Bank of England Clueless

Unfortunately, it appears that according to former MPC member Danny Blanchflower:

"The MPC didn't know where the economy had been, didn't know where it was when they made the forecast, and had no clue where it was going and still doesn't."

The  most alarming question that arises from the above is that, if the Bank of England (which has been relatively proactive in trying to reboot the economy) is so clueless, what does that say about the ECB?

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Interest Rates Under Review

The MPC has placed its interest rate of 0.5% "under review", as per the Minutes of the Monetary Policy Committee Meeting held on 6 & 7 June 2012.

The reason for the "under review" status being the ongoing deterioration of the economic situation in Europe, and "weaker economic data from the United States and emerging economies".

"Overall, the Committee judged that, at the present time, a further reduction in Bank Rate would not have any advantages over an expansion of the asset purchase programme, though it would keep the position under review."

This means that it is highly likely that rates will be reduced in the very near future.

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Interest Rates Hold Steady

As predicted the MPC have not raised interest rates, they remain (as they have done for the past 27 months) at 0.5%.

The decision to freeze rates is hardly surprising given the state of the economy and level of indebtedness.

However, do not expect the ECB to be so "alive" to the economic problems of the real world. It is highly likely that the ECB will continue to tilt at windmills, and push for higher rates, in its fanatical and mistimed battle against inflation.

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King Warns On Rate Rise

Mervyn King, Governor of the Bank of England and deputy chair of the European Systemic Risk Board (ESRB), issued a warning whilst speaking yesterday at the European Parliament that a rise in long-term interest rates would have "severe" consequences.

King's rationale being that the level of indebtedness would be increased by any rise in rates.

Given that the comments come ahead of this week's MPC rate setting meeting, it is being interpreted as a signal that UK rates will remain at 0.5% for the time being.

Whilst the MPC may well see the dangers of an increase in rates, no such "real world" understanding is apparent in the actions and attitude of the ECB who fear only inflation and ignore recession. Sadly for the people of Europe, the ECB are determined to press forward with higher rates irrespective of the damage that these increases will do the the European economy and to the citizens of Europe.

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The Miguided Hawks of The MPC

The Telegraph reports that according to the latest MPC minutes, released today, the Bank of England chief economist Spencer Dale has joined Martin Weale and Andrew Sentance in calling for an interest rate rise.

The "hawks" deem inflation to be a significant threat to the economy.

They are wrong:

1 The impact of the austerity budget has yet to be felt, once that kicks in there will be a significant deflationary pressure on the economy.

2 The economy is teetering on the edge of another recession, any upward increase in interest rates will push the economy over the edge.

3 An inflation rate of 4%-5% is bearable for a year or so.

4 The "inflation" that the MPC hawks fear is largely down to the rise in VAT in January, and the ONS (as per usual) erroneously under reporting inflation (clothing) for several years.

In short, rate should be kept where they are for the time being.

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Inflation

Andrew Sentance, a member of the Bank of England's Monetary Policy Committee (MPC), has broken ranks and publicly accused (at a speech at the Institute for Economic Affairs) Mervyn King and fellow members of the MPC of "selling Britain by the pound".

Sentance is of the view that King and the Bank are far too optimistic about how quickly inflation will fall back to its 2% target, and believes that the MPC has delayed for too long raising interest rates.

He is to my view wrong, any rise in interest rates now before the effects of Osborne's austerity budget kicks in will risk pushing the British economy "over the edge" into another recession. The economy can withstand a short term inflation rate of between 4%-5%, most certainly as there will be strong downward pressure brought to bear on it by the austerity budget.

The MPC should hold its nerve, and keep interest rates as they are for the foreseeable future.

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Project Merlin - Epilogue

Now that Project Merlin (the agreement between the government and the banks that, in theory, will regulate their behaviour) has been finally agreed and formally announced, the theory spun by the government is that we can move on from bank bashing.

Fair enough, maybe, if the banks actually make good on their promises.

However, the reality is that lending and the terms and conditions attached to that lending is unlikely to improve much (from the perspective of the corporate/individual borrower).

Even though interest rates remain fixed (no change today by the MPC) at historically rock bottom levels, the banks are making a nice "turn" on the difference between base rate and the rate that they charge borrowers and the spread between lending and savings rates.

The question that Osborne has not answered is, if the banks do not honour the agreement both in terms of substance and form what will he do then?

Don't tell me the answer to that though, tell him because I don't think that he knows the answer.

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Dark Days Coming

Yesterday's lousy "growth" figures (a fall of 0.5% in GDP) have heralded further bad news. Minutes from January's MPC meeting show that two members voted for an increase in rates, they must be mad.

The mood of gloom surrounding the economy was further depressed by a speech made last night by Mervyn King (Governor of the Bank of England), in which he said that wages will have to fall and that we are facing the worst economic conditions for 90 years.

I wonder if George Osborne has actually factored all of this into his economic plans?

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Inflation

The Office for National Statistics (ONS) reports that the annual rate of CPI (inflation) has risen from 3.3% in November to 3.7% in December.

These figures will be used by some to push the MPC into raising interest rates.

However, given the shaky state of the economy, any rise in rates should not take place until a commitment from banks and lending institutions (who already charge significant rates on loans/debts) that they will not use a rise in rates to extort further money from people already heavily in debt.

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The Time For Remorse

Bob Diamond, the new CEO of Barclays, lamented to the Treasury Select Committee that the time for remorse by the banks (wrt the financial crisis) is over.

Fair enough, maybe (not that I have noticed that much remorse so far).

However, that plea may receive greater sympathy from people if banks were a little less reluctant to lend money, and were to charge interest rates on loans granted that actually reflected the current low rate of interest set by the MPC.

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Steady As She Goes?

Despite the fact that the US has launched a new round of quantitative easing ($600BN), the Bank of England has decided not yet to follow the American lead.

The Bank of England's monetary policy committee (MPC) has kept interest rates at 0.5%, and has not increased quantitative easing.

The "steady as she goes" approach is a consequence of better than expected UK economic data. As to whether the economy continues to recover, once government cuts and the new VAT rate kicks in next year, remains to be seen.

It should also be noted that the $600BN quantitative easing package in the US may not actually be enough to kick start that economy which, if it doesn't pick up, will have ramifications in the UK and the rest of the world.

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The Bank of England's Credibility

Andrew Sentance, a member of the MPC of the Bank of England, has warned that the Bank risks losing its credibility over inflation worries.

Sentance has long argued for the 0.5% interest rates to be raised, in order the slay that inflationary monster that he perceives to be lurking in the economy.

Sentance is wrong:

1 The credibility of the Bank is not an important factor at this point in the economic cycle (ie a slow return to growth after a debilitating period of recession), restoring growth is the important issue.

2 The economy is not yet in a position to withstand an increase in rates.

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Murky

Despite Vince Cable's speech to the Liberal Democrat conference today, in which he refers to "murky corporate practices" and notes that "capitalism kills competition"; the capitalist world to which he refers is the world that he, and the rest of us, live in and rely upon for our survival.

To this end, ie the survival of our capitalist economy, the Bank of England are considering a further economic stimulus.

The recent Monetary Policy Committee (MPC) minutes show that there is a gradual movement within the committee towards doing more to support the economy. Given that interest rates are at 0.5%, the main alternative open to the Bank is that of further quantitative easing.

The US Federal Reserve has already signaled that it may restart purchases of government debt, ie quantitative easing. Given that the US and UK central banks are coordinating their monetary policy, it is highly likely the the Bank of England will follow suit.

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Interest Rates Remain At 0.5%

The Bank of England's Monetary Policy Committee (MPC) has left interest rates unchanged at 0.5%, they have been at this level since March 2009.

Ironically, as those with debts or who are trying to borrow money may have noticed the cost of borrowing has not remained static during this period but in fact risen.

Funny that, isn't it?

Still, the banks have to make money somehow!

Additionally, the MPC has left its £200BN quantitative easing programme unchanged.

So much for the media hysterics who have been talking up interest rates of 8% within 2 years.

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Interest Rates May Rise

Despite Mervyn King, Governor of The Bank of England, stating last week that interest rates are likely to stay low for quite sometime, two former colleagues have contradicted him.

Sir John Gieve, an ex-deputy Governor, and Charles Goodhart, a previous member of the Monetary Policy Committee addressed Fathom Financial Consulting's Monetary Policy Forum.

The Telegraph quotes Sir John as saying:

"I am expecting a recovery – when that is strongly established I'd expect rates to start rising faster than the market currently expects. I wouldn't be at all surprised to see interest rates at 2.5% a year from now."

Mr Goodhart was worried about the effects of food price inflation on the overall economy.

"We're going to have subdued growth for five or six quarters but a temporary increase in inflation. What do you do when inflation is still above the upper limit when the economy is looking extremely soggy?"

Were the MPC et al always 100% accurate with their forecasts, then we would not be in the mess that we are in now. Therefore, these predictions should be taken with a large pinch of salt.

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Potty!

Minutes of the last Bank of England MPC meeting show that one member of the committee, Andrew Sentance, voted to raise interest rates to 0.75% from 0.5%.

That most assuredly would kill the very modest recovery that we are beginning to experience.

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Dulwich Leads The way

Well done to my old school (Dulwich College) for winning the annual Target 2.0 competition, run by the Bank of England in conjunction with The Times, which puts A level students in the shoes of the Bank's Monetary Policy Committee.

Dulwich College won by challenging the Bank to be more "high-profile" in getting the inflation message across, as well arguing that a 4% inflation target would give policymakers much more room for manoeuvre if they needed to cut rates quickly.

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Three Way Split

It seems that the Bank of England's Monetary Policy Committee (MPC) has suffered something of a three way split, with regards to what is the best course of action to take re stimulating the economy.

That at least is the inference to be drawn from the minutes from the MPC meeting this month.

Despite finally deciding to increase the level of quantitative easing (QE) by £25BN, the committee was divided three ways.

Spencer Dale wanted to leave it at £175BN, while David Miles wanted to increase it by £40BN.

The other seven members opted for the £25BN.

Time will tell as to which faction is right.

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Quantitive Easing

Today the MPC of the Bank of England will announce its decision wrt interest rates. The "smart" money is on there being a cut of between 0.5% and 1%. However, some pundits have noted that as the recent cuts have not eased the credit drought, using the same tool again will be pointless.

Either way, it seems that other weapons are needed in order to address the fundamental issue of a credit drought. Hence the solution being mooted in many quarters (and not being denied by the government) of printing money (quantitive easing), and using the money to buy assets ranging from government or commercial debt to private equities.

There is a danger of inflation. However, under the current circumstances a small dose of inflation may be exactly what is needed.

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Slow Witted

The Times reports:

"The Bank of England's Deputy Governor for Financial Stability has admitted that the central lender failed to grasp the full scale of Britain’s economic problems before the current financial crisis erupted.

In an edition of Panorama, to be screened tonight, Sir John Gieve tells the BBC that the Bank was aware that a bubble was developing in the housing market, as well as in the price of other assets, and that it was being fuelled by “crazy borrowing”.

However, it failed to comprehend how serious the problem really was and what the implications would be for the rest of the economy."

How slow witted and out of touch are those on the MPC of the Bank of England?

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