大象传媒

Average earnings are rising at 4.5% that is no faster than RPI inflation, which is the best measure of household costs

Excluding bonuses, which are highly volatile and skewed by big city payouts, pay is rising by about 3.7%. This means people's real disposable incomes are declining, because costs and prices are rising faster than incomes.

This is deflationary and exactly the point of increasing interest rates!

Already we are seeing signs of reduced consumer expenditure and a more subdued housing market. As Evan has stated in this blog, the effect will be more pronounced once all the two year fixed rate mortgages from late 2005 end.

In my opinion, jacking up interest rates further at this point before the full effect of the last three rises is known would put growth of the economy in danger and would be unnecessary over-kill.

Well, the April money supply figures are marginally up. They'll keep interest rates constant then wait and see till next month. Up a quarter next month.

Well chalk one up for Evan! Never mind Huw, better luck next time ;-)

We already know the MPC don't have the balls and a hold just announced is about right. Until Gordon Brown gets the PM position they are not going to do anything to upset the apple cart. Once he's in and someone else becomes chancellor he can then blame the whole thing on them (or if not on a worldwide inflation). 6% by year end 2007. 7-8% by end of year 2008! You have all been warned.

One cannot expect the Bank of England to do its job properly because even thought it is prima facie independent, it is institutionally biased.

The reason for this is simply the lack of diversity within the MPC. And by virtue of its members personal circumstances, they will personally benefit from an environment of high inflation and low interest rates. This is because the majority of its members wealth is locked up in housing and state pensions.

Most of the MPC have been career public servants with index-linked pension schemes. By keeping inflation high and rates on savings products low, they will strengthen the purchasing power of their pensions versus their private-sector peers. Secondly, they are a fairly elderly bunch 鈥搃.e. over 40, and past the stage of saving for property, children etc. With much of their wealth likely to be in large family homes, and with downsizing likely to be the next move, who in their right mind would want to risk exploding their property fortune?

What this means is that the MPC members will personally benefit to the tune of tens or hundreds of thousands of pounds from a high inflation 鈥� low rate environment. I am not saying they will do this deliberately, but a huge amount of behavioural finance research (e.g. remuneration committees) has shown the most ethical and independently minded people simply cannot act without, at least subconscious self interest. Secondly their personal experiences which they undoubtedly use alongside the statistics lack the national diversity.

There is also the issue of loss aversion. Much praise for the economic stability of the past decade has been heaped on the MPC, not least by the Chancellor. In a downturn, you would expect a correspondingly large amount of criticism. Given what we know about human psychology and loss aversion, it seems likely, again probably subconsciously, that those MPC members would much rather perpetuate unsustainable trends in borrowing, than risk being be the ones who get the blame if they were to unwind.

It would be very interesting to see how an equally 鈥渋ndependent鈥� bunch of 20-something economists, eager to get on the property ladder, just beginning to save for their defined contribution pensions, and with less of an eye on history, might handle monetary policy.
The MPC is one area the government won't be desperate to introduce diversity.

Yup Huw you're right. They havent got the balls.

Wages are rising 6%, house prices 10%, oil hovers stubbornly at 70 bucks and money supplying growing at an astounding 13%. And yet the MPC apparently believes inflation will head back down as if by magic!? They seem to pin their hopes on oil prices heading back to 40 bucks. In other words, they will meet their inflation target if peace breaks out in the middle east. How likely is that?

Rates will need to go much higher, and the longer they delay, the higher they'll have to go. To skip a 25 basis point rise today was a total abdication of responsibility.

Everyone is used to 0.25% tweaks, so a sudden 0.5% increase would have signalled the BOE had got something very wrong. And they're unlikely to want to panic everyone, as that could lead to an overreaction - even a possible recession.

I actually don't think the BOE lack balls (though it does look as though their decision to cut rates to 4.5% in August 05 was a mistake).

King said earlier this year that inflation could fall dramatically over the next 4-6 months. Presumably, this would either be triggered by past energy price rises dropping out or by the BOE raising interest rates dramatically to cool things. Since the BOE isn't raising rates too dramatically now (or at least they paused for breath in June!), I reckon they think inflation will continue dropping. In part, this would be due to their four previous 0.25% rises.

For what it's worth, I think interest rates this cycle will peak at 5.75%, though obviously 6% or higher remains a possibility.

World interest rates are slowly on the way up, although the USA is between a rock & a hard place as there is a need to drop rates to stimulate the economy but higher rates are needed to control inflation. Britain has huge debts and a massive trade imbalance, but Mr Brown's options are, at present limited. The BOE will need to increase rates by another 0.5 to 0.75 % within 12 months, with it's knock-on consumer squeeze. The signs are looking more pesimistic than optimistic (65/35). The markets are on an all time high & just waiting for a "bear" signal. Hold on to your hats!!- If you believe it will all go up & up for ever, you must be aged under 30.

Paul: "Wages are rising 6%"

Where does that figure come from? The official figures show 4.5% or 3.7% if you exclude bonuses.

The ex-bonus figure is actually lower than it was in March '05 when it was 4.1%.

No data in those figures to suggest the economy is over-heating.

A bizarre failure the BoE not preventing inflation going over 3%, talk about useless.
Not exactly difficult to predict when you're flirting around your limit rather than the target number with commodity prices where they have been.
The BoE had almost nothing to do to contain inflation in 10 years - China & India were doing the hard work for them and they still failed.
All the BoE had to do was 1) not have a slump and 2) not have any bubbles that risk stability and really stuff people up.
So now, thanks to their work, we've never had it so good - but our debts have never been so large.

Remember many lock mortgages into a 2 year deal so all the rate rises don't kick in for a while - only gradually over a 2 year period.
In addition, the competitive deals around mean that new mortgages are still cheap in historical terms.
Expect bubbles to continue, the poorer people to be absolutely stuffed and watch out for external shocks to the system.

If all your figures are rounded up, and you haven't gone over 100% in total, then the figures weren't rounded at all, were they.

Well Done Evan... spot on as usual!