Its both fascinating and horrible

Isn't it fascinating how quickly the rhetoric of politicians can change.

For years, the part time politicos on the monetary policy committee talked tough about monetary policy. They told us that central banks needed have credible counter inflationary strategies. They needed to be independent of governments, and relentlessly pursue price stability, regardless of the electoral needs of ruling parties.

Today's data on reserve balances tells of the horrible reality of central banking in the UK. Reserve balances of the Bank of England is not a rhetorical device; it is not cheap speech given at dinner of local business leaders. It is a key monetary policy instrument, which can be used for good or evil.

Today's MPC have been captured by the dark side. Reserve balances highlight the true inflationary intentions of the UK central bank. The BoE have created balances on an unprecedented scale, and used them to buy up government paper. In a few short months, the bank has injected around 10 percent of GDP in new money into the economy. Give that surge in liquidity about a year or two, and we will feel its full force in the inflation data.

As the reserve balanc number has increased, the old speechs about central bank independence have died away. There is no more talk of prudent monetary policy. Instead, central bankers talk of spectres like deflation and credit contractions.

And what about the credibility of the Bank of England? Where is its once proud independence. Naughty boys have word that begins with the letter B that seem to capture the essence of the relationship. I will use a more polite analogy, the BoE has become the Government's poodle.