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I know it was inline with expectations, but A 50bps move seems far too aggressive to me. I understand the risk of long-term inflation expectation moving higher

by kypro 4y ago

I know it was inline with expectations, but A 50bps move seems far too aggressive to me. I understand the risk of long-term inflation expectation moving higher and the need to contain them, but given recession is now the base-case it seems absolutely absurd to me to be overly worried about long-term inflation expectations. There is nothing the BoE can do to directly address the supply-side inflationary pressures we're facing. What they should be focused on right now is where inflation expectations are likely going to be given their economic forecasts, and while those forecasts do suggest double-digit inflation numbers, they also suggest recession. While some monetary tightening was clearly needed, this has been a period of historically aggressive monetary tightening, to tackle inflation pressures that they have next to no control over, into a recessionary environment, during a time when people are struggling to pay their energy bills - let alone their mortgage and other repayments linked to interest rates. If their transitory inflation call wasn't bad enough, they're now about to follow that with an even larger policy mistake which will push thousands of people into poverty, with many likely to lose their homes and jobs as a direct result of this move. Well, that's my opinion anyway. I think this 0.5% move after 5 consecutive 0.25% hikes given the economic risks is insane.

jon_adler 4y ago
Sometimes there isn’t any good options available. Persistent inflation is usually a long term problem, and their mandate is to (attempt to) maintain inflation within the 2% range. We might just have an unavoidable recession. I’m not diminishing the detrimental consequences of this, just acknowledging it is likely to happen no matter what the BoE chooses. At least this short term pain scenario should bring inflation back under control, allowing for growth and gain in the medium term.
- kypro 4y ago
  I'm not saying there are good options available at this point. The primary mistake was the illusion that we could close the economy for months just to reopen without any problems, but then we followed that with the second mistake of not raising rates in 2021. The economic consequences which would result from the COVID lockdowns, monetary stimulus and fiscal stimulus was something I warned about repeatedly during 2020-2021. We're screwed whatever we do now and I agree recession is unavoidable at this point. Many people are about to lose everything and many will die as a result of fuel poverty whatever the BoE do. All they can really do now is try to limit the pain. On whether rate rises are needed, you're assumption is that persistant inflation is a concern, and I don't agree with this. The inflationary pressures we face are mostly a result of fuel prices which aggressively increasing rates will do nothing to solve. For you to be right you have to explain both why you think increase rates will control inflation we're seeing (it won't) and why you think inflation expectations will remain high in a recessionary environment (unlikely). In addition to this you also have to explain why further rate rises on top of the 5 prior raises is required. We know it takes time for rate rises to take effect so aggressively raising rates like this presents huge risks if economic data deteriorate in the coming months. If the BoE is concerned about inflation expectations, then the question to ask is why this wasn't a concern in 2021. Now recession is imminent inflation expectations shouldn't be as much of a concern.
  - cykros 4y ago
    The sanctions on Russia are certainly not helping on the fuel front (never mind the food/fertilizer front), and as bad as things were made by the handling of COVID, this additional blunder took things from limited options to no options. Central banks can only do so much when governments are hell bent on setting fire to the whole system.
  - jon_adler 4y ago
    Fair challenges. I don’t think that all the inflation we are seeing is fuel or supply chain constraints. I think we are also seeing demand side effects of the record low unemployment (albeit due to record low participation rate), high levels of personal savings (boosted during Covid), high property price inflation along with ongoing effects from fiscal and monetary stimulus over the past few years. Raising interest rates should remove some demand from the economy. These demand pressures all still remain IMHO. Interest rates are a blunt instrument and unfortunately the least able to afford them are likely to suffer most. I’d support targeted government spending to those most impacted during a high inflation recession to limit the pain. I believe the PM candidate (Truss) policy to reduce taxes is misguided. The truth is, we are probably both going to be wrong about the best way to solve this.
spaceman_2020 4y ago
The problem seems to be that inflation is now moving into categories where it tends to stick around - rent and wages. As the recent rally shows, as long as the markets continue to go up, rental rates aren’t going to come down. Commodity-led inflation might well be on its way down, but unless you do something about rampant rental inflation, it will mean nothing. A 20% increase in your monthly gas bill hurts. But a 20% increase in your monthly rental can be life destroying.
kqvamxurcagg 4y ago
The inflation we're experiencing is actually demand-led. Contrary to what you may believe demand has been elevated since Covid-19 and supply quickly bounced back. Oil and gas price increases are due to high industrial and demand. Their supply is at record levels. What is truly insane is inflation being greater than 10% and interest rates being only c. 2%. There is a reason why the BoE theoretically targets 2% above all other metrics. Unfortunately they have significantly deviated from this. The only way for commodity prices to decline, or at least remain level, is a concerted increase across the board by the major banks to reduce demand.

by kypro 4y ago

jon_adler 4y ago

Sometimes there isn’t any good options available. Persistent inflation is usually a long term problem, and their mandate is to (attempt to) maintain inflation within the 2% range. We might just have an unavoidable recession. I’m not diminishing the detrimental consequences of this, just acknowledging it is likely to happen no matter what the BoE chooses. At least this short term pain scenario should bring inflation back under control, allowing for growth and gain in the medium term.

kypro 4y ago
I'm not saying there are good options available at this point. The primary mistake was the illusion that we could close the economy for months just to reopen without any problems, but then we followed that with the second mistake of not raising rates in 2021. The economic consequences which would result from the COVID lockdowns, monetary stimulus and fiscal stimulus was something I warned about repeatedly during 2020-2021. We're screwed whatever we do now and I agree recession is unavoidable at this point. Many people are about to lose everything and many will die as a result of fuel poverty whatever the BoE do. All they can really do now is try to limit the pain. On whether rate rises are needed, you're assumption is that persistant inflation is a concern, and I don't agree with this. The inflationary pressures we face are mostly a result of fuel prices which aggressively increasing rates will do nothing to solve. For you to be right you have to explain both why you think increase rates will control inflation we're seeing (it won't) and why you think inflation expectations will remain high in a recessionary environment (unlikely). In addition to this you also have to explain why further rate rises on top of the 5 prior raises is required. We know it takes time for rate rises to take effect so aggressively raising rates like this presents huge risks if economic data deteriorate in the coming months. If the BoE is concerned about inflation expectations, then the question to ask is why this wasn't a concern in 2021. Now recession is imminent inflation expectations shouldn't be as much of a concern.
- cykros 4y ago
  The sanctions on Russia are certainly not helping on the fuel front (never mind the food/fertilizer front), and as bad as things were made by the handling of COVID, this additional blunder took things from limited options to no options. Central banks can only do so much when governments are hell bent on setting fire to the whole system.
- jon_adler 4y ago
  Fair challenges. I don’t think that all the inflation we are seeing is fuel or supply chain constraints. I think we are also seeing demand side effects of the record low unemployment (albeit due to record low participation rate), high levels of personal savings (boosted during Covid), high property price inflation along with ongoing effects from fiscal and monetary stimulus over the past few years. Raising interest rates should remove some demand from the economy. These demand pressures all still remain IMHO. Interest rates are a blunt instrument and unfortunately the least able to afford them are likely to suffer most. I’d support targeted government spending to those most impacted during a high inflation recession to limit the pain. I believe the PM candidate (Truss) policy to reduce taxes is misguided. The truth is, we are probably both going to be wrong about the best way to solve this.

spaceman_2020 4y ago

The problem seems to be that inflation is now moving into categories where it tends to stick around - rent and wages. As the recent rally shows, as long as the markets continue to go up, rental rates aren’t going to come down. Commodity-led inflation might well be on its way down, but unless you do something about rampant rental inflation, it will mean nothing. A 20% increase in your monthly gas bill hurts. But a 20% increase in your monthly rental can be life destroying.

kqvamxurcagg 4y ago

The inflation we're experiencing is actually demand-led. Contrary to what you may believe demand has been elevated since Covid-19 and supply quickly bounced back. Oil and gas price increases are due to high industrial and demand. Their supply is at record levels. What is truly insane is inflation being greater than 10% and interest rates being only c. 2%. There is a reason why the BoE theoretically targets 2% above all other metrics. Unfortunately they have significantly deviated from this. The only way for commodity prices to decline, or at least remain level, is a concerted increase across the board by the major banks to reduce demand.