I highlighted how the MPC got it wrong last time. Will they learn their lesson ?

I'm going to show off a bit here, but I wrote, at length, three years ago about how the Monetary Policy Committee were totally wrong to keep raising interest rates before we went in to recession, in a fruitless and bizarre attempt to bring down inflation. As I wrote in June 2008

"Inflation has today risen to 3.3% from 3% last month. 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."

And before that in April 2008 I highlighted the total folly of raising interest rates when I explained

My circumstances are that our three year fixed rate mortgage comes up in the Autumn and it will mean an increase of around £100 per month to out mortgage repayments. Yet if you look at my pay rise for the last three years added together I am now earning just about exactly £100 a month more after tax than I was three years ago. Meaning I will have effectively had three years worth of pay rises wiped out.

Now multiply this across the country, with millions of people's fixed rate deals all coming to an end and more and more people having to pay more for their mortgages, and what's more, tying themselves down to a set rate for three or five years. In effect, this means that we are not only going to see a recession in this country because of the effect of people paying more for mortgages (to pay for houses that will be dropping in value), but the system ties people in to paying recession prices mortgages for some years to come, thus stopping the cycle of money that might kick start a growth out of recession.

So where are we now ? Inflation has risen to 3.7%, because of "rising fuel, energy and food prices". Its June 2008 all over again. Will raising interest rates and removing money from people's pockets stop people buying food, fuel and energy ?  Of course not, they are basic essentials and not excessive consumer spending.

Will the MPC have learnt a lesson from 2008 ? You'd hope so, but some of the same clowns from 2008 still sit on the committee, so I wouldn't put it past them to make the same mistakes again.

Grim reading for the housing market

I've not got time to write a lot about this right now, but the details of the report commission by the Treasury in to the current state of the mortgage and housing market makes grim reading.

One point the reports seems to be aware of, but his passed the government by, is the current mortgage drought, as the reports author refers to it, will ahve long term effets for the economy.

The commission seems to realsie that people currently renwing their mortgages (I am one of them) are being locked in for three to five years in to higher mortgage repayments which will mean a three to five year curtailment in those people's consumer spending. My own mortgage will be £150 a month higher because of the mortage rates on offer and I would be locked in for three years to this rate.

You have to ask why the government cannot see this is a major problem.

How much control do we have over inflation ?

The perceived wisdom that raising interests rates has got to be questioned in the light of another hump in the inflation rate.

All the reports on the TV news today suggest that the rise in inflation is down to a rise in pricse of essential food items and fuel, not consumer goods. Whilst raising interest rates (or even taxes) might stop people buying a new DVD player, it will not stop people buying essentials like bread, milk and petrol, which are the key causes for the rise in inflation this month.

So given that the economy is rather up the creek and we appear to be losing the proverbial paddle, is the Bank of England right to believe that a delay in further interest rate cuts will actually do anything to halt inflation rising, more likely a long delay before a further rate cut will actially exacerbate the problems in the economy at the moment.