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Are They Going To Cut Rates Next Month

By Andy Shaw | January 23, 2010

Originally Posted 23rd October 2007

Please Note the questions says are they going to cut rates not should they cut rates!

The BoE’s minutes from the meeting were out this week, and one person out of nine actually voted for a rate cut. So it’s not looking good is it?

I’ve been having a discussion with my Economist friend and I was ridiculing the BoE for their lack of foresight and he was telling me that he believes that they are, to use his own words ’spectacularly clever’. The minutes did suggest that several bank officials would like to move swiftly, noting that “a precautionary reduction in Bank Rate could forestall a sharper slowdown in output growth”.

Now this is a good sign. And the fact that some members argued that if they did cut rates and the crisis eased they could raise them later. Now this is the right way of thinking, small adjustments rather than waiting until it’d definitely too late and they are having to overcorrect (like 5 rises in a year for example). Unfortunately the majority thought they would wait and see.

Well one of my many reasons for thinking they are less intelligent than I think the leaders of our economy should be is the way they manage the economy. For those who don’t know I’m a private pilot, I don’t fly anymore as I couldn’t get round to going up every 28 days so in the end I gave up trying.

Well I think the economy is like flying a plane, and a plane has a number of controls, the ailerons, the flaps, the rudder (cant remember if that’s the name it’s been so long!), the power, the wind (you don’t control that, but you can choose where you want to go- forces outside your control), and finally the trim. Applying very slight positive or negative pressure to most of those items alters the course.

When I was taught to fly, I was taught to make minor changes and then wait and see what happened, then make further minor adjustments to correct the course. If something in the weather started to look poor then I would take precautionary measures to try and remain on a comfortable course. The point was always to be in the precautionary state rather than the reactive state.

Well the BoE in my opinion flies the economy in the reactive state in other words they wait until they know it’s way off course before correcting instead of being able to feel that it is going off course and make a minor correction. What’s worse is the BoE flies this economy just by using the power alone! And that’s no way to fly a plane.

What does this mean for us? Rates will be kept too high for too long, just as they have been. My opinion is rates should be at 4.75 to 5.25% with the occasional push to 5.5%. So my prediction of a rate cut next month based on all the evidence that we are going off course obviously means I am reading the indicators wrong, so what do I know afterall they are the experts and according to my friend are spectacularly clever. As I’ve said before trying to predict a market is easy but trying to predict a group of people that really don’t seem to be seeing the same signs as me is really tricky. Still hopefully I’m wrong and they’ll look at a rate cut next month as a precaution!

Best wishes

Andy

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