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My Opinion On The Bank Of England’s Inflation Report

By Andy Shaw | January 23, 2010

Originally Posted 14th August 2008

As Mervyn King said, “The British economy is going through a difficult and painful adjustment, and we’re going to do f**k all to help!

Well, he actually said the first part of that in reality, the second part was added by me as I felt that this is basically what he said with his full 50+ page inflation report.

He went on to say, “This adjustment cannot be avoided.” Now, he is talking about a lot of things here, but one of these is stopping the country going into recession (that’s rather important for those that are in some doubt)! So correct me if I’m wrong, but America did avoid this, just this year in fact, and are at least having a damn good go at staying out of it! Whereas he seems to think it’s inevitable so let’s lie down and take a good kicking.

But wait for it, the really good news is that he says that he sees this continuing until 2011…nice!

He thinks that despite there being a strong argument that inflation will actually go to the negative side of things next year and in fact therefore solve the problem for him, that it is actually better to ignore that possibility and not even include it on one of his ‘fan’ charts!

Side note:

Fan charts are supposed to be things that cover 90% of all possibilities, and yet even in his own report it shows the bank only gets it in the middle zone of its predictions a mere 50% of the time! What I didn’t like was the report said that these figure were inconclusive to saying what the banks predictive skills were like. I think I can help them there, as if they are right  50% of the time then they are wrong 50% of the time too.

The funny thing is that they are actually right a lot less than 50% of the time, which means they would have more chance getting it right if they flipped a $X!£%$% coin! (I wanted to swear there, but restrained myself :-) )

Yes they really are that bad at it, they would get it right by using a coin more often!
After listening to him and reading the report I am certain that they want this to cause a slowdown and they want us (not them) to have this pain as they totally believe that it is necessary and for the greater good! I think Nixon actually thought what he was doing was for the greater good too; didn’t stop him being misguided.

Mervyn said, “Next year will be a difficult one, then after a while what we can look forward to is a not so bad decade.”

He knows that the risk of a recession is very strong next year, he even said it, yet still he does nothing as this will help him get inflation to 2%. “Stuff the economy as long as I have a tick on my bit of paper!” is basically what the guy was saying, reading between the lines (even though I didn’t have to look too hard). He was saying fiscal policy is the government’s responsibility. I think he is trying to get the message across to our wondrous leader that his (Mervyn’s) mandate should actually be the whole economy, not just inflation (which I totally agree with, well one or the other of them have control of both, not the way it is right now as that’s just stupid). They just view the upside risks of inflation as far more pressing than the downside of recession.

What amazes me is that today the Eurozone has gone into negative growth for the first time ever, and after speaking to my business partner in Spain yesterday you can be certain they will be there next quarter too, which means they are officially in recession. Well the Eurozones GDP in January looked like ours does now…Hello boys, do you think there’s any small precedent been shown here?! This means that keeping monetary policy too high means you’re going into recession.

Is it me or are they just galactically stupid, or is it really that the BoE are really just trying to force the governments hand to give them control of fiscal policy? That’s probably too way out, but I have considered it.

Before I go on it did say at the start of the report that not every member agreed with the report. I’m taking a wild guess at David Blanchflour, as he is the ONLY member of the MPC that agrees with me (or rather I agree with him) that keeping rates too high is desperately damaging our economy.

When asked the question is it possible that inflation won’t return to 2%, he jumped in to say, “We will take the action necessary to ensure it does!” It is such a shame that he is not that passionate about the British economy too, just our inflation rate and achieving his goal! I think someone with that much passion about what he does would be clever enough to sort this mess out quickly if his hands weren’t tied.

When asked what can he say to people in negative equity and what can he say to people who feel the bank should be doing more in these circumstances, he unbelievably said, “The aim of the bank will be to explain to people that as decided by Parliament the aim of BoE is to meet the inflation target.” In other words, “Tough, it’s not our problem!” The horrible thing is, he’s right it isn’t!

He went on to say, “The best contribution the BoE can make is to give realistic explanations to people of why these shocks to the world economy have occurred and to explain that they are determined to bring inflation back to target.” Well, I don’t know about you, but now that I know that the BoE will do what is necessary to bring inflation back to 2%,  I feel that I no longer need to look at the economy because they are going to sort it out!!!!

He is of the opinion that the house market position was clearly excessive and a sharper slowdown is expected. Just so you are all certain I’m going to do f**k all to try and stop that. Maybe when there are riots and other media pressures I may just take a look at it over my tea break :-)

He was asked about unemployment and said he didn’t know what’s going to happen with unemployment, but if it raises too much then we may do something. That was really him saying that he thought he may actually lower interest rates when enough people have lost everything.

But I think his greatest comment was, “Pretending there is some magic solution here” – when referring to the difficult adjustment in the housing market. That was just real bollocks, the magic solution which he says isn’t there bloody well is; it is simply a reduction in rates to around 4% which will provide not a one time fix all, but a patch that will get us through with significantly less pain.

Basically these people do not look like they will be adjusting rates at all over the next few years. However, they will continue to watch the figures and when they have gotten too bad then they may do something. I think the metaphor for this is shutting the stable door after the horse has bolted. My final remark is, ‘why is it that we are not blessed with anybody with vision in this the most important part of our economy?’

Anyway, so what does their lame duck approach mean for us?

Well basically as I have said many times before, they make the rules we just play by them. My opinion is that they are badly screwing it up right now which I’ve been saying for several years now. Essentially that doesn’t matter as I can’t do anything to change it, but what I can do is play the game with the new set of rules.

So, in my opinion the signs of real improvement (despite all I’ve said above) are actually starting to show.

On the positive side most commodity prices have plunged over the last two months, after many set all-time record highs earlier this year.  Corn, which peaked around $7.75 per bushel earlier this year, has now plunged to below $5.00. Wheat has plunged from around $12.50 per bushel to near $6.00. Rice is down sharply as well and we all know that oil and gasoline prices have declined recently too.

I was talking to a developer in Cyprus about six weeks ago and he was complaining about the prices of materials keep going up and he wanted to get the villas built quick. I said to him then (before the prices started to go down) that he shouldn’t worry as commodity prices would start to fall. Well guess what…

The Libor rate (this is the rate the banks borrow at and therefore set their mortgage deals from) has continued to come down. It is still way above the historic spread above the UK interest rate, but it moved downwards everyday in July. So this is why we are starting to see a few more deals coming to the table. I think this will continue to fall unless there is some big economic upset or a 9/11 type attack. Given this fact alone, within three months the mortgage deals will have all reduced by about 0.25%, which is the same as a ¼ point base rate cut.

And it still will have a way to go down. What I think will happen is that the commodity slowdowns and the recession coming to bear will actually make the BoE cut rates despite them clearly not wanting to do this. I think Gordon may think that if he doesn’t want to be deported after the next election that he really should lift a finger to help. Mind you, I think he is living in a land of make believe, similar to the way so many people in power are, and he is not facing the reality of what he must have the courage to do.

Unemployment is still a big worry to me, as in when I talk to people who run businesses and they are telling me what is really going on with the layoffs, so I think those figures are going to grow substantially (maybe they’ll wake up then!).

So, nothing has really changed except my expectation that they would have figured out that they need to cut rates sooner rather than later. Well that hasn’t happened, so what this will mean is that the deals we are getting today are going to stay at least as good and probably are going to get better the further into winter we go.

I was astounded at a recent deal we pulled in for £60k the other day, when last year we would have paid £90k for it and still would have had it value for £125k minimum.
But as I said in a recent article, just because the price is 33% cheaper does not necessarily mean it’s a deal. It is only a deal if you can refinance it and release all of your money.

So really the message from all of this is don’t hold your breath waiting for the BoE to put the game on again. It is down to you to do research, research, research and seek out the very best deals, so nothing has changed there!

Best wishes

Andy

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