Wednesday 9 May 2007

Can we have another interest rate hike next month please.....

So, the Bank of England wimped out and opted for a cowardly 0.25 percent increase. Further rate increases will be needed if inflation is to be brought under control.

There is no mystery why economies suffer from inflation. If central banks prints a pile of money, prices will go up. Remember that old line about "too much money, chasing too few goods"? Well, it happens to be true.

So what have our monetary maestros at the Bank of England been doing recently? Well, take a look at the chart above. The printing presses are working a lot harder these days. Back in 1999, the money supply was growing at a conservative 3-5 percent a year. Currently, the money supply is growing at around 13 percent a year.

Where has all this cash ended up? Yes, the housing market. Forget all this rubbish about scarce housing supply. Think plentiful credit and you begin to understand what is going on. The commercial banks are lending huge amounts of cash and borrowers are using this money to bid up the price of houses. Rising house prices encourages speculation, which in turn, encourages people to take out loans. It is a nasty cycle of credit that will leave most naive participants a lot poorer when it all goes bust.

If Bank of England is serious about reducing inflation, it needs to get monetary growth down to single figures. So, please can we have another rate increase please next month. One hike is not enough.

5 comments:

Anonymous said...

Good blog. Seems a little lonely, though. You'll just have to wait until the press starts using the phrase 'housing bubble' about the UK situation.

I do some repossessions in the south, and it looks like B2L people are having trouble getting tenants. But it's hard to spot any trend. There's been no glut of proceedings either. No yet.

Friendly advice: the little spelling mistakes are off-putting.

Alice Cook said...

Thanks for the friendly comments. I have never thought of myself as being lonely. Bitter, yes; angry, definitely, but never lonely.

Sorry about the typos and spelling mistakes. I try harder to proof-read in the future.

Alice.

Dr Housing Bubble said...

Alice,

Great blog. In regards to the rate increase, at least they have more guts than the Fed in the states. They left rates unchanged here letting the bubble grow more like a beast as each day goes by. They figure by doing nothing that the bubble will magically disappear; kind of like sweeping dirt under the rug thinking it is no longer there.

I get the eerie feeling that many are waiting for a typical summer rebound that will not happen, then the crisis stage will set in.

Doctor Housing Bubble

Anonymous said...

Ah, Lonelygirl16, I was thinking of the cold wind that blows through your empty comments sections. Not many people posting messages here - yet!

But you're newly linked from Housing Panic, and the Americans are feeling really lonely, hoping the rest of the world goes down with them. Try these blogs - they're vv good and might link up as well:

Mish's Global Economic Trends Analysis
http://globaleconomicanalysis.blogspot.com/
Lots and lots of responses.

Market Ticker
http://market-ticker.denninger.net/index.html
Makes the climax super exciting - it's the American way.

If the URLs are broken, just google the titles.

Have a blogalicious day, ma'am.

Unknown said...

There's some good analysis here. Shame that 95% of the population won't be able to follow it because they have absolutely no understanding of economics. Which is a big part of the problem, I guess.

What makes me laugh is the number of buy-to-let morons on various message boards boasting about how this won't affect them, as they'll just be passing on the increased cost to their tenants by putting up their rents - oblivious to the fact that rents are set by supply and demand in the market, not by greedy property owners.

No need to be bitter, I think - this is an absolutely great time to be renting!