The Great Debate UK
-Kathleen Brooks is research director at forex.com. The opinions expressed are her own.-
Looking through the minutes of the Bank of England’s policy meetings for the past year, there are a couple of patterns that you see emerge. Firstly, that rates are on hold, and secondly, that the UK’s elevated inflation rate is temporary. Now the European Central Bank has joined the chorus. ECB President Trichet recently sounded confident that prices will moderate, even though consumer prices rose above the ECB’s target rate of 2 per cent in December.
But how long will citizens of Europe and the UK accept rising prices and how long can central bankers continue to stand by while inflation smashes their target rates? To answer this we need to find out two things: firstly, is this rise in inflation really that bad? Secondly, why are central bankers willing to let inflation pass them by without exercising monetary control?
Inflation is a tricky thing to get right. A little is good since it helps growth, but not enough is bad as it can stunt an economy and leave it in a deflationary spiral. There is also another benefit to inflation: it helps to erode debt levels in real terms. When many developed economies are struggling with unsustainable debt loads, a little inflation helps to lower the size of the mountain.
Two days before Thursday's strong inflation figures, the People's Bank of China surprised with a rate hike. Global markets sold off, but quickly recovered. The effect of conducting monetary policy through short sharp shocks is waning. It looks time for a well-explained, concerted plan to fight rising prices.
Chinese policymakers favor a keep-'em-guessing approach. The first rate hike in three years came out of the blue, and the central bank remains mute on its reasons. Only annual inflation of 3.6 percent, above the official target, gives a retrospective clue. Similarly, the People's Bank has not explained why it ditched its bewildering practice of moving rates by 27 basis points at a time.
from The Great Debate:
In 1987, UK Prime Minister Margaret Thatcher whipped up a firestorm of criticism from her opponents on the left when she told a magazine reporter that "there is no such thing as society", only individual men and women, and families.
The interpretation of those comments remains fiercely controversial. From the context it is not certain the prime minister was clear what she was trying to say.
Kathleen Brooks is research director at forex.com. The opinions expressed are her own.
Ever since the last Federal Reserve meeting when the prospect of further policy stimulus for the US gripped the market, dollar weakness has been the dominant theme in FX. The Fed action is considered in some quarters as a backdoor form of currency devaluation, and there has been talk of a global “currency war” as a result.
“Those whom the gods would destroy, they first drive mad.” – the words of a wise Roman thinker (or was it a Greek central banker?). At any rate, the gods certainly seem to have no benevolent intentions with regard to this country, judging by the statements coming from the Bank of England, in particular the calls for another round of quantitative easing from one member of the Monetary Policy Committee and the cry of “Spend, spend, spend” from another.
The view emerging from the Bank and the Monetary Policy Committee is that the country is in the grip of a slow-growth recession, facing the threat of Japanese-style deflation and a double-dip recession, and that this grim situation requires near-zero interest rates, supported by QE2 if necessary, in order to restore consumption and lending (including mortgages) to pre-crisis levels.
For a central bank that looks certain to bust its 2 percent inflation target for most of the time between now and the London 2012 Olympics, there is still a lot of uncertainty out there.
Bank of England Governor Mervyn King referred to "uncertain" or "uncertainty" about the outlook five times at the May quarterly Inflation Report press conference according to the bank's transcript, and the latest one didn't seem much more confident in tone.
-Mark Bolsom is Head of the UK Trading Desk at Travelex Global Business Payments. The opinions expressed are his own.-
Sterling tumbled to a one week low against the dollar in trading this morning, after the Bank of England delivered its latest quarterly inflation and growth forecasts today.
-Laurence Copeland is professor of finance at Cardiff University Business School. The opinions expressed are his own-
The policy debate is hotting up. On one side, we have the expansionists, arguing that it’s the Nineteen Thirties all over again, that Keynes is right now as he was then – we need more, not less government spending, we are digging our own graves by cutting back, especially as the fiscal retrenchment is continent-wide, covering thrifty North Europe as well as profligate ClubMed. According to this view, fiscal contraction will exacerbate the situation by magnifying the fall in the level of economic activity, leading to a downward spiral and, incidentally, making it harder than ever to repay our debts.
By Ian Campbell
– The author is a Reuters Breakingviews columnist. The opinions expressed are their own –
Just in government and David Cameron’s relationships are in question. Eyebrows have been raised about the prime minister’s friendship with an Old Lady, sometimes known as the Bank of England. The affection appears reciprocated by Mervyn King, the Bank’s governor. But to think the Old Lady’s independence is compromised is probably to take things too far. The bank’s current low interest rate policy looks more than just a political favour.
– The author is a Reuters Breakingviews columnist. The opinions expressed are his own –
Critics might say the UK’s inflation target is just for fun. Consumer prices were 3.4 percent higher in March than in the previous year, well above the 2 percent target rate, but the Bank of England will do nothing at all.
If the central bank were serious, shouldn’t it raise interest rates and crush every bit of life out of the UK economy? Not really. The UK has above target inflation because world oil prices are high, the pound is low and VAT is up. But it has inflation for poorer and richer.