Bank of England won't let inflation get out of control, Ramsden says

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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby dutchman » Fri Sep 23, 2022 3:15 pm

The buffoon (Ramsden) is going to be forced to raise rates again after today's mini-budget sent Sterling into a freefall! :clown:
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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby dutchman » Mon Oct 10, 2022 5:52 pm

IMF veteran’s call for an immediate rate rise highlights UK’s tarnished credibility

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The Bank of England should push through an emergency rate rise to restore global confidence in UK policy-making and head off a potentially dangerous cliff-edge when its bond support operation expires, a top economist has warned.

Maurice Obstfeld, a former chief economist of the International Monetary Fund (IMF), said the Bank of England has been put in a position where it must demonstrate that it is not a captive of the Treasury even if this means inflicting economic harm.

He said: “They need to raise rates before the next meeting; that would send a very powerful message.

“Fears over fiscal dominance are real given the way the British government has conducted itself in this episode. A lot of damage has been done.”

The warning from Mr Obstfeld is unexpected since he is generally viewed as a dove in global circles and has been warning recently against monetary overkill by central banks. His call for an immediate rate rise is a sign of Britain’s tarnished credibility.

“It was reckless to roll out tax cuts without the requisite analysis or respect for institutions. The message was that ideology trumps all else,” he said.

Mr Obstfeld said the retreat on the top rate of tax was a valuable “stabiliser”, not because the sums are relevant – just £2bm out of the £45bn package – but rather because it signals an awareness of rising political risk.

He said: “The whole Covid experience has strained social cohesion and people are going through very tough times. Economists are now more alert to the distributional effects of crises.”

Mr Obstfeld said the Bank must walk a fine line since the structure of the UK mortgage market leaves the economy highly sensitive to rises in interest rates.

He added: “The Bank of England should move quickly but not not do anything crazy. I think a 50 basis point rise would be about right.”

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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby dutchman » Thu Nov 03, 2022 4:47 pm

Bank of England raises interest rates by 0.75 percentage points

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The Bank of England has raised interest rates by 0.75 percentage points to 3 per cent in its most forceful act to tame inflation for 30 years but signalled that borrowing costs would not rise in the future by as much as markets expect.

The pound fell 2 per cent against the dollar, which had been buoyed by a contrasting message from the Federal Reserve that US interest rates would increase by more than Wall Street anticipates.

Warning that the outlook was “very challenging” and forecasting a long recession ahead, the UK central bank issued unusually strong guidance that interest rates would not need to rise much further to bring inflation back to its 2 per cent target.

“We can make no promises about future interest rates,” said BoE governor Andrew Bailey. “But based on where we stand today, we think [rates] will have to go up by less than currently priced into financial markets. That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.”

He added that the BoE’s rate-setting Monetary Policy Committee would “not pursue an [interest rate] path that will drive inflation sustainably below target”.

The BoE’s move matched the Fed’s 0.75 percentage point rise on Wednesday and an identical increase by the European Central Bank last week. Raising rates to 3 per cent took the UK’s official interest rate to its highest level since late 2008. It is the largest increase since 1989, apart from a swiftly reversed rise on September 16 1992, known as Black Wednesday.

Seven of the nine MPC members voted for the three-quarter point rise, saying in the minutes that “a larger increase” at the meeting “would help to bring inflation back to the 2 per cent target sustainably in the medium term, and to reduce the risks of a more extended and costly tightening later”.

But their guidance and the economic forecasts published by the BoE suggested a dovish outlook for UK interest rates.

The BoE laid out two possible scenarios. In one, interest rates would rise to 5.25 per cent, leading to eight quarters of contraction — the longest recession since the second world war — and inflation falling to zero in three years’ time.

But in a strong signal that it believes it may have already done the bulk of the work needed to curb inflation, the central bank highlighted an alternative scenario in which rates do not rise any further from the current 3 per cent.

In this scenario, inflation is projected to peak at 10.9 per cent in the fourth quarter of 2022 before falling to 5.6 per cent at the end of 2023, 2.2 per cent at the end of 2024 and below its 2 per cent target in 2025.

However, even if interest rates stay on hold at 3 per cent, the BoE still forecast a recession for five quarters, based on higher energy prices and mortgage costs.

The BoE said the majority of the MPC believed that “further increases” might be required for inflation to return sustainably to target but stressed that recent market pricing for the peak in interest rates had been too high.

When the BoE closed its forecast in the run-up to the meeting investors had been betting that rates would top out at 5.25 per cent. Markets currently expect rates to peak at 4.65 per cent in September next year.

The BoE estimates that 2mn mortgages will reach the end of their fixed term by the end of next year, with those with an average-sized mortgage of £130,000 having to pay £3,000 more annually to service their debts.

In a further dovish signal, the Bank said its forecasts were based on government policy as of October 17. They therefore do not take account of Prime Minister Rishi Sunak’s plans, due to be announced later this month, to make £50bn of savings, which would put further downward pressure on inflation.

The MPC said it would “take account of any additional information in the government’s autumn statement at its December meeting and in its next forecast in February”.

Two members of the MPC dissented from the vote to increase interest rates by 0.75 percentage points. Swati Dhingra voted for a rise of 0.5 percentage point rise, while Silvana Tenreyro voted for a 0.25 percentage point increase.

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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby dutchman » Tue Nov 08, 2022 10:25 pm

Bank of England blames early retirement for surging inflation

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Huw Pill, the Bank of England’s chief economist, insisted its interest rate increases are not to blame for the recession, arguing that the downturn is being caused by a sharp drop in the size of the UK’s workforce which is fuelling inflation.

But he admitted that his colleagues at Threadneedle Street may have contributed to soaring price rises by continuing with its £450bn bond-buying blitz - known as quantitative easing - during the pandemic.

Mr Pill said there are around 600,000 fewer people in Britain’s labour force than the Bank had anticipated before Covid. The lack of workers is maintaining pressure on employers to pay staff more even though the economy is stumbling into a recession, he said.

The Institute for Fiscal Studies has pointed to early retirement as a key factor depressing the number of workers, which has left businesses struggling to find the staff they need to fill vacancies.

“That is a real shock to the economy, that is not something that monetary policy can prevent,” Mr Pill told a conference hosted by UBS.

“It needs to manage the consequences of that. Given that tightness in the labour market, the concern about self-sustaining dynamics emerging in wage and price setting all implies that we still have more to do.”

Mr Pill also pointed to surging energy and food prices, which the Monetary Policy Committee (MPC) is seeking to tackle with higher borrowing costs.

Since December last year, the Bank has raised interest rates from 0.1pc to 3pc as it seeks to bring inflation back down from more than 10pc towards its target of 2pc.

Mr Pill said: “There is a danger, which we are aware of, that we at the Bank of England, on the MPC, will be blamed for the recession.

“I think recession is actually driven by other forces and we are trying to manage the adjustment of those other forces.”

However, addressing a House of Lords committee later on Tuesday, Mr Pill, who was not at the Bank of England in 2020 when it decided to continue with its QE programme, conceded that decisions taken might have been different “with the benefit of hindsight.”

In addition to energy and food prices, Mr Pill said “other developments in the past - I think it’s fair to say including choices over monetary policy” may have stoked inflation.

“Support for demand was stronger than it should have been,” the chief economist added.

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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby rebbonk » Wed Nov 09, 2022 12:45 pm

Interestingly, I listened to an economist talking the other day. His theory (guess) behind rising inflation is price gouging by suppliers. Over the next few months as companies deliver their accounts we shall see if he's right.
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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby dutchman » Fri Nov 11, 2022 4:49 am

Alternatively I heard a market analyst suggest many businesses have held off from passing on cost increases through fear of losing customers? :roll:
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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby rebbonk » Fri Nov 11, 2022 12:12 pm

That is possibly true in the business world, Dutchman, but in the domestic world (electricity, gas, petrol, diesel, food, etc..) it seems to be a different ball game. When it comes down to it, we, as customers, often have little real choice.

We have already seen massive profits being declared by the fuel companies (I'm quite sure they could reasonably have absorbed some of the costs) and I await the supermarket's yearly accounts with interest.
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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby rebbonk » Fri Mar 24, 2023 3:09 pm

An interesting article that dares to point the finger...

The dirty secret behind the cost-of-living crisis

It isn’t wage rises that are fuelling high inflation – it’s profiteering by large corporations.


As central banks across the world, including the Bank of England, continue to raise the cost of borrowing, the strains on a financial system hooked on a decade of ultra-low interest rates are becoming apparent. Silicon Valley Bank is merely the most prominent example of what could be a string of financial failures and defaults.

Worse, as I argue with my co-authors in a short new book on the cost-of-living crisis, is that the inflation we are experiencing is unlikely to be tamed by interest rate increases, because price rises are flowing from a lethal combination of global instability and profit-maximising monopolies. We are being marched into an economic polycrisis of financial failure, soaring inflation and recession. A comprehensive change in policy is needed to avoid it, in Britain and across the world.

The first step would be to finally repudiate the myth of central bank competence on inflation. The belief that central banks can successfully manage prices, if made “independent” of governments, rests on the 15 years of economic stability before the 2008 financial crisis. The Great Moderation saw inflation level out at low levels across the developed world, and coincided with a fad for declaring central banks “independent” of their governments when making interest rate decisions.

But a far more plausible cause of prolonged low inflation was the massive decline in the real price of manufactured goods as eastern Europe and, especially, China were opened up to global markets. Four hundred million formerly agricultural residents moving into China’s booming industrial cities and factories had more impact than a decade’s worth of “independent” chin-scratching by the Monetary Policy Committee.

Nor did monetary policy exert a notable influence on prices after the 2008 crash, when interest rates were held at near-zero and the great money-printing exercise otherwise known as quantitative easing (QE) began: £895bn of electronic money has been created by the Bank of England since early 2009. Since then, inflation has been variously high, moderate and, on occasion, even negative. There is no clear relationship between QE and the overall level of prices – although its impact on asset prices helped worsen wealth inequality as the Bank of England admits.

The interest rate rises announced today (24 March) will prove similarly redundant – at best. The theory behind raising rates to squash inflation is brutal – which is sometimes openly admitted to by central bankers and their academic friends. It hinges on higher borrowing costs and more attractive savings rates, inducing less spending and so raising unemployment which, in turn, disciplines workers, frightened by the prospect of joblessness, into accepting lower pay rises. Lower pay is then expected to feed into lower prices overall.

This might be thought of as a cruel way to control price rises, if it controlled price rises. The logic matches the government’s rationale for offering derisively low pay rises to its own workers (such as 5 per cent for nurses). But with UK inflation at 10.4 per cent and pay increasing by just 5.7 per cent on average, there is no plausible basis for claiming that higher pay is currently fuelling price rises. The more likely impact from rate increases will be failures comparable to Silicon Valley Bank – an institution whose business model depended on perpetually low interest rates was pushed into a crisis when they rose.

The truth is that inflation today is the unwelcome product of a set of mostly unavoidable global factors interacting with powerful, profit-seeking institutions. The global factors are obvious: Russia’s invasion of Ukraine; the lingering impact of supply chain disruptions from lockdown; and, increasingly, a more unstable global environment that is raising the costs and difficulties of production.

But it is the way shortages and rising costs in essential sectors, most notably energy and food, interact with powerful companies that is decisive – and, potentially, within the control of governments. Though rarely reported as related to inflation, the explosion in large corporate profits over the past year has been exceptional. The extreme profits of the energy companies, made just as energy bills surged, are well known. But profits for food giants have also soared, with the four largest global agribusinesses seeing profits rise by 255 per cent since the Covid-19 pandemic, according to the trade union Unite, while further down the supply chain the UK’s biggest supermarkets have seen a 21 per cent rise in their profits over the same time period. Profit margins for the 350 largest companies on the London stock exchange were 89 per cent higher this year than before the pandemic.

There is no “wage-price spiral”: this something closer to a “profit-price spiral”, as the economists Isabella Weber and Evan Wasner demonstrate in a groundbreaking new paper for the University of Massachusetts. As the pandemic led to shortages, large companies were able to exploit their market power to jam up prices, fuelling inflation and their own superprofits.

With the ecological crisis set to intensify, such shortages will only worsen. That means bigger corporate profits for companies able to exploit them. Our book proposes three solutions to this: the first is increasing payments for all those who cannot rely on wealth – meaning wages, salaries, benefits and pensions all need to rise by at least the rate of inflation, while profits are squeezed. The second is imposing selective price controls on key commodities such as natural gas – a policy lever that is increasingly accepted. The third, over the longer term, is to weaken the grip of major corporations on essential supplies: through investment in alternatives, such as renewable energy and domestic food production, and through the changes in ownership and control that would ensure long-term, sustainable investment in essentials.

Source: https://www.newstatesman.com/comment/2023/03/dirty-secret-cost-of-living-crisis - James Medway (behind a paywall)
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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby dutchman » Sun Mar 26, 2023 9:35 pm

The Bank is claiming inflation will fall to 2.9% by the end of the year, try not to laugh! :clown:
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Re: Bank of England won't let inflation get out of control, Ramsden says

Postby rebbonk » Sun Mar 26, 2023 9:48 pm

And asking businesses not to put prices up so as not to fuel inflation! :rolling:
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