I'll interpret the results of last week's poll later on, but this week's Fun Online Poll (prompted by Alice Cook) is something on which every politician and commentator seem to have an opinion, while ignoring the more fundamental point:
What should the Bank of England's Monetary Policy Committee do at its next meeting? (click link to vote or use widget in sidebar)
The first three options are the usual ones:
* Cut the base rate
* Keep the base rate at 1.5%
* Increase the base rate
What nobody seems to seriously consider is the fourth option:
* Disband itself and allow the markets to set interest rates
*rant*
I think that the notion that the MPC is 'independent' and only 'targets inflation' has now been completely and utterly debunked. Money supply was rising at ten per cent a year for the past few years, which they masked by simply moving the target from the Retail Price Index (that included mortgage repayments) to the Consumer Price Index (that excluded it), and even the old RPI didn't really reflect the insane increases in house prices.
Back in early 2008, when inflation was a worry but house prices had started sliding, the Governor of the Bank of England told the MP's Treasury Committee "I would like to see CPI include house prices in some form", but now that there is a risk of deflation (which tumbling house prices would exaggerate) there's no talk of it any more.
Further, we gave up trying to control exchange rates in the 1970s (bar a brief and unhappy interlude between 1990 and 1992), so who in their right minds believes that a committee of nine lacklustre appointees can possibly set an interest rate once a month for the next month in advance that somehow optimises anything? In the real world, interest rates change by the hour or by the minute, not by the month.
We also know that interest rates on savings accounts are less than one per cent in many cases, but credit card rates are over twenty per cent; similarly the interest rate that people have to pay on tracker rate mortgages depends as much on when they took out the loan as on the base rate itself (the spread over the base rate having increased almost as quickly as the base rate has fallen); apart from that, each borrower's mortgage rate is determined by how much equity he has left in his property.
None of this bears any relation to the number that the MPC might or might not scribble on their press releases next Thursday, remembering always that the interest rate that the BoE charges banks for borrowing is quite a different rate altogether...
*/rant*
Sunday 1 February 2009
Fun Online Poll: What should the Bank of England do next?
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9 comments:
when in danger or in doubt
run in circles, scream and shout
wouldn't it be better if the MPC stopped messing about with the base rate and started setting Libor instead?
MA, it is up to 'the markets' i.e. the commercial banks, to set LIBOR (which is a backward looking statistical measure of indicative value only), there's no need for government interference in that either.
Hmmm
I think including house prices in the measures used to determine whether to decrease or increase or hold interest rates is far more preferable to the total disbanding of the BoE.
Either that, or the use of LVT separately, which could act as an automatically adjusting interest rate on housing.
Without the BoE, how would counter-cyclical measures work? I'm thinking here not in terms of "well, if we were in a perfect free market there'd be no need of counter-cyclical measures" but in terms of the current situation and/or a transition to a freer market.
OT
http://www.guardian.co.uk/money/2009/feb/01/banks-mortgages
New Build prices to halve.
AH, "the use of LVT [would] act as an automatically adjusting interest rate on housing."
That's 90% of the counter-cyclical measures we need. And we know that the BoE has failed miserably in terms of counter-cyclical measures - e.g. they dropped interest rates in 2001 to cushion us from fall out of 9/11 attacks and dot-com bubble bursting. But in times of reduced business activity, commercial banks drop their interest rates anyway.
Further, commercial banks (or those that want to thrive) always include their own inflation expectations in their interest rates. Those who don't will fail, that in itself is not an issue.
Yeah, I know: I was joking. In the current situation, the MPC Base Rate has become irrelevant. Banks can't get money at the new low price and can't lend it on at a low price. The market is effectively setting the rate.
AC1, I saw that on HPC, brilliant stuff. New build prices have a long way to fall before yer average FTB with a deposit of maybe £10,000 can buy one.
MA, touché.
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