The Great Debate UK

Friendly Cameron and King get mix right for now

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 overly friendly talk has arisen because both sides have made comments that might be deemed injudicious. King appeared in May, before the election, to give his backing to Conservative fiscal tightening plans. Cameron, meanwhile, has often mentioned how he thinks tight fiscal policy should allow interest rates to stay lower for longer. The new government has also fixed up the Old Lady with greater supervisory powers.

Could this chumminess lead to the wrong monetary policy? King’s critics might think so. Inflation is 3.4 percent, well above the 2 percent target. Andrew Sentance, one of the monetary policy committee (MPC) members, voted for a rate increase in this month’s meeting. Adam Posen, another MPC member, acknowledged “a direct difference with the governor” on one thing. He sees not just one-off inflationary factors but also a slight “unanchoring” of inflation expectations. And yet Posen also sees the UK poised between two very different outcomes — either recovery or “the renewal of a severe recession”. Similarly, David Miles, a third member of the MPC, believes that now is not the right time to raise rates even though inflation is “uncomfortably” high.

Inflation impoverishes Britons the easy way


– 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.

from The Great Debate:

Tightening underway, Fed a passenger

A tightening in financial conditions is under way but its principal architect won't be the Federal Reserve.

Far from it, the Fed will be pinned down by powerful disinflationary, perhaps even deflationary, forces, making it very unlikely to be willing to raise interest rates any time soon.

from Breakingviews:

China’s tweaks won’t cure financial excess

weigu.jpgA month before China ushers in the year of the Tiger, its central bank has begun to address the effects of its roaring liquidity boom. It is encouraging that the authorities in Beijing are alert to the threat of an overheating financial system. But with so many countervailing forces, the liquidity tiger will not be tamed so easily.

Markets yelped Tuesday after the central bank raised the minimum ratio of capital to loans at banks by half a percentage point. But this amounts to little more than scooping water out of the sea. Some 1 trillion yuan ($146 billion) of government bills mature in the next two weeks. If they are not rolled over, three times more money would flow into the system than the reserve hike will leech out. Then there are foreign speculative flows - an estimated 378 billion yuan in the fourth quarter of 2009.

A tough spring in store for the pound


foley- Jane Foley is research director at 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.

Will inflation soar when QE is withdrawn?


MarkBolsom - Mark Bolsom is Head of the UK Trading desk at Travelex, the world’s largest non-bank foreign exchange and international payments provider. The opinions expressed are his own. -

The rise in November’s CPI figure was larger than expected, but not a total surprise and markets have largely ignored the data.

from The Great Debate:

The death of the “punchbowl” metaphor

jamessaft1.jpg (James Saft is a Reuters columnist. The opinions expressed are his own)

Don't expect the year-long rally in risky assets to be undermined any time soon by the Federal Reserve becoming concerned about inflation.

The old metaphor -- that the Fed's job is to take away the punchbowl just when the party starts getting good -- just doesn't apply in the current circumstances. That's not to say inflation isn't a threat in the medium term -- it is virtually a promise.

Things just got a lot worse for inflation


David Kuo- 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.

Pensioners must shop around to get best annuity


hunt- Stephen Hunt is managing director of Rockingham Retirement. The opinions expressed are his own. -

If we keep going the way we are, disaster looms for millions of over-60’s in the United Kingdom.

from UK News:

Is a 1.8 percent inflation rate good or bad news?

- Sumeet Desai, Reuters senior UK economics correspondent. -

Inflation unexpectedly held steady in July, official data showed Tuesday, but economists still expect big falls in the annual rate this year and monetary policy to stay loose for some time to come.

Is a 1.8 percent inflation rate good or bad news?