VMR left this comment on my Fun Online Poll: "The MPC never set interest rates, they just followed 3 month Libor with a 1-2 month delay. As soon as they tried to control it, Libor went its own way. The MPC has no clothes."
Cutting and pasting the relevant data from The Bank of England's Statistical Interactive Database into a spreadsheet gives us the following chart comparing monthly averages of Three month LIBOR and the Official Base Rate since January 2000 (click to enlarge):
The data on monthly average Three month LIBOR goes back to January 1978, the relationship seems to have held ever since then, having only broken down in the last year or so (click to enlarge):
All the more reason to disband the Monetary Policy Committee, I suppose (currently slightly ahead on 40% of the votes).
Monday, 2 February 2009
I've learned something new today
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13 comments:
Mark, are you suggesting that we simply have a base rate which tracks LIBOR, and thus aligned perfectly to the market?
V, I see no reason to have a base rate whatsoever. Not even LIBOR tracks the market perfectly, as it is actually a statistical measure. The rates that banks charge or pay their customers are market rates; the rates that the government pays on its bonds are market rates.
We don't need a 'base rate' as such. But we do need a rate at which the government - on our behalf - will lend money as the lender of last resort. This need not be one rate. I mean what rate would YOU require to lend to RBS? Or HSBC? Or BT?
Perhaps then the LOLR rate needs to be set with a spec for the risk that is assumed. That is 'we will lend at X% if we rate you as AAA but at y% if we rate you as BBB (or as z% [a very high number] if you are RBS).
Just a thought.
Would MPC decisions have been more "independent" if some of its members did not own their own homes!?!
They all had a vested interest in maintaining the asset price boom that afflicted Britain over the last ten years.
The Government has recently been looking for a new independent member of the MPC - I'm tempted to apply...
L, of course the BoE should set the LOLR for each bank at whatever the 'market rate' is, i.e. adjusted for risk and security.
S, excellent. I don't own a home and I have loads of cash, so I'd be a great counterweight. Where do I apply?
The BoE rate has proved to be completely misleading for most. The money markets may need some sort of guide though.
economicvoicedotcom
Mark, it's only paying £128k pa. The pension's ok though...
OK, That's MW and Snafu on the committee to represent the non-property owning interest. As the MW Party bank regulator I elect myself to the committee. The next meeting will be on Thursday. The agenda will be:
Agenda
1. Minutes of last meting
2. Discussion of the best and quickest way to hand interest rates over to market forces.
3. The closure of the MPC.
4. AOB
Right. That should do it.
L, seconded, agreed, sorted.
I'm surprised at how easy this whole government lark is.
MW - If you think government is easy you going to be really surprised when you find out how easy banking is - as long as you don't get clever and greedy.
Next meeting, getting rid of the LOLR role.
lol - you should seriously apply, and provide a link to your best (and relevant) stuff.
Very interesting graphs. It does perhaps suggest why as of late the base rate has failed to shift bank lending or interest rates.
However - is it just me, of did the massive recent cut at the end actually cause LIBOR to drop? - it looks like the OBR drops, then followed by the LIBOR.
From Jan 07 it looks like it could either be that LIBOR was over-responsive to OBR changes - just look at the spike after the OBR increased in about Apr 07. It then looks like it become unresponsive from Oct 07 to Jul 08, and then responds to it again after the huge cut. Do the events of the crisis bear this out in terms of events and gov policy, etc.?
AH, the time honoured relationship held until July or August 2007 - just before Northern Rock went pop - but we can assume that the banking insiders knew that something was afoot.
From that stage on, the government knew that the credit/house price bubble had burst. and so it doggedly reduced the OBR. LIBOR was stubbornly high at around 6% until October 2008, which is when the bank bail outs happened. From there on, the government could dictate what LIBOR ought to be.
Further, LIBOR is calculated as risk free rate plus risk premium. The risk free rate (deposits with Treasury) has gone down and down, but the risk premium has gone up, in other words the spread has widened to over 100 bps as at December 2008.
But LIBOR/OBR reductions have had relatively little impact on the rate charged for new mortgage loans, which is a true 'market' rate. The risk premium on mortgage loans gets bigger and bigger the more that lending banks realise the economy is going down the tubes and house prices are crashing.
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