The Great Debate UK
Can inflation be controlled by raising interest rates?
- Mark Bolsom is the Head of the UK Trading Desk at Travelex, the world’s largest non-bank FX payments specialist. The opinions expressed are his own.-
One of the Bank of England’s Monetary Policy Committee members, Andrew Sentance, was quoted this morning suggesting that the Bank of England will need to consider raising interest rates this year if a “recovering economy poses a threat to inflation.”
Sentance’s view that inflation will rise is consistent with our forecast and is also backed up by the recent upwards trend in the UK’s CPI Manufacturing data. A rise in inflation is unsurprising, given the Bank of England’s asset purchasing scheme, which aims to boost liquidity through printing more money. Inflation has also been bolstered by a weak pound, rising oil and commodity prices, as well as the return of VAT to 17.5 percent.
However, whether rising inflation can be controlled by raising interest rates, as Sentance suggests, is debatable. Historically, central banks have used interest rates to combat inflation, as they act as a brake on credit consumption – as rates become higher, credit becomes more expensive. Hiking up rates therefore offers the consumer an incentive to save, and reduces liquidity in the economy.
A tough spring in store for the pound
- Jane Foley is research director at Forex.com. The opinions expressed are her own.-
The pound has started the year on a negative note. Ongoing concerns over the budget deficit, an impending general election, the prospect that the Bank of England (BoE) may yet increase quantitative easing (QE) and a drop in consumer confidence are all clouding the outlook.
from The Great Debate:
In praise of smaller banks, less volatility
-- James Saft is a Reuters columnist. The opinions expressed are his own. --
If we want a world with safer banks, we need to be prepared for the consequences; lower growth over a painful medium term but the promise of making it up over the long run as we suffer less devastating financial blowups.
A banking system forced to operate with more capital and a higher proportion of safe, liquid assets is one that will shrink and charge more for credit, potentially retarding growth as we transition to a different mix of financing.
from UK News:
Too big to fail? Guerrilla central banking and the last resort
Deciding it was safe to come clean because banks are now on a more even keel and the worst of the credit crisis is behind us, the Bank of England has told the nation that at the height of the turmoil it secretly lent Royal Bank of Scotland and HBOS a colossal £62 billion, which is more than the entire British defence budget.
Both banks faced the imminent closure of high street cash machines and the curtailment of normal banking operations across the country.
from Breakingviews:
Inflation’s gonna be OK, says Merv
Mervyn King, Governor of the Bank of England, sees a long, hard road back to the path we thought we were on before the financial crisis broke. Just how long is shown by Chart 2 in Wednesday's Quarterly Inflation Report. The Bank's Monetary Policy Committee does not expect Britain's GDP to return to its peak, 2007, level until 2011, and there's an outside chance that even in 2012, the country's output will be no more than it was in 2006.
This "considerable period" of "sustained weakness of demand" is why the MPC's other fan chart, the "rivers of blood" projections of inflation, looks so benign. The best guess (sorry, "central projection") is plumb on the 2 percent target for the CPI in 2012. We all know, said the Governor, that inflation is going to jump in January, thanks to the combination of dearer fuel and rising VAT, but after that, it should slide gracefully back, wobbling around the target for the next three years.
Bank hedges bets with QE expansion
When the Bank of England decided to expand its quantitative easing policy by 25 billion pounds to 200 billion on Thursday, it was essentially hedging its bets.
After Britain’s economy shrank unexpectedly in the third quarter, and with two thirds of the City expecting an expansion to the QE programme, simply shutting off the tap of government bond purchases would risk being more of a shock than the economy could bear.
from Commentaries:
Do banks really need to hoard liquidity?
That's the provocative question posed by Willem Buiter. His latest, characteristically lengthy, blog post tackles the regulatory vogue for forcing banks to hold much greater reserves of liquid assets - in practice, government bonds.
Buiter's missive follows new rules from Britain's Financial Services Authority, which will force banks to increase their reserves of government bonds by more than a third. The rules have been met with predictable bleating from the industry, which accuses the regulator of undermining Britain's competitiveness and promoting the fragmentation of the global financial system. Another concern is the FSA's handling of the transition.
Things just got a lot worse for inflation
- David Kuo is director at The Motley Fool. The opinions expressed are his own.-
What is the collective name for a crossing of fingers?
Because that seems to be what the Bank of England’s Monetary Policy Committee members are doing. They are collectively crossing their digits in the hope that they have done enough to steer the UK economy out of recession.
They have pumped billions into the UK economy and it doesn’t seem to be having much effect – yet. That is unless you are a banker looking to bolster your balance sheet with freshly minted notes. Banks are happy to swap their assets for the Bank of England’s cash but remain unwilling to lend. Additionally, there is still uncertaintyabout the ability of the economy to grow unaided if the central bank should stop printing money.
from Commentaries:
So that’s why the Bank buys all that government debt
I've found the answer to the monetary puzzle de nos jours. The ritual of the UK Treasury's DMO issuing new government debt one day, only to have the Bank of England buy similar amounts of almost identical stock the next, has puzzled me ever since Quantatitive Easing began.
How much simpler it would be for the Treasury to borrow directly from the Bank - the modern equivalent of running the printing press faster - to pay the government's bills.
Enjoy low inflation while it lasts
- David Kuo is director at the Motley Fool. The opinions expressed are his own.-
If you are not confused you are not paying attention. Those sage words from management guru Tom Peters can be applied to a wide number of economic issues today, but none more so that to the latest inflation figures.
Question is: do we have inflation, deflation or some mixture of the two?
The answer lies in which index you are looking at?
Inflation as measure by the Consumer Prices Index (CPI) has held firm at 1.8 percent. But according to the Retail Prices Index (RPI), which excludes mortgage costs, inflation for July came in at minus 1.4 percent – that’s up from minus 1.6 percent in June.
