Thursday, 15 May 2008

"No rate cuts before 2010"

Screams the FT's headline ... in other words, they'll have a couple of rate cuts just before the next General election.

Swervin' Mervyn has also been hinting for some time that house prices should be included in CPI, in other words, (falling) house prices will depress the headline inflation figure, making their lives so much easier.

Is there anybody who still thinks that the Bank of England is independent?


Anonymous said...

Is there an advantage to the economy (via inflation) of claiming stability in rates over what is, in financial terms, such a long period? Smacks of politics to me.

Mark Wadsworth said...

"Smacks"? I think that this blows away any notion of BoE independence. In the real world, FX rates change every few seconds, LIBOR changes every day, so how can an 'independent' central bank predict two years into the future?

M said...

Switching to one of the more realistic rates of inflation may allow the bank to claim a certain degree of success as falling house prices provide downward pressure, but then switching to such a rate would put the real rate of inflation at more than double the government's official version. The question is whether house prices will be deep enough to bring such a measure below a 2% target, unless the government abandons that target?

As it is even a realistic 10% drop in house prices might not apply enough pressure to offset inflation of fuel and food. The housing market is tight and slow, those in a position to buy may be able to take advantage of falling prices driven by those who have to sell, but unless there is a growth in supply and a subsequent growth in new mortage acceptances I don't see where the shift in mortgage repayment costs is really going to come from?

Mark Wadsworth said...

That's the clever bit.

Mervyn keeps hinting he wants 'house prices' (which are static or falling) in the CPI basket, he hasn't said he would include mortgage repayments, which are going up quite rapidly!

Seeing as 'housing' makes up a quarter or expenditure, you could justifiably take a weighted average of CPI (currently plus 3% - weight 3) and house price deflation (currently negative 1%, weight 1), (3% x 3) + (-1% x 1) = 8, divide by 4, hey presto, that's your new improved CPI of 2%!

Anonymous said...

Agreed. My question wasn't rhetorical though, I would have thought a near-fluid rate was ideal but there may be advantages to fixation my ignorance doesn't recognise. Seems not though. Did anyone really expect one of the few examples of Labour relinquishing control of an something to last?