Brexit Inflation and Interest Rate Signals

carney-cpi

The Bank of England’s inflation target is 2.0% – with the fall in the pound inflation is set to overshoot to between 2.5% and 4.5% depending which rune reading economist you believe. When the 2% target is missed by 1% or more Carney has to write to the Chancellor explaining why he has missed his target. He’s been writing those letters for most of his term…

Inflation has now crept up to 1% after knocking along at zero for a while. Even at the extreme end of forecasts inflation will not reach the levels seen before the great taming of inflation in the 80s. (Unless the QE unwinding is a disaster, which is not impossible.) Having read many papers on the subject Guido is none the wiser as to how the world’s Central Banks can go cold turkey from the QE opiate without a very bad come down. In any event, at these levels interest rate policy is now symbolic, market loan rates are increasingly detached from base rates. Firms are not going to make or break investment decisions because base rates are 0.25% or 0.5%.* May is right that we need to see rates rising, to head off inflation and to boost confidence.

Nothing would more clearly signal that the Brexit apocalypse is not upon us than the Bank raising base rates. Normalisation of monetary policy has to happen. Or at least the Bank should signal the beginning of normalisation…

*Fans of reflexivity and paradox will contemplate the post-referendum rate cut with joy. Carney implies it boosted the economy, critics say it was unnecessary. Did it boost confidence that the Bank of England was ready to do whatever or was it a way for Carney to claim credit for his gloomy predictions not coming true?




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Quote of the Day

John Curtice on fiscal policy:

“Attitudes to taxation and spending are basically counter-cyclical. If a government comes in and tries to reduce spending and taxation, after a while people will get worried about the state of public services. If a government increases taxation and public spending, after a while they’ll get concerned about increasing taxation…. In as much as there are lots of ideologues out there who think the state should be this proportion of GDP, they’re all wrong. Because the public’s view is counter-cyclical to the recent experience. It’s basically impossible to satisfy the public.”

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