Why we need a rate rise

Edward Sutherland

I agree with you, Fraser. It's no good King going on about "special factors". The USA,Germany and France have to bear the same high fuel, food and raw materials costs, yet they control inflation far better. King has failed miserably- and you're dead right to compare his kid-glove treatment to that which would apply to any senior executive in the private sector whose plans had been shot to pieces.

TomTom

Germans do not believe they have 1.7% inflation seeing the index as cooked. Now they have Axel Weber leaving in April and fear the man Merkel is putting in charge is soft on inflation. Her economic adviser is tiped as new BUBA President.

Publius

...I see your esteemed colleague Mr Forsyth's advice is to stop targeting inflation.

He never responds, so perhaps you could ask him what his thinking behind this suggestion is.

normanc

Doesn't the graph in point 5 indicate that, instead of splurging out on cheap debt UK households are instead using the chance to try and get our debt down? The cheap rates will only be a problem if they're abused (again). Also, try and get a new loan at anything under 5% and you'll be doing well.

As for point 6, the other sobering aspect of that is a huge chunk of that GDP growth is being earmarked by our lords and masters as taxes, new and existing. We're increasing debt and taxes at a frightening rate.

You can have a balanced budget with no deficit but if you're taxing people at 50% (and more) of their income something is still very much awry.

Ulysses 31

Bankers greed, homeowners greed, they're both to blame.

Raise rates, burst the bubble and to hell with them both, quite frankly.

Olaf

Where is this cheap debt?

To get these good rates you have to have 40%+ deposit for overpriced housing.
Loans are as expensive as they've been for many years. The banks are not passing on the low base rates except where they have to.

When the rates goes up and the banks eagerly pass that on you'll start to see the pips burst.

Perry

" Inflation is temporary, he says, and should be okay again this time next year "

I never met the Vicar of Bray, but something about Mr King often brings him to mind.

Publius

So when various prices (e.g., train fares) increase in line with inflation, can we object that the inflation is the wrong sort of inflation, and demand that the fares stay the same?

No? I thought not.

PS - I still want to hear why Mr Forsyth thinks inflation targeting should be scrapped.

Extranea

As usual there is a lot of ifs and buts in the analysis, details on trends and economists expectations. The truth is we are in a peculiar economic situation not exactly like anything we have had before.

Some say the last quarters figures were just a blip - we will not know until the next set of results come out.

The increase in "debt" is also not the same as dealing with the "deficit".

There is no doubt rates will have to rise in the medium term. But the timing is crucial. I have heard some economists on the left and right just going down the same old ideological paths they normally tread. Rates up on the right, leave rates on the left. Both are invariably wrong due to the inability to see the wood for the trees.

http://extranea.wordpress.com/

denis cooper

I don't think you should be seeking to personally scapegoat Mervyn King over poor control of inflation since 2006, given that for example inflation in the eurozone has also been all over the shop during that period.

Chart on the ECB website here:

http://www.ecb.int/mopo/html/index.en.html

Bear in mind that unlike the Bank of England the ECB sets its own inflation target, which is CPI "inflation rates of below, but close to, 2% over the medium term".

As for whether UK official interest rates should rise, under Sections 11 and 12 of the Bank of England Act 1998:

http://www.legislation.gov.uk/ukpga/1998/11/contents

the paramount question for the MPC should be whether raising base rate would actually help it to meet the 2% inflation target set by the Chancellor.

I don't know whether it would or it wouldn't have that effect in the short term, but clearly they should take into account the medium term problems which may arise from diminishing credibility and evaporating public confidence.

Publius

@Extranea
"The truth is we are in a peculiar economic situation not exactly like anything we have had before"

-- Isn't that what Gordon Brown told us with his 'end to boom and bust'?

I am afraid I am distrustful of those who talk of new paradigms.

Lotus_51

So let me get this right. The Governor of ther BoE says that inflation is mostly due to the devaluation of sterling making imported commodities more expensive.

This devaluation of sterling was caused by inflating the money supply...

....and the Governor's solution to the problem is to inflate the money supply some more with cheap credit.

Augustus

A certain amount of moderate inflation is often good for companies, who can pass price increases on to customers, but there's a line in the sand somewhere, and 4%
(CPI) is probably it.

Percy

Instead of Mr King writing another letter, couldn't someone send him one with a nice new P45 in it?

Jayu

Are mortgages counted in the household debt figures? If so we are not comparing like with like, as continentals tend to rent more than buy, and they don't have the buy to let market that we have.

Cameo Parkway Kid

It's no good you all calling for Merve's head down here - he's only carrying out the destructions of The Blancmange Headed One and his pet chimp. To be fair to the latter, we don't seem to be as blessed as the those on the continent snow-wise.

alexsandr

I dont need a rate rise
every .25% adds another £13.54 to my mortgate payments.

yank

6. To put this in perspective, for the duration of this parliament UK national debt will grow more than the UK economy. Cameron often talks as if he’s “sorting out” the debt problem. In fact, he’s increasing debt every year. Increasing it by (a wee bit) less than Labour would have, certainly – but the overall picture is still sobering.

.

Well, it took a 1/2 dozen scrolldowns through your post, and some more of your wonted piling-on to the croupier toff, before you finally got to the point, and the culprit.

I guess if we bring up the rhetorical siege mortars and bombard the bunker, deep in the bubble, you'll get straight to addressing that point, and culprit.

Cynic

We need a rate rise and the sooner the better, otherwise it will have to be a much heftier one than could be achieved by having a small increase now. What will really have an impact on borrowers will be a steep rise in rates. Alexandr, would you rather have an extra £13.54 added to your mortgage payments or eight times that amount?

Percy

@alexsandr

You're going to be thrilled when they get back to their long term average then.

Fraser Nelson

Publius, Lord Saatchi wrote an excellent CPS pamphlet on inflation targeting - i can recommend it!

Chris

There's nothing absurd about low interest rates. What is absurd is the idea that we can get out of trouble by devaluing the pound. It's tried every single time there's any economic problem and it never, ever works. This time its given us the usual inflation problem.

If we'd join the euro we'd have taken economic policy out of the hands of these idiots. Imagine no more pointless tinkering with the exchange rate, no more having a currency which the markets know is a one way bet. Britain, and British business in particular, need to get rid of the clique who run our economic policy. How many chances are we going to give them?

Hugo Chav

Nadeem Walayat - 15/2/11:

The Bank of England MPC members continue with their mantra of temporarily high inflation due to short term factors. One could cut and paste from any inflation statement from MPC members of the past 12 months to hear the same propaganda out of the Bank of England. The question everyone should be asking the BoE is when does temporary high inflation stop being temporary? Originally it was for a couple of months, now it is over a year, will high inflation still be temporary a decade from now? For that is how long I expect the Inflation Mega-trend to run.

The gold fish memory broadcast and mainstream media fed by ivory tower academic economists continues to tow the line of temporarily high inflation by focusing on core inflation that excludes, food and energy costs because off course everyone in the UK has stopped feeding or heating themselves. Despite that fact that food and energy are far more relevant to the British population than for instance the price of a 50 inch Plasma Screen.

http://www.marketoracle.co.uk/Article26314.html

Nick

Fraser, why do you never discuss the impact that the fall in sterling has had on inflation, and the impact that a 10% rise in sterling might have on collapsing inflation in the future.

Suburban Bloke

Forget 'OECD Outlook' graphs to tell us about UK household debt - just drive around any suburb and count the number of black Range Rovers etc. in the block paved front gardens of ordinary houses.

Anthony Makara

Essentially we are back to the trade-off between inflation and growth.

We cannot have the one without the other.

The Prime Minister's objective, to rebalance the economy based on Manufacturing and Exports, will die a death once interest-rates start to rise. Yet, we are now so hostage to imported inflation that a weaker Pound will destroy the living-standards of those on fixed-incomes.

In a stable economic environment we might expect interest rates to be 2-3% above the rate of inflation, so in effect we are in for rapid and brutal correction of 5%. The effects of this on the housing market, and liquidity, will be crushing.

Ultimately, we are now paying the price for the artifical over-valuation of Sterling during the Blair/Brown years, when inflation was only prevalent in housing as our money went on imports from soft currency economies.

Whatever the decision of the ECB, there is a clear choice to be made.

Baron

King hasn’t got more than one vote, as do the other member of the Committee, the need for casting vote hasn’t arrived yet, it’s abit unfair to kick him alone.

the greatest beneficiary of the low base rate are the banks, not the unwashed as normans points out. Helps to re-build their balance sheets.

the retail price index will touch double figures before we see any abating of the rate. The driver will be the QE cash currently held back by the banks in case it’s needed for re-financings due this year. It ain’t pocket money, roughly a fifth of the annual consumer spending. It will produce a step function in the RP index if the banks move as one. Remember you’ve heard it here first (since December).

denis cooper

I don't think much of the rise in inflation can be blamed on the fall in the pound.

That happened over two years ago, since when the sterling trade weighted index has been pretty stable.

Feb 14th 2011 - 81.6414
Feb 15th 2010 - 80.7666
Feb 13th 2009 - 78.4472

yank

Mr. cooper, that's 4% in the last 24 months. That ain't chicken feed. It's part of the issue, at least.

Edward McLaughlin

Thanks Fraser.

We've got prices of all basic needs going up massively, wages screwed down thanks to 'the need to embrace globalisation' ....and import any number of desperate aliens, sod the fabric of the nation, and the answer to all that is a series of hikes in everyone's mortgage repayments.

I get it: character building, yes?

TGF UKIP

Posturing hairy chested teenage rubbish, Fraser. The money supply ain't galloping away, quite the contrary, no excess of demand over supply, quite the contrary and as a grown up economist, David Smith over at the S. Times, has been pointing out strip out tax rises, together with imported food and commodity prices over which we have no control and inflation is well under 2%.

True interest rates have been left at .5% for far too long, but this economy and underlying confidence are currently in a very delicate state thanks in no small measure to your client's trying-to-look-tough mismanagement. Any interest rate other than an enormous one would only be symbolic and therefore merely confidence damaging.

Having fucked up on the fiscal side though, no reason why they should not screw up on the monetary side as well, so we can doubtless expect a few speeches from your client pressurizing King any day now.

Mr L

Very low interest rates are immoral, because they penalise the prudent and encourage the profligate. Inflation is a further scourge of people with savings. I thought Conservative governments wanted people to save and be self-reliant. It is not clear to me that this lot do. As for Professor King, well, he's an academic.....

Fex Urbis

When does the British rioting season start? 2011 is going to be a vintage year.

Ali C

I don't think Brown's legacy of boom and bust plus quantitative easing has helped much.... a legacy of brown stuff.

denis cooper

yank -

Just on the figures I picked out for illustration, yesterday and the nearest equivalent tabulated days one year ago and two years ago, there's actually been a 4% UPWARD movement in the external value of sterling. But I wouldn't read too much into that.

The big fall was over two years ago now - a 30% fall from an over-valued all time high of 106.8 on January 23rd 2007 to an under-valued all time low of 73.8 on December 30th 2008, after which it recovered to about 80, 25% down from its peak, and has since stayed around that level.

I should have thought that by now most of the inflationary effects of that 30% fall over two years ago will have already worked through and dropped out of the calculation of the annual inflation rate.

Suburban Bloke

Gentlemen, stay calm - it's just growth that feeds inflation and unhappiness - one age groups inflation is another's prosperity - take a few days off and embrace your lovers - there is no such thing as a stable economy, economies don't exist...

Cynic

@Chris "There's nothing absurd about low interest rates." It was too low interest rates that helped fuel the housing bubble.

"If we'd join the euro we'd have taken economic policy out of the hands of these idiots." I assume you mean if we'd joined the euro? In that case, interest rates would have been even lower and the consequent bubble even bigger.

"Imagine no more pointless tinkering with the exchange rate, no more having a currency which the markets know is a one way bet." Imagine having no control over your taxation system, money supply or fiscal policy. One size does not fit all.

dorothy wilson

alexandr: And every .25% reduction in interest rates has decreased the value of my savings. Do you really think those of us who have been careful and put some pennies away for a rainy day should subsidise those who have over-borrowed?

David Bouvier

It of course was only ever a rhetorical point but graph 6 appears to wrong-headed.

You are comparing the stock of debt, with the flow of GDP. An increase of GDP about around £240bn over 6 years would (assuming steady growth) represent around £720bn of extra output over that period, which is about double the c. £360bn extra debt incurred over the period.

This is equivalent to not understanding the difference between debt and deficit.

David Bouvier

Setting interest rates is similar to driving a car where it take around 2 years for the steering to respond, while you are being buffeted by high winds.

Anyone here who says they know for sure whether rates should go up or not does not understand the problem.

Of course decisions have to be made, but there is always plenty of room for honest disagreement.

I would suggest that until we have consistent growth we should be cautious, though perhaps a 1/2 or 1/4 point rise is required, but merely to normalise the mood, not to be followed automatically by a ramp up to historically average levels.

If any rise will be followed by irresistable pressure to ramp up further better to hold them steady for now.

Mike Anderson

Fraser, this is the best article on economics that I have seen all year. Ignoring received "wisdom" you have illuminated the issue with real facts and analysis. Congratulations - and keep up the good work.

richardj

The exchange rate that matters is £/$ which has gone from 2.10 to 1.60 since late 2008. Oil is priced in $ so the inflation from the oil price over the period is 30% - frankly adding world food price rises and the vat rise of 5% since the beginning of 2010 an inflation rate of 5.1% seems a good result. Going forward the recent vat and oil rises will not be in future inflation figures and the January figure will probably be the apex. Of course if the UK had not being sujected to 13 years of financial incontinence and irresponsibilty we would not be here. However as your other readers have pointed out the real rate for borrowers is at least 5% if secured and much more if unsecured.

Mr Humanus Wright

Hi,

Have you got any information regarding the use of remote, non-passive, non-invasive inner ear cochlea sound transmission via either the ultrasonic hearing effect (or hypersonic effect), or the microwave auditory effect (or microwave hearing effect or Frey effect), incorporating hybrid carrier wave sound (or overlay sound) propagation using ambient and subliminal sound techniques? Possible uses could be non-lethal weaponry, psychological warfare or private message transmission.

Query is regarding the increased use of remote, non-invasive, non-passive, non-lethal military weapons (directed energy weapons), being used by security agencies, as well as in the UK, in the 'surveillance war against terror', against political dissidence, political activism and public demonstrations! They are being used along side more traditional remote, passive, covert full intrusive surveillance methods, and other abuses of RIPA.

These include the use of 'under the radar' remote non-invasive, non-passive weaponised instruments that shoot intense radiations and emissions (ionizing or non-ionizing), to target individuals from nearby properties and vehicles, to attack and cause a detrimental effect to their neurological and physiological system, and a degradation to the normal functionality of the brain; surveillance war in an urban environment.

There are serious human-rights & civil-liberties issues at stake with this kind of growing urban warfare (directed energy weapons that target the central nervous system and cause neurophysiological disorders), being rolled out in the UK since at least 2007. The legal issues regarding the use of suspect radioactive isotopes outside controlled laboratory environments, and the violation of 'The Radioactive Substances Act 1993 - Prohibition of use of radioactive material without registration' now known as 'The Environmental Permitting Regulations 2010' are a blatant disregard and abuse of human rights.

There maybe growing evidence that the security services have diversified their tactics, and are using 'local instruments of government' (particularly the 'NHS' - including hospitals, research organisations, radiographers and process industries, using radioactive materials!) as a front and illegal loop-hole to allow them to orchestrate acts equatable to intense harrassment bordering torture within the UK.

To isolate and identify the exact legal & technical definitions of these illegal, non-passive, non-lethal military weapons (directed energy weapons) being used within the UK is nearly impossible, so that the correct 'Freedom of information Requests' can be made to the relevant non-/governmental institutions!

Regards

Mr Humanus Wright

Tacitus

My fear about a rate rise is that it will all end up in a very nasty double dip recession. Now let me think .. who warned us about that?

Read my blog at http://bit.ly/eLwJ9p

kev w

Why is it that we have quantative easing. would it not be better to pay off our debts instead of lending the banks the money at a derisory interest rate. The banks really take the mickey by charging so much to borrow. I bet the banks don't go back to the days of 2% above the BOE rate.

Can anyone give me a sensible answer as to why we don't print some money to clear our debts.