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Word on the
street is that the Old Lady is going to start cutting interest rates
next year. Estate agents are praising the idea – they would though,
wouldn’t they? And Joe Public is all up for it too. That’s because
he’s strapped to his situation by the biggest beast of debt burden
ever.
Reading the
Have Your Say sections of many websites discussing Mervyn King’s
recent remarks, I notice that people are under the impression that
it is the obligation of the Bank of England (BoE) to reduce rates
and prevent a house price crash.
I find this
mildly annoying. Firstly because, as a saver, I’m enjoying the
first bit of decent yield on cash in a long time and, secondly,
because people espousing these views are misinformed.
The remit of
the Bank of England is (and this is from its own website):
“…to safeguard the value
of the currency in terms of what it will purchase. Rising prices –
inflation – reduces the value of money. Monetary policy is directed
to achieving this objective and providing a
framework for non-inflationary economic growth. As in most other
developed countries, monetary policy operates in the UK mainly
through influencing the price of money – the interest rate. In May
1997 the Government gave the Bank independence to set monetary
policy by deciding the level of interest rates to meet the
Government's inflation target – currently 2%.”
That’s quite
a read, so let me give you the salient points:
-
The BoE
is supposed to protect the buying power of our money.
-
The BoE
does this by influencing the price of money.
-
In May
‘97 the Government gave the Bank independence to set interest
rates and
-
Keep
inflation on target – currently at 2%.
You notice
that there is no mention of moderating house price inflation. In
fact, if you look into this a bit further, you see that the 2%
inflation target is based on the Consumer Price Index (CPI). And
here’s the clincher: the CPI excludes house prices.
In case you
didn’t get that: THE CPI EXCLUDES HOUSE PRICES.
Under the
“house costs” part of the CPI we have, not surprisingly, rental
costs and then some other less relevant constituents like “shower
heads”, “wallpaper paste”, “varnish”... If you think I’m making this
up, have a look at
www.statistics.gov.uk. The noticeable omission here the actual
cost of a house. No wonder inflation is only between 2 and 3
percent!
Who
calculates the CPI? That’ll be the Office for National Statistics
which, judging by the .gov.uk part of its web domain, probably has
something to do with the Civil Service. But this letter is not
questioning the independence of the Bank of England which adjusts
interest rates to meet a figure controlled by Government. That’s for
another day.
As is the bit
about “providing a
framework for non-inflationary economic growth”. What?! Who writes
this stuff? Are they serious that house price inflation in double
figures played no part in an economy driven by consumer spending?
What
interests me is this notion that a wobble of the housing ladder is
now something Mervyn King must deal with. Everything was hunky-dory
over the last five years. For home owners, the government’s 3
percent inflation number seemed like a good deal; but then it would,
wouldn’t it, if your house was worth 20% more than the year before…
Personally I think real inflation is a little higher: I spend my
money on things like Council Tax, public transport, petrol and
eating out. Do the maths yourself: what did you pay for a travel
card last year? And the year before? What did you pay this month? If
only we could live on Chinese-made DVD players and flat screen TVs…
God help
those old folk living on the interest on their savings.
Anyone
looking at $100 a barrel oil and seriously advocating a drop in
interest rates is either mad or doesn’t understand the relationship
between inflation and interest rates and the impact of oil on the
former.
The cost of
oil is one of the primary drivers of inflation. If not the
primary driver. Apart from the obvious impact on the cost of
transport, petrochemicals are such a part of our daily lives, I’ll
wager that you’re touching a derivative of one right now.
By my
reasoning, the Monetary Policy Committee should be looking to push
interest rates up or at least hold them. But it won’t. This
is a nation of debtors and although rhetoric about saving makes for
great politics, the truth is, the government needs house prices to
go up so that the masses might think they’re rich.
You read it
here first: when house prices start to come off, watch for motions
to include them in the CPI.
Should that
day arrive, seriously ask yourself if the Bank of England is really
protecting your money.
What did Mark
Twain say? Something about lies, damned lies and statistics…
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