Have the Bank of England Monetary Committee screwed up??

"If the only tool you have is a hammer, everything looks like a nail."

Seems to me that the only serious macroeconomic tool that's in use right now is interest rates. Unsurprisingly, if you only tweak one variable, in a highly complex and deeply interdependent system, it'll get a few things right, and a whole bunch more things wrong.

Try to put the brakes on consumer spending: get a housing crash and an overweight currency (with knock-on effects on exports, etc.). And that's just the simplistic overview.

Jon

So what's the alternative - put it back in the hands of a government who would play with the interest rates to gain a few million more votes at a general or council elections.

Not only that, but they only have one measure to go on, which is inflation. And a measure of inflation which doesn't include house prices.

The time spans I've heard range from 6 - 18 months. I don't really understand the delay.

OK some 2 million mortgages have annual reviews, but I don't believe the numbers are significant by themselves. However, this year this it looks as if a number of factors have conspired to occur at the same time; house prices have disconnected from earnings and have overshot, consumer sentiment has changed and the annual mortgage budget plan review has arrived.

They have to, to pre-empt the traditional earnings inflation; and consequent drop in employment that follows a housing boom.

I'd say they've done a good job since '97.

No government can control public exuberance as manifested by low savings, high debt and relatively high house prices without causing damage. Why should it, it's a free country where individuals are free to make their own choices and their own mistakes.

The best thing that can happen imo is that the effects of consumer exuberance are contained to those that have made stupid decisions during the last 3 years, and are not allowed to affect the wider economy to any great extent.

As far as house prices go, there's also the issue of the current boom being a structural adjustment to a low inflation environment, following bond prices and equity prices. eg

Average annual inflation in the '80's was 7.3% Average annual inflation in the '90's was 3.5%

therefore it would be reasonable for an asset to double in price if it had been bought in the 80's on the basis of the 80's rate of inflation continuing.

Daytona

Hasn't that been tried before, and failed ?

Daytona

I tend to agree, to a degree, but.....

People tend to buy houses on the basis of what they cost today, (in monthly mortgage payments) and, had they not reduced interest rates so far, these monthly payments would not have fallen so low, and the boom would not have been so dramatic. In addition, general debt would not have increased so much, and savings would not have fallen so low.

The downside would have been that business loans would have been more expensive and, perhaps, business investment may not have been as high.

The fact is that the typical mortgage repayment has increased by around

Having lowered them too far, it seems that they may now have raised them too high - just my opinion, but it was one that I held when rates were at their lowest. The fact was that most people were talking about money being so cheap, thus guaranteeing increasing borrowings of all types.

I cant complain - my semi retirement and pension has been underwritten by the housing boom - but I sometimes wonder what those who have the power are thinking.

But the other alternatives are so unpopular both with politicians and the electorate. Take tax for example - it's simple enough to put up taxes to decrease demand, but people don't like paying tax as it is, let alone asking them to pay more, especially when they don't see any real return as the government would have use the tax increases to repay borrowings. If it taxed more to spend more then that is simply adding more wood to the inflationary fire.

Thatcher removed most of the tools in her first term of Prime Minister in the early 1980s - what you're advocating is a return to the old ways. They never worked either - which is why she got rid of them. I don't think there will ever be a perfect solution.

Bitstring , from the wonderful person Richard Faulkner said

'How do I keep it?', typically.

I note with some concern that, since RPI is no longer the BoE target number, it has managed to sneak up from the 'target' of 2.5% to 3.5%, and is still rising .. and people are asking for rate =cuts=.... Welcome back inflation??

Making national banks independent of national governments was required by all those countries who signed up to all three stages of the Maastricht Treaty. Stage three being the adoption of the euro.

Hence a pre-cursor to the UK accepting monetary union and signing up to Maastricht stage 3, (we have already accepted stages 1 & 2), would be the BoE becoming independent. Which is probably why one of Gordon Bs first actions in 1997 was to do just that.

Rgds

__ Richard Buttrey Grappenhall, Cheshire, UK __________________________

Tough s*it, I'm afraid :-)

Daytona

Riskier loans tend to have a fixed mark-up on the so it's unlikely business loans have increased by as much. For example loans for commercial property are typically 2% above base.

It is -exactly- why he did it.

I have this on very good authority. He got the idea off Arthur Andersen. I was working there at the time, and knew the people who came up with the idea.

I wasn't much of an idea imo. It was the only thing a Labour government could do to gain credibility with people it wanted to borrow money from, given it's history.

Daytona

One argument in favour for the BOE is that they made know their intention is to keep inflation within set guidelines. They have advertised this with the promise of altering interest rates to ensure this. In essence they have done this quite well. However I believe as you rightly suggest, inflation should not have been the overriding criterion and perhaps consistent growth should have been the goal. Boom and bust is very damaging whereas inflation by itself doesn't necessarily reduce demand etc.

Any views?

Story from BBC NEWS:

UK retail sales fell in December, failing to meet expectations and making it by some counts the worst Christmas since 1981.

Retail sales dropped by 1% on the month in December, after a 0.6% rise in November, the Office for National Statistics (ONS) said.

This is the poorest December sales performance for 23 years.

The ONS revised the annual 2004 rate of growth down from the 5.9% estimated in November to 3.2%.

The Bank of England has warned against reading too much into the numbers.

'Wait and see'

The full story of this Christmas' figures may not be clear until Easter, Bank of England Governor Mervyn King said.

Some analysts put a positive gloss on the figures, pointing out that the non-seasonally-adjusted numbers remained in positive territory, and showed a performance comparable with 2003.

The November-December jump last year was roughly in line with recent averages, although some way below the serious booms seen in the 1990s.

And figures for retail volume outperformed measures of actual spending, an indication that consumers are looking for bargains, and retailers are cutting their prices.

Mixed results

However, reports from some High Street retailers highlight the weakness of the sector.

Morrisons, Woolworths, House of Fraser, Marks & Spencer and Big Food all said that the festive period was disappointing.

KEY CHRISTMAS SALES FIGURES WH Smith : Down 1% in six weeks to 15 Jan Tesco : Up 7.6% in seven weeks to 8 Jan HMV : Up 6.4% in five weeks to 8 Jan Jessops : Up 4.5% in five weeks to 2 Jan The Body Shop : Up 6% in 10 weeks to 1 Jan Retail Stores : Up 14.2% in Dec until Christmas Ottakars : Up 2.2% in five weeks to 1 Jan Woolworths : Flat for four weeks to 1 Jan Sainsbury : Up 2.4% in 12 weeks to 1 Jan

And a British Retail Consortium survey found that Christmas 2004 was the worst for 10 years.

Yet, other retailers - including HMV, Monsoon, Jessops, Body Shop and Tesco - reported that festive sales were well up on last year.

Investec chief economist Philip Shaw said he did not expect the poor retail figures to have any immediate effect on interest rates.

"The retail sales figures are very weak, but as Bank of England governor Mervyn King indicated last night, you don't really get an accurate impression of Christmas trading until about Easter," said Mr Shaw.

"Our view is the Bank of England will keep its powder dry and wait to see the big picture."

Apparently based upon some flawed use of statistics (though perhaps most uses of statistics are flawed?).

No it wasn't.

This value has been calculated using the rise in sales between November and December. So this year's rise was less than last year's rise. This year's December figures could be worse than last year, simply because this year's November figures were better. (IMHO What a stupid way to calculate it!)

On a sensible measure of measuring absolute December sales against each other, it wasn't. Though I forget where it was on this measure.

TBH, I'm in agreement with the post that somebody made last week suggesting the the Xmas boom was going to become flatter over time as it becomes a less 'special' time for buying things (other than food!). This boom in retail purchases before Xmas isn't actually good for the market (except as a way of concentrating all the bad news at one point in the year) and its flattening off can only be a good thing IMV.

tim