Tuesday, May 17, 2011

King: A man who hasn't a clue

Mervyn King © fintag

News comments:
You know my views.

Mervyn King and the MPC should have retired years ago. One moment we hear inflation is under control and the next it is not. The next moment we hear interest rates will stay low and then they will have to go up very soon.

The markets of course love this but patience is running thin. As we keep arguing, inflation is a killer and interest rates have to go up. The UK must put CGT on real estate for bricks and mortar do not create wealth in the long run.

(Image viral created Sept 2007 ...nothing changes then does it?)

Today's shorts:
UK Inflation 4.5% (bloomberg)

Today's longs:
Mervyn King says rates to stay low on May 2, 2011 (mortgagestrategy)

Mervyn King to play Peter in Peter and the Wolf.


Anonymous said...

I would love to know how an increase in interest rates would reduce inflation significantly. A quarter or even half percent here or there might allow the £ to appreciate slightly, but not enough to offset the rising cost of imports and possibly at the expense of exporters.

Wage increases at 2% and stable (lower amongst the great unwashed). No demand based inflationary spiral on the horizon as living standards are eroded.

The solution appears to be to stuff the exporters and stuff even more the householder whose income will be attacked by inflation AND interest rates.


Although I suppose that Granny will get an extra 30p a week interest. That makes the rest of it more than worthwhile, I'm sure.

Leonardo said...

@ Anonymous
EU countries have lower inflation and higher interest rates. We import more or less the same things

Anonymous said...

True, and that's mainly explained by the relatively robust performance of the Euro.

The markets are dumb, but not dumb enough to pour into Sterling on the back of an interest rate rise of even 0.5%, which is the most that can be expected in the short to medium term. So there would be little relief from imported inflation on the back of an increased £.

And although I'm not certain I doubt that those countries you refer to have had structural increases in inflation via VAT rises etc.

Last month's rise was on the back of air and sea travel, tobacco and alochol. So if you didn't travel on a plane or a ship and don't smoke your personal rate barely moved.

Leonardo said...

the following countries had "structural increases in inflation via VAT rises":

-Spain 2% VAT increase; HCPI 3.5%
-Portugal two increases in VAT, first of 1%, second of 2%; HCPI 4%
-Greece two increases in VAT, first of 2%, second of 2%; HCPI 3.7%

Other countries that have not been forced to raise VAT, either have moderate inflation or booming economies.

If you are serious about inflation, then why not raise interest rates by 1%? That is the core mandate of the BoE.

and yes I did travel last month, and of course I drink alcohol. I also drive...

Anonymous said...

So we should be basing our policy on the back of what Spain, Portugal and Greece do?

Instead of continually repeating the mantra that we should 'increase interest rates by 1%' try and explain what you think that would achieve and how. What would the effects on core inflation be compared to imported inflation? How much do you envisage Sterling increasing? Do you realistically see wages increasing anywhere near inflation in the medium term? How would that affect exporters?

What is your end game?

I agree about the core mandate of the BoE. It's outdated and the 2% figure was set at a time when economic conditions were completely different. Is 2% a 'one size fits all' figure? Is there any rationale that bears close scrutinty?

Although commodities have dropped back a bit there is every chance that prices will continue to increase, and that whatever we do the interest rate 2% is unattainable.

And the EU interest rate is what, 1.25%? Referring to your original point it's not exactly as if the whole of Europe is flourishing under the regime. There's another case where one size clearly doesn't fit all.

I can't link to it directly but I saw an article yesterday that showed that core inflation has been above 3% since 1997, but the overall figure was dragged down by cheap imports (now no longer the case). And that covers a period when interest rates were 5,6%?