Thursday, 7 June 2007

More cowardice from the bank of england

The Bank of England wimped out again today. Faced with a choice between controlling inflation and protecting the housing maket, the MPC chose the housing market. Rather than increase interest rates, the committee voted to delay the inevitable in a futile effort to hold off the coming crash.

The Bank is now fast losing credibility. It simply isn't serious about controlling inflation. It prefers to wait and see, hoping that the future will bring favorable price developments. Perhaps, it will luck out and energy prices will fall. Maybe, wage setters will suddenly forget that retail prices are rising at almost 5 percent a year and voluntarily take a real wage cut this year. Alternatively, the UK could be flooded by yet more cheap Chinese goods, that will keep consumer prices down. Central banks sometimes can get lucky.

However, luck cannot counter the harsh reality of monetary economics. Inflation is a not hard thing to understand. It created by excess monetary growth. At the moment, the UK's central bank is producing money at a growth rate of 13% a year. With that kind of monetary growth, inflation is a certainty. Sooner or later, the Bank of England will learn the importance of monetary growth. It's a pity that it did not learn the lesson this month.

Despite today's cowardly behaviour, further interest rate increases are inevitable. It is now very likely to interest-rate will reach 6% by the end of the year.

Here is the shameful statement, if you want to read it.


Anonymous said...

Don't worry, by this time next year, rates will be 6.5 percent and rising.

AC said...

Don't worry about cheap goods and services from India and China saving the day. India's boom is out of control. Indian IT wages are spiraling so much they are having to outsource software jobs from India to Mexico !

Cheap offshore wages are a one off effect. Inflation is comming !

shtove said...

Shoorley the only solution is to jump on the ECB discipline bandwagon?

But that could never happen, sir! The English are too proud, too independent.

Let Northern Ireland and Scotland slink away, and then watch reality take hold.

Ben said...

Man, how long can these guys go on being wrong?

Here is a transcript of a pertinent speech given by Merv in 2004. Apparently, according to his (ahem) "analysis" back then, house price inflation was just going to subside of its own accord over the next few years.

Meanwhile, inflationary expectations are now not only baked into the economy, they're burned to a blackened crisp and caked all over the sides of the oven.