Thursday, 6 December 2007

Bank of England cuts rates - Part 1

So the Bank of England chose the housing market over price stability and cut interest rates. It chose to defend the interests of City of London and contemptiously ignore the welfare of those who depend on fixed incomes like pensioners, the unemployed and savers. It chose a bailout over price stability.

I had a look at the Bank of England's website today, and this is what I found:

"A principal objective of any central bank is to safeguard the value of the currency in terms of what it will purchase. Rising prices – inflation – reduces the value of money. Monetary policy is directed to achieving this objective and providing a framework for non-inflationary economic growth. As in most other developed countries, monetary policy operates in the UK mainly through influencing the price of money – the interest rate. In May 1997 the Government gave the Bank independence to set monetary policy by deciding the level of interest rates to meet the Government's inflation target – currently 2%.

Low inflation is not an end in itself. It is however an important factor in helping to encourage long-term stability in the economy. Price stability is a precondition for achieving a wider economic goal of sustainable growth and employment. High inflation can be damaging to the functioning of the economy. Low inflation can help to foster sustainable long-term economic growth."

However, today the Bank of England released the following statement:

Although output in the United Kingdom has expanded at a brisk pace for the past two years, there are now signs that growth has begun to slow. Forward-looking surveys of households and businesses suggest spending is moderating, broadly in line with the projections contained in the November Inflation Report. But conditions in financial markets have deteriorated and a tightening in the supply of credit to households and businesses is in train, posing downside risks to the outlook for both output and inflation further ahead.

CPI inflation was 2.1% in October. Higher energy and food prices are expected to keep inflation above the target in the short term. Although upside risks to inflation remain, which the Committee will continue to monitor carefully, slowing demand growth should ease the pressures on supply capacity, bringing inflation back to target in the medium term.

Against that background, the Committee judged that a decrease in Bank Rate of 0.25 percentage points to 5.5% was necessary to meet the 2% target for CPI inflation in the medium term. "

Can anyone spot the contradictions here? The Bank of England's mandate is to ensure low inflation as a precondition for sustainable growth. Yet today, inflation is above the government mandated target, inflationary pressures are rising, but to ensure growth and protect the financial sector, the MPC feels it necessary to cut rates.

The MPC is just incoherent. There is no other word for it. It says one thing and then does something else.

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