King’s credibility is faltering

les

I would say Nelson's credibility is faltering!

Simon Stephenson

What's the bluff going on here, Fraser? King and the MPC are following exactly the policy that Cameron and Osborne wish them to follow. It may be right, it may be wrong, but it is what the elected government wants to happen. So what's all this disquiet with King, eh? Is he to be the sacrificial lamb - the dismissal which gains the government a few months of honeymoon before the replacement is found to be following exactly the same route?

Just how stupid does the establishment think we are? And how stupid does it think international financiers are?

Sally Chatterjee

As Simon Stephenson says above, there is little bluff. The Bank of England must be delighted with a bit of inflation.

Of course not telling savers about the change of tack is a serious matter but every finance professional and economist knows exactly what Britain is doing. Inflation is not a surprise, quite the opposite.

Rhoda Klapp

Just what part of an interest rate change makes a difference to imported inflation? You would kill the recovery, but you could make no difference to the price of oil or food. Of course the government (but not the BoE) could desist from piling Pelion upon Ossa with their stupid taxes and duties and worst of all their insane energy policies, but the Nelson course here presented is not only wrong but dangerous. The only thing King did wrong was to stay in place when he should have resigned when Brown et al were planning and executing the whole mess.

perdix

Not surprised to see the NYT (which is joined at the brain with The Guardian) criticising a central banker who supports the coalition's efforts to reduce the deficit.Am expecting to see further comment from that Labour apologist Danny Blanchflower.

Sage of the South

Mr Stephenson’s assertion – “King and the MPC are following exactly the policy that Cameron and Osborne wish them to follow” - is in my view correct. The current MPC plus Cameron/Osborne is an ominous combination.

Those of us of a certain age recall that the present Governor was one of the 364 economists who signed the (in)famous letter to The Times decrying the 1981 Budget’s tightening of fiscal and monetary policy and predicting (stupendously wrongly) that disaster, not recovery, would be the result.

Meanwhile the Treasury is happy to acquiesce in the Bank allowing inflation to persist by keeping interest rates low.

The current bout of inflation may indeed be predominantly cost-push, and exacerbated by sterling’s effective devaluation, and the recovery may well be so fragile as to be vulnerable to an interest rate rise.

But the Bank’s policy is, fortuitously, politically most convenient - continuing inflation contributes very helpfully to masking the facts that the so-called “cuts” in public spending are actually no such thing at all, and that the largely illusory reductions in both the state’s share of the economy and the public-sector deficit are to be achieved largely via the impact of inflation, irrespective of its effects as a theft-tax on the prudent and the fiscally responsible.

Would that Andrew Sentance was in charge………..

Baron

Fraser, ask yourself a question. Which outcome is more bearable, a period of high inflation or a deep recession? Either is bad, but if pushed many, particularly of the working age, would go for the former.

TrevorsDen

The MPC was appointed by Brown / Darling.

Will 2500+ people in Sandwich be worried about inflation? Given the huge propaganda about the cuts I can understand what might happen if rates went up.

The worry for them still is the recovery. 1Q '11 onwards might see the start of the rise.

Andy Leeds

I think King is not a particularly good Governor. But then again I don't think that the present structure of him and the MPC is particularly good either. I would prefer the decision on interest rates to be one for the Court. I think that might lead to better judgements.

Jon

Looking at the BOE transmission mechanism the only way a rate rise would kill the current inflation would be through appreciation of the pound. I am assuming the costs to recovery (from killing the export market) out way the benefit of reducing the inflation rate by a hundred basis points.

yank

Yeah, no sense whining about King, because the government supports what he's doing, clearly. Cameron and Osborne support this, just as King has talked pretty about them.

Overall, it's a nice arrangement, and so helpful of the Spectator to identify a sacrificial lamb to protect its pets. And please be careful not to strain yourself, patting yourself on the back for your Coalition-helpful lambing.

King's the champion of quantitative easing. Inflation continues on the rise. The currency has devalued significantly against the dollar and euro. You can blame whatever you want for all this, but these things are related, and something's gotta give.

The government supports all this policy. After Cameron's and Osborne's carcasses are tossed into the ditch, likely soon after King's is disposed of, we'll see if they have breath enough to discuss whether it was a good idea to sit still and encourage monetary policy to cover their fealty to the growing size of the state and public spending, and further, was it a good idea their slavish devotion to tax and fee increases pounded down upon a People suffering the effects of the stagflation they engendered.

Any government or central bank incapable of keeping up with the big spenders and money printers in Washington is surely incompetent, and not embracing fiscal and policy sanity.

And we can start with the policy insanity of slamming down the costs of greenie policies that weigh as an anchor on every single person there on that pile of rocks. Do they bring on a 1% COL increase? Is it 3% ? Is it raising the unemployment rate just 1% ? Or maybe it's 2-3%... what do you think?

That study slamming the global warming shysters hasn't received even a whiff of mention here at the leftist Spectator. Perhaps it's time that you lot at least show a small bit of shame of your masquerade as a "conservative" publication, pull your head out of the sand and bubble, and start to quantify the costs and effects of that which your beloved coalition has determined the People are obligated to endure.

That is the thing that conservatives do, fyi. We identify reality, first.

There are only so many routes available to battle current economic trends. Your continued snubbing of easily at hand routes is a failure of not just imagination, but of common sense.

ROB

I am not entirely sure that i agree with the premise of the article.

@ Andy. "The Court". Which one would that be? Bournmouth Magistrates?

Fatbloke on tour

Trevor - aka "Fraser" - the fastest spinner in the Nelson family even although my brother is a DJ.

There you go again, trying to do economics and failing miserably. Your whole article is tripe from start to finish, this time even worse than usual to the extent that I am actually embarrassed for you and the SpeccyLand stalwarts who avidly devour your every word.

Where to start, CPI inflation:

SpeccyLand has the graph of CPI-Y
That is CPI with the tax changes removed.
Guess what the current is, 1.8% approx, less than the government target.

Sniffy is to blame for half the inflation in the UK at the moment. He is the reason our inflation rate is higher than other major economies.

Look up the figures, simples.

Merv the Swerve knows this.
I even think Sniffy and Dave the Rave know this.
Any chance the SpeccyLand scribes can catch up?

You then go on to talk about the effect inflation will have on foreign investors who have a stash of Gilts. You have got your knickers in a twist over a PIT analysis over 5 weeks that suggests that Sterlings performance has been the worst of all the major economies.

Chicken Licken has more backbone than you if you think that 5 weeks is enough to fully develop a trend, or something worth bumping your gums about.

Overseas Gilts holders are not interested in our inflation rate they are only interested on their inflation rate and the return on the product and the direction of Sterling.

We offer 0.25% / 0.6% more than other major economies, the Yen is an outlier and the current exchange rate of EUR 1.19 / USD 1.61 has only one direction to travel in the medium to long term, that is up for the benefit of SpeccyLand journalists that don't do economics.

No wonder our biggest export is our debt.
Inflation is not an issue, Sniffy is the cause of half of it and even he won't want to put up VAT by another 2.5% in 2012.

Fatbloke on tour

Trevor - Part 2

Your stuff on inflation was bad but it doesn't stop there.

Growth cannot be considered at this moment in terms of "trend".

We are coming out of the biggest global fianancial event of the last 135 years. We have 6.4% of lost GDP to deal with, at no point in the next 3 byears can the concept of trend growth even be considered in any mature analysis of the UK economy.

We are currently staring down the barrel of a quite big aftershock, the possibility of a double dip in Q3/4 while the output gap is looking to be in the region of 8-10% no matter what the "Three Brothers Grimm" try to spin.

4% - They really are having a laugh.

Trend growth does not come into the equation at the moment, you are like "Brillo" in your need to fast forward the normal cadances of an economic event.

No wonder in the field of economic journalism he has the reputation of being a "premature ejaculator" when it comes to analysis. Please don't follow his example.

Your are right to have a go at Merv the Swerve, Mr Moral Hazard - the man with the rubber backbone, but you are using the wrong issues to criticise his competence.

He will keep interest rates low because Dave the Rave and Sniffy need the rates to be kept low.

Their credibility, "their" financial plan - economic suicide note to most non dog boilers - is built on keeping interest rates low.

He now has more economic clout than the chancellor.

Dave the Raves likes it that way.
Merv the Swerve loves it that way.
Cleggy just wants to be in the loop.

Match made in dog boiling hell.
I fear your criticism is howling at the moon.

If however Dave the Rave is playing Merv and you are an outrider attacking his credibility and judgement to hasten an early retirement, then I salute both you and Dave.

Great to see a biter being bit.
However you are taking game playing to new lows.

Unfortunately I fear for the UK economy no matter the outcome in terms of personalities. The slash and burn is too far too fast. I fear inflation will be but a sideshow to the economic and social trainwreck coming to a street near me although probably not you.

Tiberius

It's your first sentence that is right, Fraser.

Interest rate rises now would not bring down inflation in the next year, but would increase spare capacity in the economy and reduce the growth rate.

TomTom

The Gray Lady isn't going to attack Helicopter Ben and the British press isn't going to attack Mervyn King because they depend on financial services advertising and they are having a field day. Guaranteed funding at 0.5% and 29.9% credit card yields. More and more of the real economy is being transferred to the banking sector.

Look at Nestle and Kraft the world's largest coffee buyers now cautious buyers as huge funds have entered the market driving up prices. That is how excess liquidity is being used - to drive up commodity prices and stimulate revolution throughout hungry nations.

The Central Bankers created the Boom under senile Greenspan and are generating yet another for the banks to reflate themselves, but the real economy is being destroyed

Dimoto

How very, very odd.
Mr Fraser Nelson joining the deficit denying, "ultra Keynesian" NYT gang ?!!

What's next ? flat earth, honorary knighthood for Krugman or support for the Balls "investment not cuts" strategy ?

For God's sake get a grip Fraser.

PuppetMaster

The BoE is not independent, it might say it is on the tin, but it isn't, nor will it ever be.
Governments ALWAYS inflate their way out of debt problems, but the debts in the shadow banking system are so large that is difficult to see if this can be pulled off without crashing the real economy.

The only way out is if we followed the Iceland example, where they repudiated the banks debts and are now recovering.

At the moment the banks still control the government, if we don't destroy them, then they will destroy us. Simples.

cuffleyburgers

Sound money is at the heart of good economic management, King must go.

The negative effect on growth of raised rates can easily be offset by deregulation, tax simplification (and cuts) and of course leaving the EU.

Chris lancashire

I don't always agree with Rhoda Klapp but that comment is absolutely spot on.

Ian Walker

The baby-boomers with their buy-to-let portfolios, paid-off mortgages, ISAs stuffed with inheritances and free degrees may be worried about inflation.

For those who will be in debt forever because that selfish generation couldn't bear even the smallest tithe for their progeny, inflation is a blessèd relief.

michael

The dip in pre christmas construction will take about 2 quarters to bounce back, in the same way that the last jan feb freeze-up and subsequent catch up pushed a GDP surge into the summer quarter. Unusual weather screws things around, always has always will.
-may not be an excuse, just a fact of trading life.
nb Banks don't lend on short term trends what interests them is long term prosperity and the potential for it... Cos that's where
the fat fees are.

Percy

King has no credibility left, that left a long time ago when the plank failed to see the mother of all recessions coming. He's just doing what he's told by Dave, keep rates low so all those greedy old buggers from the shires, with their BTL portfolios, who vote for Dave are protected.

Captain Panakin

Unfortunately most of this is rendered irrelevant by the movement in guilt yields since the low in mid October - 5yr yields 1.8% to 2.8%, 10 year yields 2.8% to 3.9%. And lest we forget 1% on borrowing costs us an extra £10bn per annum on our £1trillion debt pile. Merv is losing credibility in the most important arena of them all.

Extranea

Over the past 2 years, many commentators on the right have been calling for raises in interest rates, even people like Nigel Lawson in Autumn 2008. They were wrong.

The Bank of England and the government are walking a tightrope on the economy. Raising rates too quickly when the inflationary pressures are largely external and outside our control will simply choke growth.
http://bit.ly/eqcRfq

Jonathan Woolf

Quite a worrying consensus on these pages that inflation is nothing to worry about and will help reduce the deficit. Haven't we learnt anything from the last few years or indeed remembered what it is like when inflation gets out of control?

Fraser's point is that growth based on loose money, cheap credit and inflation is not real growth at all. That's what we had from 2002 and look where we ended up. We may have had low goods price inflation during those years, but that was because of imported deflation on manufactured goods from emerging markets (China in particular). Money was too loose during those years generating rampant asset price inflation, the consequences of which were the credit crunch and collapses in asset values plus a severe recession. Using precisely the same medicine to get us out of that mess hardly seems sensible does it?

Once the markets, consumers, and wage-earners conclude that 3-4% inflation is deliberate - which point has actually already been reached - then inflationary expectations get entrenched, the value of the pound will stay low, and government debt costs will rise. So it is not a deficit-busting strategy. Bond investors are not stupid - they know an inflationary default when they see one and will price their risk accordingly. Small rate rises now will restore the BoE's credibility, signal they take inflation seriously, and will in the longer-term keep the costs of borrowing down and ensure growth is based on a more sustainable footing (not artificially pumped up by inflationary money printing).

Calling Fraser a Keynesian is the height of ignorance. His argument is monetarist and rightly so. See Heffer, Redwood and others if you fail to understand Fraser's contention.

Rhoda Klapp

Jonathan, it isn't the fact of inflation, or the damage it causes that makes me question Fraser's post, it is the effectiveness of his proposed solution. I think it will kill any growth, except the growth in prices, which are of such a nature, this time, that the rate rise will not affect them. Money is already tight. Rates may be low, but it seems that new debt is not being taken on, and those carrying old debt who are affected by the rate will of necessity have to cut back and pay down, to the detriment of spending. This is not an overheating economy. It could easily become a moribund one.

yank

R.K., problem here is, the currency is being devalued against the others, and that can't but have its inflationary effect on the commodity imports, as you mention. I don't know the way out, or indeed even if there is a sure one, but the one being chosen is suspiciously in alignment with wet policy. Something's gotta give here.

Gotta break the cycle here. Bust the paradigm. Move the needle, and all those other new agey nostrums.

I suggest a major rollback of the regulatory state. Not just tweaking... but a major peel-off of economic ballast. This is no time to be lumbered with hauling that around. Do it to a degree that the world's chattering classes arise en masse. Then we'll be able to witness that government is truly shyttin' and gittin'. This could be a time for true leadership... world leadership... and the others will see that. This crew appear to be pure followers, and this ain't the time for that. They're missing the chance, and that could become even more costly to many. It will likely soon drive the followers into the ground as well.

Fatbloke on tour

JW @ 1.27

Half the inflation is real inflation and half is government generated.

That is the reason why the inflation rate in the UK is higher than other major economies, Sniffy is the culprit.

Lord Boyders

There are two ways of handling demand led inflation: Increasing tax or increasing interest rates. ie both take money out of the pockets of consumers so they spend less.

Surely we consumers are spending far less already. Taxes have risen. Prices are rising regardless of demand. Increasing the cost of money won't make any difference. Or am I being thick and simplistic? Quite likely both.

Where's my nurse?

Rhoda Klapp

Yank, rollling back the state would be my option too, but it is not seen as doable by the government or desirable by the Grauniad woofters who actually run the country, or at least hijack all political intercourse. If they had to solve the gordian knot, they'd put a knot on it.

It is my personal observation from dealing with clients that in the UK around half of the workforce is employed in stopping the other half from achieving anything. If we could only identify which half is which we could double productivity at a stroke.

Ron Whitehand

Some friends and I have all been wondering why Mr King is still in post. He is failing to tackle the number one measurement for his job. He has to go.

Dimoto

Jonathan Woolf - in case you hadn't noticed, the attack on King comes straight from the NYT and the ultras in the US.

Mr Nelson, as a fashionable kinda bloke, has just been feeding from this nonsense.

A 0.25% rise in the interest rate would be a timely warning shot, and very unlikely to slow growth, but the real target of the NYT/Krugman gang is "financial consolidation", which they hate.

They wish that the coalition would sanction heaps more QE - exactly what you profess to fear.

D Green

I'd say the BoE's credibility will look really shaky if they crumble under all the media pressure and raise rates.

Fex Urbis

@ Ron Whitehead

Agreed 100%.