Absolute craziness from the Monetary Policy Committee

Inflation has today risen to 3.3% from 3% last months. This is 1.3% above the government's target.and is 1.2% up on last year. However, in the Monetary Policy Committee's own report they state that 1.1% of the 1.2% inflation rise in the last 12 months is down to rises in electricity, gas, petrol, oil and food. In effect, the MPC admits that the rise is because of a rise in the prices of the basic necessities of life and not because of extravagant spending.

So why are the MPC talking up the prospects of having to raise interest rates again ?

It is an absurd situation that an economy which looks to be heading for a recession might be tipped over the precipice because the MPC might raise interest rates in order to stop people spending money on luxuries when the MPC's own figures show that only 0.1% of the rise in inflation is down to spending on non essentials.

It is a crazy state of affairs when the answer to people spending money on essentials like fuel and food (which are the items that are rising in price) is to hit them harder in the pocket by raising interest rates so they pay more on their mortgage. Will this mean that they spend less on food and oil ? No. Will it mean that they spend less on goods and services that might keep the economy's head above water in a time of troubles ? No.

We are in for a heavy landing and the MPC appears to be doing nothing to help.

The truth is that what the economy needs is a cut in interest rates. A rate cut will not lead to more inflation because inflation is being caused by external factors beyond the reach of our domestic interest rates. Interest rates are a blunt weapon which have no effect on the causes for inflation but will hurt every home owner.


Ed said...

Interest rates feed through into inflation in all sorts of different ways (impact on business spending decisions, impact on exchange rates etc) and raising interest rates is likely to have an impact on spending on fuel and food (more so on fuel - you will choose to stay home this weekend instead of driving to the coast, you are less likely to decide not to eat.) You MIGHT even decide to buy a smaller cheaper car this weekend rather than that BMW7 Series you have your eyes on - or even a push bike instead.

Signs are that increases in the price of petrol are already having an impact on demand so it is not necessarily a commodity that is completely fixed in demand.

The problem, at least as I understand it, is that the MPC is given a target for inflation set by the Government and only has one tool - interest rates - with which to hit it.

The solution may well be for the government to ease its inflation target for this year - the problem with that is that the inflation target has become a bit of a political p+nis - admitting you cant keep it up any more just isnt done.

Anonymous said...

Yup, the MPC setting interest rates can be useful but only sometimes.

From what I can gather, the government could and should have taken action much earlier on things like - cutting or freezing fuel duty, forcing banks to take some of the cost of their collosaul fuck-up on their collective chins and start some serious diplomacy in the middle east - The pointless and dangerous impasse with Iran is doing nobody any favours, Israel and Palestine are still a destabilising influence in the area, and all of that is pushing up the price of oil.

I'm also surprised that people aren't giving Brown et al a real kicking about the Iraq war pushing up oil prices and taxes.

Pundits are quick to say that the Iraq war is old news, but it's hitting everybody in their pockets today through taxes and oil prices, we should be calling the government on it.

Infuriatingly, a fair ammount of the blame for our current situation rests squarely on the shoulders of the government :
* Total Failure to regulate "whizzy new financial instruments" that boiled down to fraud/mis-selling.
* Starting a war in the largest oil producing nation, crippling production and forcing up prices.
* Forcing local government to cut services and raise council tax to help pay for military adventures and aid in Iraq.
* Taxing already over-priced fuel and causing inflation as the price of fuel impacts on the cost of food, basic supplies and services.

I'm really surprised at how quickly a Prime Minister who was a cautious Treasurer has taken his eye off the ball and trashed our economy in such a short time.

John said...

Cutting interest rates would only delay the inevitable by encouraging people to borrow more and keep spending up.

It was notable that the MPC didn't mention how much of inflation was down to their weak policy causing the value of the pound to fall internationally.

Interest rates need to go up - significantly and soon - we are already at the point where for many products it's profitable to buy with borrowed money and hoard them.

That's a recipe for disaster.

You want to make petrol cheaper? Stop people buying so much rubbish from China on credit cards, and China won't use as much oil in factories, the global price will fall, and the problem is solved.