BOE beyond reproach?

Dear Ian,

In essence, I agree with you that interest rates have no effect on global imported inflation and I am not a big fan of Andrew Bailey who I believe has too narrow a view of the economy.

However, this is where economics gets more complex. It is a bit like Mother Nature or an ecosystem where one change always has effects on other parts of the economy in a sort of zero-sum game.

Eg, As other central banks increase their rates we are more or less forced into supporting Sterling or face importing even more inflation just by way of exchange rates.

Also while not the cause the lid needs to be kept on domestic inflation. Literally making people worse off and discouraging employers from being able to afford big pay increases and thus fueling the imported inflation.

Then there's the bond markets and government debt/borrowing requirements etc etc.

Nothing sits in isolation which is why economics is actually considered a Social Science and is very unpredictable.

Basically the BoE have to cover their butts.
If they raise interest rates, even if it has no effect on core inflation, then they are "doing their job".
If they ease up on the hikes, and again core inflation stays high, then they are roasted.

To say Bailey has a 'too narrow a view' is being polite. He was a disaster at the FSA and nothing changed when he went to the BoE. He was told by economists and the Treasury that he should be increasing interest rates over a year before he was forced into it, but persisted with the following for far too long: “So the really big question is, is higher inflation going to persist or not? Our view is that on the basis of what we’re seeing so far, we don’t think it is.” That was Bailey in mid-2021!
Anyone in the private sector would have been sacked ages ago!

The BoE is not a lender in the traditional sense, so what make vey little by increasing interest rates.

Some thoughts....

The Bank of England (BOE) is SUPPOSED to be an independent organisation from the Government. They do this to give the markets confidence that the Government will not just print money like the Weimar Republic when they want to piss more money up the wall.

However the Government sets both the mandate and appoints the governor. So the separation is poor.

The mandate is set to ASK the BOE to keep inflation under 2% per year. Don't even get me started on why it's not 0% a year. (Money is a measure, for other measuring devices like rulers or scales you don't expect them to change 2% a year).

Along comes a virus and sends everyone into a panic with a cat amongst pigeons.
The government decided to some people free lunches and not others and enforce Chinese style laws. This costs big time. Have no guts to level with what this will cost they need to borrow crazy levels of money to be paid by whoever later.

The bank steps in and says we'll pump whatever you need so you can borrow what you want at low rates.

As soon as everyone emerges all the extra cash in the economy sloshes about chasing fewer goods.
Inflation gets out of control, so they have to be seen to get control of it to retain credibility. Because without credibility, what is paper or 1s and 0s worth ?

The problem is there is a wage cycle and the bank has a problem, which means they will crash the economy if they have to get in top of it.

Rather like landlords should always increase rents to stay at or close to the local norms, the BoE should have increased rates by a very small % on a regular basis. Borrowers and renters would not now be facing a massive shock.

This is an economic issue clouded by political views. (Politicians on both sides wanted a windfall tax so said oil companies were making bumper profits, but didn't mention previous years losses. Even now Shell & BP share prices are only the same level they were a few years ago.)

The country saw in the 70s how damaging inflation is, but the lessons have been forgotten. As New Yorkie said, Bailey and the Monetary Policy Committee were told loudly and clearly in 2021 but they said the advice was wrong. The absurdly low interest rates since the financial crash were the aberration. A good way to follow more of this might be to read the financial pages - and/or follow a few authors online via Twitter or podcast!

My opinion, is the B of E just follows the American Fed Bank rate. If the Fed put their rate up, then we have to follow otherwise investors ditch and weaken the pound making imports more expensive contributing to higher inflation.

Reply to the comment left by David Nichols at 14/06/2023 - 10:54uk cut interest rates to 0.1% as an emergency.
and kept them that low far too long.
the MPC has a target inflation of 2%.
it has FAILED to achieve this by a factor of 5!
i agree if this Board was in a ltd company it would have been removed, and rightly so.
yes the MPC did follow the FED in 2022 in the direction of our rate s rising BUT it didn't follow the Size of the increases. i think the FED had 4 rises of 0.75% and we had only one rise of that magnitude, in November 2022. too little too late. MPC have been asleep and failed us. yes with energy prices easing and the magnitude of the price rises a year ago are hopefully not going to be repeated again this year the year on year inflation will come down. but i dont think MPC can take any credit for this.

I think it partly depends upon how long a view you take of the economy. Even Gordon Brown (who in my view was an economic disaster) understood that the UK economy was driven by the housing market. The BOE has limited tools at its disposal but it's supposed to control inflation. If it keeps pushing up interest rates it may well end up putting a dampener on inflation *if* whichever government is in power also manages to control wages. But in a service economy like ours and one that has a high proportion of private property ownership that will cause a lot of collateral damage. And it will drive up rents.

Now if what you wanted was to reduce CO2 emissions (electric cars won't do that) then you could allow landlords to deduct their finance costs if they were upgrading their properties to A or B. And you could get a boost to part of the economy if you allowed landlords to invest their SIPPS in zero emissions properties. But to do that you'd need to sort out the EPC system (which is a b*****s muddle). I think I saw recently that Keir Starmer wanted to force UK pension funds to invest 5% of their funds in UK businesses so I think even labour understands that pensions are a potential source of funds to boost the UK economy. But it depends upon which parts of the economy you want to boost.

Historically labour governments have been in the pockets of the unions and they have gone along with rising wages. The left wing elements of the economy don't care about that because they think (left-wing) governments should decide everything anyway. And they also do enormous amounts of collateral damage.

So short-term the BOE is doing a lot of damage. The government could mitigate some of that damage by allowing landlords to invest their pensions directly in housing with low emissions. Right now the BOE and the government are together creating a worse housing crisis.