basis point of cuts early next year.

Comment by Peter Spencer
(University of York)
Vote: Cut by ½%
Bias: To cut

The credit crisis - which seemed to be resolving itself a month ago - is intensifying. UK inter-bank market rates have moved back up to a premium of 75 basis over base rate in the three-month area. This premium acts as a lightning rod, revealing the stress the banking system is under and transmitting this to other sectors. It reflects both counterparty risk and the pressure on bank regulatory capital posed by loan losses and the need to take Structured Investment Vehicles (SIVs) and other off-balance sheet vehicles back on board.

The bank reporting season could help to solve the problem of counterparty risk in the banking system, but will do little to resolve the problem in the hedge fund and SIV sectors, which remain completely opaque. It will do nothing to ease the pressure on regulatory capital. This pressure might be eased by by halting share buy-back programmes and floating subordinated debt. However, it will probably take large rights issues to solve this problem quickly – and it is hard to envisage banks engaging in these in the current environment. Short term, it seems they have little alternative to slowing the growth of the balance sheet by cutting back on inter-bank and other lending. The authorities may have to relax the regulatory regime just as they did for life insurance companies in early 2002.

As long as these pressures remain, banks will restrict the flow of credit to other sectors and make it more expensive. It is hard to estimate the effect this will have on the economy, since it is hard to find any recent precedent. The closest is perhaps the Savings and Loan (S&L) crisis that hit the US banking system in the early 1990s – when it took two years of low interest rates to recapitalise the banks. However, many companies borrow at LIBOR and other rates that move automatically with inter-bank rates, so their interest charges have already gone up. Average corporate borrowing rates are already 2 percentage points up on the year. The last time we saw this kind of increase (in late 2004) business investment growth fell back from 9% to below zero within six months.

My main concern is for small and medium-sized enterprises (SMEs) that tend to rely on their banks for medium-term finance. They are probably safe at the moment, but what happens when this is due for refinancing in say six months time? Many of these are in household goods and other sectors that have done well on the back of the cheap and plentiful flow of credit, areas that will surely be sensitive to a consumer slowdown. My worry is that the bank will take one quick look at this and simply say sorry.

The UK economy went into the crisis with a strong momentum, but is now decelerating sharply. Business confidence surveys fell back right across the board in October. Advance indicators of the housing market – notably mortgage approvals and the Royal Institution of Chartered Surveyors survey balances – also point to a sharp slowdown. If effective interest rates remain at these artificially high levels for much longer it is hard to say what will happen. I would cut base rates by ½% immediately to offset the inter-bank premium and bring three month LIBOR back towards 6%. I would then monitor lending conditions very carefully with a view to further reductions.

Comment by David B Smith
(University of Derby and Beacon Economic Forecasting)
Vote: Hold
Bias: Wait and see but tightening remains a possibility for 2008

It is possible to almost pity the MPC at present – if institutions can be pitied - because there is an extremely high probability that any decision they make will be the wrong one. In addition, the potential costs of errors of judgement have risen sharply, with the possibility of a credit implosion and serious recession on the one side being counterbalanced by the dangers of a run on sterling and an upwards ‘gear shift’ in inflation expectations on the other. The big picture is that Britain’s small open economy is heavily dependent on the wider global background. Many people have excessive faith in the ability of the MPC to control events and grossly overestimate the power of modest tweaks in the official REPO rate to influence the real economy.

The lax fiscal background revealed by the October 2007 Public Sector Finances data exacerbates the pressures on the monetary authorities, because of the resulting policy inconsistency. The widespread perception, following the Northern Rock and the missing Revenue and Customs computer disks affairs, that the late Mr Oliver Hardy is now in No. 10 Downing Street, and the late Mr Stanley Laurel in No. 11, also does nothing for the credibility of the wider policy framework or the attractions of sterling for global investors.

With the benefit of hindsight, it is apparent that the ‘Great Moderation’ of recent years was underpinned by a sensible and steady pace of broad money creation at the level of the mature industrial economies as a whole. However, the excessively low real interest rates from 2001 onwards led to an upwards creep in OECD broad monetary growth, an over stimulation of financial markets, and accelerating inflationary pressures in the prices of commodities and fixed assets such as property.

Recent pressures in the international financial markets can be regarded as the inevitable re-entry costs that had to be paid if monetary growth was to be brought to heel and international inflation to be kept tethered at around 2.0% to 2½% or so. Between 1996 and 2005 annual average broad money growth in the ‘core’ OECD area as a whole fluctuated in a remarkably narrow 4¾% to 5½% band, while CPI inflation only varied between just over 1½% and 2½%, despite an oil price which gyrated between US$13.4 for a barrel of Brent Crude in 1998 to a probable average of over US$73 this year (it was US$92.5 on 27 November).

However, OECD broad money growth picked up to average 6¼% in 2006 and a part-projected 7¾% this year (it was 8.1% in the third quarter alone). Such numbers are not consistent with the maintenance of slow and steady inflation in the long run. However, the high level of credibility achieved by Central Banks by the mid 2000’s meant that the longer-term inflation implications of this monetary acceleration have not been anticipated by economic agents, at least so far. This is why accelerating OECD monetary growth had stimulatory effects on economic activity and the price of fixed assets in recent years that, in turn, led to further speculative activity and credit demand.

The hard-line implication that follows from this analysis is that people who go on a credit binge will ultimately suffer a hangover, and that ‘hair of the dog’ treatment by central banks exacerbates this addiction in the long-run, and may ultimately destroy the credibility of their counter-inflationary commitment. However, this does not mean that broad money and credit growth should be allowed to collapse, which is the mistake made by the Bank of Japan’s ‘sado-monetarists in the early 1990’s.

An outbreak of credit rationing can also lead to sudden and powerful adverse effects on economic activity that are simply not incorporated in conventional forecasting models, particularly those employed by most central banks (indeed, one suspects that the downwards adjustments to the Bank of England’s Inflation Report growth forecasts between May and November were largely the result of applying negative residual adjustments to the forecasts generated by the Bank’s model – it would be nice to know). This is an important point where the UK is specifically concerned because the economy appears to have been glowing red hot in the third quarter, when most of the official data expires, with non-oil market sector Gross Value Added (GVA) rising by 0.9% quarter-on-quarter (or 3.9% annualised), to stand 4% higher than in 2006 Q3, and the deficit on net exports of goods and services equalling some 4¼% of the basic-price measure of GDP. The recent easing of the sterling index to 100.9 (January 2005=100) might also be considered as a warning shot across the bows where future inflation prospects are concerned.

There is a widespread assumption in the current interest-rate debate that the present level of three-month interest rates is somehow ‘wrong’ and that the generally noticeably lower official REPO rates are more appropriate to the underlying economic situation. This view may not be entirely correct, however. In particular, if one assumes that the normal three-month real rate of interest in the world as a whole is around 2%, when the OECD output gap is at neutral, and adds on the latest ‘headline’ CPI figures, then this suggests that: the three month rate in the US should be around 5.5%, compared with its present 5.0%; the Euro-zone three month rate should be 4.6%, which is broadly where it is; and Japan’s three month rate should be 1.8%, compared with the observed 1.0%, although this is a somewhat artificial calculation because of Japan’s mildly negative annual inflation rate.

A similar calculation for the UK using my preferred ‘double-core’ retail price measure, which rose 2.8% in the year to October, would suggest an equilibrium three-month rate of 4.8%. However, a freely estimated statistical relationship using data for the past four decades suggests that one might also want to add on the ratio of the balance of payments deficit to GDP, which is presently around 3½%. This suggests that Bank Rate could rise to 8¼% in a worst case scenario, in which overseas investors refused to plug the payments gap with the cheap capital inflows that have been engendered by the attempts of leading economies in Asia and elsewhere to hold down their exchange rates. This 8¼% is most definitely not intended as a forecast in any shape or form. However, it is noteworthy that in the mid 1990’s, when core inflation was around its present level for several years, but the payment’s deficit was much smaller, Britain’s official REPO rate fluctuated around 6% to 6¾%, which is reasonably close to where three month inter-bank rate is today (6.5% on 27 November).

Overall, while recognising that there are serious downside risks to the credit creation process and economic activity, I do not believe that the evidence as yet supports the case for a cut in Bank Rate, and suspect that more damage will be done if inflationary expectations take off, or there is a run on the pound, than will be averted by aggressive rate reductions in the immediate future. Beyond that the only viable policy seems to be ‘wait and see’, while noting that rate reductions overseas stimulate the British economy through the trade account and are to some extent a substitute for rate cuts at home.

Comment by Peter J Warburton
(Director, Economic Perspectives Ltd)
Vote: Cut by ½%
Bias: To cut

During the past month or so, global credit conditions have tightened demonstrably. US credit impairments that were obvious months ago were formalised by a flood of rating downgrades in mid-October. These have forced commercial and investment banks and other non-bank financial institutions around the world to acknowledge further asset write-downs and realised losses. A downward spiral in US house prices, feeding on the escalation in foreclosures, continues to undermine asset quality. Financial losses emanating from the US mortgage market and structured finance are now expected to reach US$500bn with multiplier effects on other segments of the credit system. In short, a profoundly deflationary credit downturn has taken hold.

The implications for the UK economy of this global credit event are becoming apparent, week by week. A small subset of private sector services, including computer services, other business services (legal, accounting, recruitment etc.) and financial intermediating is contributing over 60% of quarterly GDP growth in 2007 Q3. This subset of activities is particularly vulnerable to a setback in global capital market activity and a loss of momentum in credit growth. Declining activity rates in UK residential and commercial property markets add another dimension of concern. Consequently, the UK must be considered one of the most exposed economies to the global credit downturn.

Over the past week, credit traumas have spilled over into the interbank markets in a reprise of the August debacle. Hence, the premiums of interbank rates to base rates in the major currencies have widened again, penalising borrowers in the wholesale financial markets and the swaps market. In the case of LIBOR, it would require an immediate cut in base rate of about 50 basis points to offset this inadvertent tightening. The dramatic events of recent weeks have injected urgency into the situation and my preference is for Base Rate to be cut straightaway by the full 50 basis points. Further interest rate reductions are expected to be required over the coming months. However, the cost of borrowing to businesses and households is unlikely to fall until base rate reductions become material. A sharp deceleration of UK economic activity is expected in 2008, regardless of the likely profile of base rate cuts.

On the specifics of the UK’s inflation target, the October retail price release contained more good news regarding private sector goods and services inflation and more bad news on the collection of administered and exogenous prices such as oil prices and indirect taxes. With annual private sector inflation back to around 1.5%, base rate has scope to fall to around 4.5% during 2008.

Comment by Trevor Williams
(Lloyds TSB Corporate Markets)
Vote: Hold
Bias: Strongly to ease

Growth in the UK economy is slowing, with the Purchasing Managers’ Indices (PMI’s) for services and manufacturing suggesting a decelerating pace. The service PMI was 53.1 in October from 56.7 in August; the manufacturing PMI was 52.9 from 55.1 and that of construction was 57.4 from 60.3. However, the deceleration as yet is neither dramatic nor deep and still supports expansion of around 3% a year. Retail sales growth fell in October, though by only 0.1% and was still 4.4% higher than in the year before. But manufacturing output fell by 0.6% in September and was a little lower than a year earlier, suggesting that a slowdown is underway. This means that there is time for careful judgement about the reaction of monetary policy to the slowing pace of activity.

There are also signs that inflation is still an issue. Unemployment on the claimant count fell by nearly 10,000 in October, as annual wage inflation including bonuses rose for a third month in succession, to 4.1%, the first time since March that it has been above 4%. Moreover, food prices are high, oil prices are rising and so it was no surprise that consumer price inflation rose to an above target 2.1% in the year to October, the first rise since March. Retail price went back above 4%, to 4.2% and RPIX which excludes mortgages went back above 3%. It is no wonder that inflation expectations have not fallen back much, though this is likely to change in the months ahead.

News that UK GDP was revised down to 0.7% from 0.8% in the third quarter looks positive for rate cuts on the surface. But what would likely lead the MPC to conclude that growth was still healthy would be the figures for market sector GVA, which is private sector driven. This showed that the economy grew by 0.9% in 2007 Q3 and was 4% higher than in the same period of 2006. This compares with long term averages of 0.8% and 3.4%, respectively.

But the fact is that the credit crisis does seem to be inducing a deceleration in the growth of the M4 money supply and keeping interbank rates at levels consistent with a base rate of 6.25%. These trends imply that official rates should fall. Moreover, there ought to be some action taken to try and get LIBOR closer to where the base rate implies, by injecting liquidity into the interbank market. With the development of credit markets has come new risks and so new monetary tools and approach are required from central banks to tackle what remains a brutal liquidity squeeze for those have to access interbank markets. The ECB has pointed the way, with repo market activity and acceptance of a wider range of collateral for open market operations. In order to more cleanly focus on inflation and growth, the Bank of England may have to be more creative. I would leave rates on hold in December, but with a clear bias to ease once there is more evidence on growth and inflation trends.

What is the SMPC?

The Shadow Monetary Policy Committee (SMPC) is a group of independent economists drawn from academia, the City and elsewhere, which meets physically for two hours once a quarter at the Institute for Economic Affairs (IEA) in Westminster, to discuss the state of the international and British economies, monitor the Bank of England’s interest rate decisions, and to make rate recommendations of its own. The inaugural meeting of the SMPC was held in July 1997, and the Committee has met regularly since then. The present note summarises the results of the latest monthly e-mail poll, conducted by the SMPC in conjunction with the Sunday Times newspaper.

SMPC membership

The Secretary of the SMPC is Kent Matthews of Cardiff Business School, Cardiff University, and its Chairman is David B Smith (University of Derby and Beacon Economic Forecasting). Other current members of the Committee include: Patrick Minford (Cardiff Business School, Cardiff University), Tim Congdon (Visiting Fellow, London School of Economics), Gordon Pepper (Lombard Street Research and Cass Business School), Anne Sibert (Birkbeck College), Peter Warburton (Economic Perspectives Ltd), Roger Bootle (Deloitte and Capital Economics Ltd), John Greenwood (Invesco Asset Management), Peter Spencer (University of York), Andrew Lilico (Europe Economics) Ruth Lea (Arbuthnot Banking Group and Global Vision) and Trevor Williams (Lloyds TSB Corporate Markets). Philip Booth (Cass Business School and IEA) is technically a non-voting IEA observer but is awarded a vote on occasion to ensure that nine votes are cast.


Comments

In reality though, a cut of 50bps seems unlikely given Merv's comments on inflation concerns the other day. In fact I think a 50bps cut would raise considerable alarm and do more harm than good, and I'd be amazed if the MPC didn't see it that way. Especially given the panic set off by the emergency action over Northern Rock.

Posted by: Minh at December 2, 2007 01:37 AM

This just goes to show that no-one on the shadow MPC has the calibre required to sit on the actual MPC. 75bps?!

Posted by: Sell Everything at December 2, 2007 08:52 AM


Agree with Sell Everything, this lot are ready for the looney bin.

Posted by: Dan at December 2, 2007 10:55 AM

That's just bizarre. The fact that one member votes for a big cut means none of them have the calibre to sit on the actual MPC? Illogical, Captain.

Posted by: David Smith at December 2, 2007 10:57 AM

Well they're just looking at what the US are doing aren't they? And what good is it doing them?

One 0.8% drop in the opinion of house prices from one institution does not warrant panic stations.

We already have an issue with inflation due to the current cost of oil, if they cut the rates, all we will do is feed the inflation monster thats on the horizon.

Petrol £1.02 a litre, I remember not so long ago the country being outraged at 88p a litre.

To a degree it's time business in this country stopped taking a hit on proffits and pass the costs on to the consumer, lets see the how ONS deal with some real inflation statistics.

Why is it that when rates need tightening for good reason, there is always so much caution, but the second there is a smidgen of hint that things are not well, you get people shouting CUT CUT CUT (and one certifiable, calling for -0.75%)

I personally think cutting won't make the least bit of difference, doesn't mean the mortgage rates will come down, there are many many many banks out there worried about who's got the dodgy US bonds, to cut rates now.

Posted by: Dan at December 2, 2007 11:13 AM

Tim Congdon: “The main reservation here is that a ½% cut in base rates might trigger a 5% or so fall in sterling. That is why it would be better for the Bank of England to restore the normal working of the inter-bank market by supportive money market operations.”

Trevor Williams: “Moreover, there ought to be some action taken to try and get LIBOR closer to where the base rate implies, by injecting liquidity into the interbank market. With the development of credit markets has come new risks and so new monetary tools and approach are required from central banks to tackle what remains a brutal liquidity squeeze for those have to access interbank markets. The ECB has pointed the way, with repo market activity and acceptance of a wider range of collateral for open market operations. In order to more cleanly focus on inflation and growth, the Bank of England may have to be more creative.”

These two seem to have the right idea. The problems in the financial markets are problems for the BoE to fix, not the MPC. You’re right, SE, in that the MPC members are not qualified to deal with financial market problems. They should leave the BoE to deal with the markets, sit there and just not do something.

If the financial markets are broken, a rate cut now won’t fit them. If there are going to be mass redundancies in the financial sector a rate cut won’t help. If all that happens is that this ‘effective’ rate rise stays in place another two months, the MPC can do something dramatic in Feb. - after we have the retail, employment, wage rise and bonus data from the year-end.

I thought the last UK rate rise was a big mistake but I'm all for staying put until we know a cut will really do some good.

Posted by: sandid at December 2, 2007 11:34 AM

Calm down. Whether or not you agree with Patrick Minford, there's no need to insult him - he has more knowledge of economics, particularly monetary economics, in his little finger than you'll ever have. I should also add that all the shadow MPC's votes came before the Nationwide released its November house price index.

Posted by: David Smith at December 2, 2007 11:39 AM

Not you, Sandid

Posted by: David Smith at December 2, 2007 11:55 AM


Bottom line I think here is the damage is already done, the dodgy mortgage bonds are already in circulation, a cut of 0.75% won't change that. The banks know it too, which is why I think a cut will make no difference to them as they will have the guard up, by way of stricter lending criteria NOW and for the forseable future, they aren't going to pass on the benefit of cheaper cash to the consumer, I just can't see it happening.

It's not going to be brushed under the rug, and nobody needs need a little fingers worth of Economic Monetary experience to see that.

Posted by: Dan at December 2, 2007 12:08 PM

"Whether or not you agree with Patrick Minford, there's no need to insult him - he has more knowledge of economics, particularly monetary economics, in his little finger than you'll ever have."

I don't think I 'insulted' Patrick Minford. But, David, if you're dishing out diktat, maybe you should follow it too? To insinuate we are ignorant IS an insult.

I'm becoming increasingly puzzled about why you run this website? Is it to promote a healthy discussion about current economic matters, or is it just a forum for people who agree with your opinion?

Posted by: Sell Everything at December 2, 2007 02:33 PM

We've eonly got money supply increasing at 13%. What we need is 20 or even 30%. That should make everything better.

Cut now and cut hard.

Posted by: Ian at December 2, 2007 03:28 PM

In my book, saying people don't have the calibre to sit on the MPC, or that they are "for the looney bin", or "certifiable" count as insults. Energy and food pose upside risks to inflation in the short term, as everbody knows. The question is whether this is outweighed over time by the slowdown, the scenario the Bank set out in its November forecast.

As for the money supply, Tim Congdon wouldn't be urging rate cuts if he didn't expect a sharp slowdown in broad money growth, as he says.

Posted by: David Smith at December 2, 2007 03:51 PM

Please remember that Patrick Minford is a long-time rate-cutter, and has been opposed to most of (if not all) the rises this phase. What is new is that the uber-monetarists have switched dramatically, from supporting further rises to cutting. If you read Patrick Minford's previous comments in the SMPC minutes (and if David could link them it might be easier), you would see he has been consistent.

Posted by: paulbiv at December 3, 2007 01:21 PM

Yes, consistently wrong.

Posted by: Sell Everything at December 3, 2007 01:44 PM

Hmmm MPC target inflation, yet we have huge energy and food inflation occurring, as well as shelter over the years. So what is being asked

oh cut rates Mr King (don't need to ask Blanchflower as I'm sure he's creaming at the thought he'll get his way at last!)

Pathetic. I hope the less well off riot, when they realise their wages are not going up, and they can no longer afford to eat or get to work!

Posted by: Kev M at December 3, 2007 07:29 PM

Ah, class war and monetary policy. I don't see an outbreak of rioting on the streets if the Bank of England cuts interest rates.

Anyway, Patrick Minford has expanded on his views in the Telegraph: http://www.telegraph.co.uk/opinion/main.jhtml?xml=/opinion/2007/12/04/do0402.xml

In terms of linking the previous shadow MPC minutes, a simple search should bring them all up on the site.

Posted by: David Smith at December 4, 2007 12:46 PM

HI David

Maybe no rioting on the street, but I expect the message boards will be throwing verbal Molotov cocktails, at the MPC.

Posted by: kingofnowhere at December 4, 2007 09:20 PM