Comments: The Bank raises the stakes

What chance of CPI over 3% in the inflation report next week then, do you reckon? And if so, rates up to 5.5% in Feb? Looks likely to me...

Posted by Khaled at January 11, 2007 01:20 PM

I was a little suprised by the MPC decision, believeing they would hold until february and the inflation report, but I believe its good news in that the MPC is serious about keeping inflation firmly under control.

I think most people have a 'feeling' that the cost have living over the last year has been increasing at a much higher rate than offical CPI figures suggest but its taken until the annual round of wage reviews for this slack to be taken up and people can actually take action which they believe is necessary in the form of high wage demands.

I agree with the previous poster that we have a fair chance of seeing 5.5% in the very near future. But all of this is small fry compared to the 10%+ rates we saw in the 90's.

Posted by Eliot Clarke at January 11, 2007 03:49 PM

I think I posted a comment on your site David about 4 or 5 months ago predicting this very move this very month. I think it's exceedingly well timed.
I will argue endlessly that economics is as much psychology as maths. A shock .25% rate rise is infinitely better than a much trailed .25% rate rise - because the Bank's aim is to cool perceived inflationary pressures.
In the past the governor has had some success with that simply by issuing warnings - particularly where the housing market is concerned. The rate cut of 18 months ago, because it was unexpected, had an inflationary effect on the markets, again notably property, out of proportion to its direct financial impact.
Better small moves, but unexpected moves to achieve the shock factor that a .5% move to achieve the same effect.
I also predicted in that same post 6% rates by year end (or possibly early 2008). This was and remains a hunch rather than a firm belief. However I think Mr Eliot Clarke's remark above is most telling. 6% is certainly not the 10 or even 15% rates of 16 years ago. But partly as a result of the explosion in credit again in part brought about by the entry of aggressive US lenders into the UK marketplace in the 90s Britons are considerably more in debt than a decade and a half ago. A rise of 1% over the course of this year could cause far more pain than a rise of 1% in the course of a day back in the days of a Chancellor whose most notable contribution to economy was the purchase of the second cheapest bottle of champagne available in his local off license. (Sorry, couldn't resist).
My prime concern is that rate rises won't restrain those who are fuelling inflation (most notable top end property prices) and they will hurt those who are desperately trying to make ends meet.
So I would urge instead the government to introduce one measure and think about a second.
The first would be to close the loophole to allow non resident but domiciled foreigners who pay no tax on non UK earnings to escape tax on the sale of property here. It is iniquitous. By all means allow rich foreigners to live here without taxing their foreign earnings, but if the make a killing on the sale of their house forgive me but that is an earning in the UK. Tax please.
The second - either some adjustment to tax for high earners (in other words a third band for those earning over 500,000 p.a.) or a shift in VAT so more essential items are duty free while luxury items attract a higher rate of tax.
And David I suspect such measures won't appeal to you - but let's have a bit of a debate about it....
Happy New Year to you sir

Posted by jonathan at January 12, 2007 04:39 AM

I don't disagree with you about non-domiciles and taxing their housing gains - despite some huffing and puffing from the Treasury, they've got away with paying very little tax - even as most people have faced significant increases. I don't know how much this, or your other proposals, would help ordinary folk, or ordinary homebuyers, however.

I must also leap to Norman Lamont's defence. He never bought the champagne from Threshers it was (gulp) a made-up story and exposed as such at the time. He also did pretty well in presiding over the rebuilding of economic policy after Black Wednesday - giving us the UK's first-ever inflation target and an enhanced role for the Bank of England.

Posted by David Smith at January 12, 2007 05:19 PM

Foreigners make up such a small percentage of UK house purchases that I very much doubt an extra tax on their gains would make any difference to the treasury's tax income, or the property market (OK, perhaps it migt have an effect on top-end London, but not a huge one).

Posted by Bill at January 12, 2007 05:41 PM

how many people out there are there who'd leap to Norman Lamont's defence? So much for the old adage of not letting the truth get in the way of a good story.
But as for the two proposals - I'm not sure how much they'd help 'ordinary' folk either, however I think they might take the steam out of the top end of the market and that might have a trickledown effect - and I doubt they'd do anything to hurt 'ordinary' folk. (though I should add I've never met an ordinary person in my life; everyone I've met has been extraordinary in some way or other - even if they don't consider themselves extraordinary).
But a couple of small moves such as ...doesn't preclude other measures. But clearly the psychological impact of the quarter point move only serves to underline that a big part of the job is managing expectations...

Posted by jonathan at January 13, 2007 08:50 AM


Thank you for your recent contributions to the national press regarding the worst public finance status to be taken over by the new incoming prime minister( presumably Mr Brown).

While on the subject of Chancelor Brown, let it be known that the brown stuff seem to have finally hit the fan in the innards of the MPC chambers.

The sneak preview that Mr King has had at the up to date inflation figures, has jolted the nursery staff to start to dispense and forcefully apply nappies to the nasty financial incontinence of both public and private sectors.
One large nappy some six months ago could well have contained the prolonged potty training that will now have to be endured.

Needless to say that this will be accompanied by the usual irrational tantrums and hysterical protests. Best advice for potty training, distract, deviate and break all the rules to distract the subject from its enforced road to full bodily function control........We all will be better of in the long run, after all,....... things can only get better!

Best wishes and fortitude,

Arik Schickendantz

Posted by Arik Schickendantz at January 13, 2007 10:06 PM

Eliot wrote:
I agree with the previous poster that we have a fair chance of seeing 5.5% in the very near future. But all of this is small fry compared to the 10%+ rates we saw in the 90's.

Not when you consider the bottom of the cycle, rates were at 3.5% - 5.25% is 50% increase. Imagine someone mortgaged highly with rates at 3.5%. The debt is static, whilst the interest rate isn't!

Also consider we are most likely not at peak yet.

Posted by Rev at January 15, 2007 12:38 PM
Post a comment

Remember personal info?