Comments: Time for steady nerves on rates

No matter what, raising interest rates is never the answer is it David? I note your predictions for inflation have been way off of late, as they have been been for oil.

The bank has a inflation target. Inflation goes up, then the repo rate goes up. Simple.

I understand that you are contemplating future moves in interest rates as justification for your argument. But then again, you have been unsuccessful of late in managing this.

Have you become blinded to the upside inflation risk? Your recent performance suggests it is.

P.S. I don't want to hear the no-one else predicted this excuse.

Posted by Sinhale Shah at July 23, 2006 01:12 PM

The Bank, as Sir John Gieve, one of its two deputy governors, pointed out last week, has discovered something interesting about inflation. When there is pressure from some sources, such as rising energy costs, it is offset by an apparent reduction in price pressures elsewhere, keeping inflation close to target.

What a surprise, even though it seems inflation is spiralling out of control and the cost of living increasing hugely on a daily basis, the CPI basket magically comes in right on target. Not that it's rigged or anything, Brown would never do something like that, being our best chancellor ever and all.

Posted by bah at July 23, 2006 03:47 PM

Quote. "The bank has a inflation target. Inflation goes up, then the repo rate goes up. Simple." .... And economically literate.

(a) Monetary policy operates with a long lag. What matters is not inflation now but what the Banks expects it to be in 18-24 months time.

(b) A big rise in oil prices was the very situation when it was envisaged, not only that inflation would go above target, but that it would go outside the letter-writing range. The surprise is not that inflation is high, it is that it is so low.

(c) As everybody forgets, the target is symmetrical. A couple of months above target, after years below it, and everybody starts running round like headless chickens.

Posted by David Smith at July 23, 2006 04:05 PM

David,
I'm fascinated then to know what you think lies ahead for European integration after Lordi's Eurovision win this year. Mind you there was that piece on the BBC website about how we should all be more like the Finns.

Posted by Jonathan at July 23, 2006 06:34 PM

Quote. "The bank has a inflation target. Inflation goes up, then the repo rate goes up. Simple."

I don't think those who understand MPC policy will disagree that they primarily have an inflation target. As a result, higher inflation figures will translate at some point to a higher repo rate.

As usual the argument boils down to what one believes inflation will do over the coming months. David, I do feel that you underestimate the dark side of the force and that inflation will climb higher. Our abnormally lax base rate world seems to be tightening up all around us, and I'm fairly certain we won't escape the noose so easily. Well, I guess only time will tell...

P.S.

It can't be easy David to put predictions in print and face the criticism when we don't get things right, particularly on a national level. But well done for having the gall to put your ideas on paper. I don't always agree with what you've written, but then it does provide food for thought.

Posted by Werewolves at July 24, 2006 12:28 AM

Interesting to see the ITEM club argees with David (Or David Agrees with them

http://www.thisismoney.co.uk/news/article.html?in_article_id=411015&in_page_id=2

Despite inflationary risks from high oil prices, the report said there was 'probably enough slack in the UK economy' to allow the Bank's Monetary Policy Committee to keep its base rate at its current level of 4.5%.


While inflation reached 2.5% last week, the Item Club said the figure was likely to fall below its 2% target from the middle of next year and average 1.8% in 2008.

http://www.ey.com/global/Content.nsf/UK/Economic_Outlook

Posted by Kingofnowhere at July 24, 2006 08:32 AM

There is very little case for raising rates.

Firstly there's the massive risk to the housing market which has been foremost in the MPC's thoughts since last year's August cut to bring about the soft landing. The plates are still spinning and there's work to be done still!

Also there's the World Cup effect which skews the inflation figures. I know that in the run-up to England vs. Ecuador match, I rushed out and bought a new car, and a loads of those little England flags. It's paramount that these impluse purchases are not included in the equation.

Posted by Grahame Woolfson at July 24, 2006 09:37 AM

HI David

Seems moneyweek think your only reason is that the BOE hasn't prepared the markets. Doesn't Merryn Somerset Web write in the Sunday times, I would have thought she would have read your articles? Perhaps not, because shes been predicting a house price crash since 2002 ;)

http://firstrung.co.uk/articles.asp?pageid=NEWS&articlekey=2539

And indeed, the only reason that The Sunday Times could find for the Bank not to hike rates is "because it has not prepared the markets to do so."

Posted by Kingofnowhere at August 2, 2006 11:04 AM

Didn't work out too well for you there, did it David? Rates up!

Posted by Borat at August 6, 2006 10:45 AM

Thanks to Borat for bringing us the news of the rate rise. I think it's called stating the b***ding obvious.

As I said in this piece, the case for a rate rise was an easy one to make. The case against was more subtle, and it went beyond the fact that the Bank had not prepared the markets. On this occasion the Bank went for the unsubtle approach. It won't do any serious harm, though the handling of it has done nothing for the Bank's reputation.

Posted by David Smith at August 6, 2006 12:17 PM