The Bank of England has raised UK interest rates from 5.5% to 5.75%, its fifth rate rise since last August.
Its Monetary Policy Committee (MPC) warned that inflation remains a danger, saying "most indicators of pricing pressure remain elevated".
Some analysts have taken that to mean there may be a further rise this year.
The higher rates will add £16 a month to an average £100,000 repayment mortgage, but it could be good news for savers who should earn higher interest.
Charities have expressed concern that higher mortgage costs will leave many borrowers facing difficulties.
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Showing posts with label interest rates. Show all posts
Showing posts with label interest rates. Show all posts
Thursday, 5 July 2007
Why inflation targeting is a bad idea.
Fifteen years ago, the UK exited from the ERM in humiliation. At the time, the failure struck at the very core of the Bank of England’s counter-inflationary strategy. By targeting the pound to the German DM, the bank hoped that it could hold down inflation. However, the Bank couldn’t maintain the target.
In the days following the ERM exit, the Bank of England faced the difficult question of “what now?” It came up with a barely noticed idea. From now on, the bank announced, we will target inflation directly. No more intermediate targets for us, the Bank declared. The Bank would no longer look at money supply growth, interest rates, or exchange rates; only the end result would matter. Inflation, and only inflation, would be the only target that mattered.
At the time, the implications of this new inflation targeting regime were only dimly understood. Superficially, it seemed like a sound idea. Its simplicity and clarity was appreciated by politicians. In 1997, the inflation targeting regime was further enhanced when the Bank of England gained policy independence from the Treasury.
However, inflation targeting had a deep dark side that only became apparent much later. The chosen target wasn’t price inflation, it was consumer price inflation. The Bank of England chose to target a subset of inflation. Crucially, the Bank chose to ignore asset prices, housing costs and indirect taxes.
Inflation targeting also meant that the Bank no longer paid much attention to other indicators, which could guide monetary policy. The Bank, in effect, threw away, monetary economics as a guide for policy. It ignored the money supply, interest rate policy and exchange rates.
more ...
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Check out the rest of this blog here.
In the days following the ERM exit, the Bank of England faced the difficult question of “what now?” It came up with a barely noticed idea. From now on, the bank announced, we will target inflation directly. No more intermediate targets for us, the Bank declared. The Bank would no longer look at money supply growth, interest rates, or exchange rates; only the end result would matter. Inflation, and only inflation, would be the only target that mattered.
At the time, the implications of this new inflation targeting regime were only dimly understood. Superficially, it seemed like a sound idea. Its simplicity and clarity was appreciated by politicians. In 1997, the inflation targeting regime was further enhanced when the Bank of England gained policy independence from the Treasury.
However, inflation targeting had a deep dark side that only became apparent much later. The chosen target wasn’t price inflation, it was consumer price inflation. The Bank of England chose to target a subset of inflation. Crucially, the Bank chose to ignore asset prices, housing costs and indirect taxes.
Inflation targeting also meant that the Bank no longer paid much attention to other indicators, which could guide monetary policy. The Bank, in effect, threw away, monetary economics as a guide for policy. It ignored the money supply, interest rate policy and exchange rates.
more ...
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Check out the rest of this blog here.
Thursday, 21 June 2007
Governor's defeat last time heralds rise to 6pc
As he went round the table and asked for each of his eight fellow members' votes, it must have slowly but surely dawned on Mervyn King that things were not going his way. By the time the spotlight returned to him, it will have become clear to the frustrated Governor that, whatever he did, interest rates were going to stay on hold this month.
Only one question remained: should he go with the majority, or should he follow his convictions and vote for an increase, risking causing a major market fuss when it emerged that he had been outvoted for only the second time?
In the end, yesterday's Bank of England minutes showed that he chose the latter. After the details of the vote emerged, the pound jumped by more than half a cent to $1.9929. Economists around the City predicted it was almost certain that rates would increase next month, and warned that this raised the likelihood that borrowing costs jump to 6pc.
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Only one question remained: should he go with the majority, or should he follow his convictions and vote for an increase, risking causing a major market fuss when it emerged that he had been outvoted for only the second time?
In the end, yesterday's Bank of England minutes showed that he chose the latter. After the details of the vote emerged, the pound jumped by more than half a cent to $1.9929. Economists around the City predicted it was almost certain that rates would increase next month, and warned that this raised the likelihood that borrowing costs jump to 6pc.
more ...
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Check out the rest of this blog here.
Friday, 8 June 2007
The Bank's worst decision
Mervyn King, the Bank of England governor never comments on the past decisions of the Monetary Policy Committee.
He's often invited to admit to a mistake, or a regret, or even allow a moment of self-congratulation. But he generally declines to comment, explaining that the Bank has to focus on the next decision, not the last one.
He's right to remain silent. If he comments on one decision, he'll be invited to comment on another, and he'll soon be forced to comment on everything, which would be fine except his extensive commentary would then inevitably be over-interpreted.
But just because he doesn't comment, doesn't mean we can't.
And there is one decision taken by the MPC that deserves to be named and if not shamed, at least named and regretted.
It was taken in August 2005, and it was one Mervyn King himself did not agree with. Indeed, it was noteworthy as the first decision in the history of the independent Bank of England in which the governor had been overruled, and it was in retrospect probably also the worst decision the Bank has taken.
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Check out the rest of this blog here.
He's often invited to admit to a mistake, or a regret, or even allow a moment of self-congratulation. But he generally declines to comment, explaining that the Bank has to focus on the next decision, not the last one.
He's right to remain silent. If he comments on one decision, he'll be invited to comment on another, and he'll soon be forced to comment on everything, which would be fine except his extensive commentary would then inevitably be over-interpreted.
But just because he doesn't comment, doesn't mean we can't.
And there is one decision taken by the MPC that deserves to be named and if not shamed, at least named and regretted.
It was taken in August 2005, and it was one Mervyn King himself did not agree with. Indeed, it was noteworthy as the first decision in the history of the independent Bank of England in which the governor had been overruled, and it was in retrospect probably also the worst decision the Bank has taken.
more ...
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Check out the rest of this blog here.
New Zealand 8% rate shock as inflation stalks the world
New Zealand has stunned investors by raising interest rates a third time this year to 8pc to head off an inflationary spiral, adding to fears that central banks across the world may need to tighten much more than originally thought.
The rise was denounced as a "kick in the teeth" by the Auckland Chamber of Commerce, a sign that consensus over monetary policy is starting to break down as the overheating crisis turns serious.
Alan Bollard, the reserve bank governor, said roaring demand for commodities called for draconian measures. "We may once again be surprised about the persistence of domestic inflation," he said.
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The rise was denounced as a "kick in the teeth" by the Auckland Chamber of Commerce, a sign that consensus over monetary policy is starting to break down as the overheating crisis turns serious.
Alan Bollard, the reserve bank governor, said roaring demand for commodities called for draconian measures. "We may once again be surprised about the persistence of domestic inflation," he said.
more ...
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Check out the rest of this blog here.
Thursday, 7 June 2007
High time the Bank grasped the nettle on inflation
Only a year ago it would have hardly seemed conceivable to question the Bank of England's performance as the director of Britain's interest rate policy. Now, barely a day goes by without another reminder that the Monetary Policy Committee made a mistake, and now we are all paying the price.
The mistake in question was its decision two years ago to cut borrowing costs to 4.5pc - a move which, significantly, Governor Mervyn King objected to. It was that decision which is largely responsible for today's spectre of inflation.
Admittedly, the Bank has had to contend with higher prices generated both home and abroad. The decade-long dividend of globalisation was to push down import prices.
Now, we are importing inflation from abroad, as Chinese manufacturers try to recoup the extra energy costs they have been facing.
However, over the past year, the UK has developed an inflation problem of its own - the worst in the West, and for this the Bank is responsible.
It was wrong to cut rates in August, because it gave the impression that more cuts would follow. It was wrong not to reverse that more quickly, and to hesitate before lifting rates to their current level. It ought to lift them one more time today, rather than waiting a few months, as the market expects.
more ...
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Check out the rest of this blog here.
The mistake in question was its decision two years ago to cut borrowing costs to 4.5pc - a move which, significantly, Governor Mervyn King objected to. It was that decision which is largely responsible for today's spectre of inflation.
Admittedly, the Bank has had to contend with higher prices generated both home and abroad. The decade-long dividend of globalisation was to push down import prices.
Now, we are importing inflation from abroad, as Chinese manufacturers try to recoup the extra energy costs they have been facing.
However, over the past year, the UK has developed an inflation problem of its own - the worst in the West, and for this the Bank is responsible.
It was wrong to cut rates in August, because it gave the impression that more cuts would follow. It was wrong not to reverse that more quickly, and to hesitate before lifting rates to their current level. It ought to lift them one more time today, rather than waiting a few months, as the market expects.
more ...
------------------------
Check out the rest of this blog here.
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