The FT has reported that:
The Bank of England says “further modest increases” in interest rates are likely as it tries to bring inflation down to its target of 2 per cent in the next few years.
This comes after the Monetary Policy Committee left rates unchanged despite inflation increasing to 3.1 per cent in November. As the FT continued:
Markets expect the BoE will raise interest rates up to twice next year, once in May and a possible second time towards the end of 2018, bringing them from their current levels of 0.5 per cent to 1 per cent by the end of the year.
Before noting:
Though borrowing would become more expensive, 1 per cent would still represent a historically low interest rate level and could still encourage households and businesses to borrow and spend.
And suggesting:
The committee believes the UK economy cannot grow much faster than 1.5 per cent a year without pushing up inflation. As a result, the bank's outlook for the economy and living standards remains weak – leading members to stress that more interest rate rises are likely to become necessary.
Three comments seem appropriate.
The first is that it seems increasingly absurd that the MPC is only worrying about inflation. In part that's because the country could do with some to assist those in debt manage the burdens they face. It's also because the measure is simply so crude, failing to take into account so many impacts on the economy arising from issues over which the MPC has no real control, whether by interest rate changes or by conventional quantitative easing. And it is because the goal is now so contradictory when it is believed that we must have growth to see an increase in real wages and yet any sign of growth must be snuffed out at birth by an interest rate rise for fear of inflation. What the policy inevitably means is we are doomed to stagnation in living standards.
Second, this suggests that the Bank of England badly needs a better measure for economic targeting, but this has to be set by the government: it is not for it to set in isolation. The logic of using interest rates to manage inflation is so now so hopelessly inappropriate for the UK economy (and the vast majority of the people who live in the country) that urgent change in policy priorities is overdue if the cycle of guaranteed despondency in which we are stuck is to be broken. Charles Adams has suggested that targeting increasing median income makes sense and I have a lot of sympathy with that.
Third, the idea that the Bank of England, or anyone else, has the foresight to forecast growth next year for the economy when there are so many massive headwinds facing the country undermines their credibility at present. More caution, a little more wisdom, and a demand that the government play its role with fiscal policy to which the Bank might lend a hand, might have been appropriate, I suggest. But that's not what we got from a body dedicated to conventional wisdom. In which case a minor revolution in thinking is required.
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SWR was taking about the Swedish approach on his blog
“Imagine the following economy. Growth has been strong for a number of years: 2.7% 2014, 3.8% 2015, 3.1% 2016 and is expected to be above 3% again in 2017. The OECD also think the output gap is positive i.e. output is above the sustainable rate. Inflation was bobbing around zero for a few years, but since 2016 has gradually crept up to the target of 2%.”
This is where the UK would love to be. The interesting thing is:
“We are talking about the very healthy Swedish economy. An economy where inflation is at target and some experts think the economy is running hot. What level do you think the Riksbank, Sweden’s independent central bank, has set its interest rate at? The answer is -0.5%.”
Sean,
“This is where the UK would love to be. The interesting thing is:…”
…..we can’t be seen to accept that the way towards this sort of economic stability and health is the precise opposite of the neoliberal orthodoxy we’ve been slavishly following for forty years.
We have a polity which would rather see the destruction and impoverishment of its population than admit it’s philosophy is at fault.
Point 3 in the 33 Theses intro sums this up very succinctly when it says: “Too often when theories and evidence have come into conflict, it is the theories that have been upheld and the evidence that has been discarded”
Religious faith brooks no opposition. ‘God moves in mysterious ways’, they say. QED. End of.
I don’t know how you deal with that mindset.
We have a polity which would rather see the destruction and impoverishment of its population than admit it’s philosophy is at fault.
Agreed
“Demand that the government play its role with fiscal policy..”
Agreed.
But we’re talking about Phillip Hammond here, and he doesn’t have a clue.
Further local authority cuts from April 2018 are going to be swingeing and severe; if things weren’t fiscally disastrous enough now, they will be after that.
Mr Shigemitsu,
“But we’re talking about Phillip Hammond here, and he doesn’t have a clue.”
I find it hard to believe PH is as stupid as his policies appear to indicate. I think there is deliberate intent. I think there has to be.
Previously you’ve hinted that you believe some influential people want rates to rise precisely to precipitate the kind of crisis they can exploit. Do you think that’s still a part of the reason for this seemingly absurd approach?
It may be
Perhaps we should be examining why the need for growth is there at all, and subsequently having a rethink about where, as a society, we get our money from. If government can licence banks to create it, why not others? I’m convinced money creation needs to be vocational, handled by responsible people or groups with as their chief consideration the well-being of the overall community. It shouldn’t be allowed anywhere near the hands of ‘for profit’ organisations like the banks.
There is a lot of heterodox literature that challenges the notion that interest rates in any obvious way can ‘control’ inflation. The MMT view, for example, even suggests that interest rate hikes can contribute to inflation. Since the Fed hikes the pound/USD has gone from 1.08 to 1.19 and the Euro from 1.2 to 1,36.
Interest rates are a crude to tool in relation to aggregate demand effects because of so many complex factors. Mitchell states it thus:
‘MMT considers that the aggregate demand impact of interest rate changes are unclear and may not even be negative (for a rise) or positive (for a fall) depending on rather complex distributional factors. For example, remember that rising interest rates represent both a cost and a benefit depending on which side of the equation you are on. Interest rate changes also influence aggregate demand — if at all — in an indirect fashion whereas government spending injects spending immediately into the economy.
This is the reason why MMT proponents do not give priority to monetary policy over fiscal policy.’
Also worth noting Richard Werner- Lower rates do not stimulate an economy-higher rates do not slow an economy’
See: http://www.youtube.com/watch?v=zp-oomyars4
Simon, Richard Werner’s view is correct here in my opinion. In simple language, increasing interest rates transfers more money to the “haves” from the “have nots.”
Tinkering with interest rates can be compared with adjusting the central heating room thermostat when the boiler thermostat is set to the minimum – in other words it has little effect except that it can turn the boiler off but cannot get the heat above the preset level.
I think it is no coincidence that the US Fed and BoE are following the same path.
I think there is a lot of truth in that – and always have
Hence my perpetual dedication to fiscal policy
There was a mention, about 17 years ago, of moving to “triple bottom line reporting”. This considers more factors than just the economic ones: economy, environment and society. Whilst some companies have started to include CSF reporting with their annual reports, there are no standard measures for them, nor similar measures for countries.
We live on a finite-resource world. Economic growth cannot (in the long term) be the be-all and end-all how we measure how well a country is doing. By focusing solely on the economy we have ended up environmentally and socially poor, with a wide disparity in net disposable income. History has shown that leads to one of three things: revolution, slow degradation of the economy & society, or change. The latter requires vision and leadership that seems to be sadly lacking on both sides of the House.
Morgan(?) Freeman,
“History has shown that leads to one of three things: revolution, slow degradation of the economy & society, or change. The latter requires vision and leadership that seems to be sadly lacking on both sides of the House.”
Well that depends whether we consider Brexit to represent change. Which I think we must.
I’m not confident that it represents any change for the better though. There seems a general consensus amongst respondents to this blog that it will be the ‘frying pan to the fire’ sort of change.
Warren Mosler on interest rate ‘myths.’
‘Maybe there’s some connection with the ECB, the European Central Bank, as they lower rates, the currency has been stronger. Is it possible the central banks have it backwards? With all those multiple PhD’s, and all the research, the hundreds of millions of Euro they spend on research, could they have it backwards? All the evidence says yes. And the countries with the higher rates, as they raise rates it doesn’t seem to work. It seems to make inflation worse and the currency low.
So what are they overlooking? Who is the largest payer of interest? The government. And what happens when rates go up? Government pays more interest to the economy. And when rates go down governments pay less interest to the economy.
The economy loses interest income when the rates go down, and everybody who has money in the bank knows that. It helps the borrower, but it hurts the saver. But there are more savers than borrowers. The government debt in Italy is over 100% of GDP. That’s mostly somebody’s savings. Okay, that’s all ‘net savings’. When the interest rates goes up, that savings earns more money. When interest rates goes down the economy earns less money on the interest. So when interest rates goes down, the budget deficit goes down, and people earn less money.’