Does the new Governor want higher inflation?

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Mark Carney, the next Governor of the Bank of England, has set the cat among the pigeons by suggesting that central banks in countries with low interest rates and weak economies might need to abandon targeting inflation in an effort to spur growth. He did not refer specifically to the UK but, given that he will be carving his initials on Sir Mervyn King’s desk in July, it is hardly surprising if people are taking his suggestion seriously.

Under the Bank of England Act of 1998, the main objective of the Bank is “to maintain price stability”. That is set at a CPI inflation target of 2%, though many of us may argue that aiming to debase our currency by 2% a year is hardly “stability”. In any case, the Bank has been atrocious at keeping inflation to this target – deliberately, say some commentators – hence the Chancellor’s folder full of apologetic letters from Merve.

Will the Bank of England’s remit change?

Testifying last week before the Treasury Select Committee, George Osborne professed himself “glad” that Carney had raised the subject, calling the idea “innovative”. “There is,” he said, “a debate about the future of monetary policy, not exclusively in the UK, but in many countries. There is a lot of innovative stuff happening around the world… I am glad that the future central bank governor of the UK is part of that debate.”

Hardly were the words out of Mr. Carney’s mouth than the US Federal Reserve announced that it would continue with its zero interest rate policy until U.S. unemployment fell to 6.5%, as long as inflation was no higher than 2.5%. It also massively extended its QE3 programme, adding another $45 billion a month to the current $40 billion.

Uncorking the inflation genie’s bottle

To savers, pensioners and the tens of millions of Britons whose wages have not kept pace with rising prices, inflation has resulted in a marked drop in living standards in recent years. If the Bank had kept to the inflation target, prices should have risen only 10% in 5 years. Instead, both the CPI and RPI record rises of 18%, a period in which average earnings rose only 10%.

For the poorer-off and pensioners, whose food and energy bills are a larger proportion of their outgoings, the situation is even worse. CPI food indices are up 30% in five years, while the index for electricity, gas and other fuels has climbed a massive 50%.

No wonder people are feeling poorer.

Debating monetary policy

Whatever the Chancellor says, there has been almost no real debate on monetary policy. There is an almost universal belief among mainstream economists and politicians that it is right to cut interest rates to the bone, print more QE money and try to get people who are heavily indebted to take on more debt and buy things. The only debate among these people appears to be how much more money to print.

Surely after £375 billion of QE, four years of bank rate at a record low of 0.5%, a massive drop in the pound and the government spending £600 billion more than its income, the debate should be on the topic: “Why are these policies not working?” Low interest rates are not the solution; they are the problem. The authorities have opted for pain relief instead of cure.

Not every central banker agrees

However, two central bankers last week challenged the orthodox view. Norman Chan, the Hong Kong Monetary Authority’s Chief Executive said that “quantitative easing is not a panacea… There is a possibility that the process of deleveraging is disrupted by quantitative easing, leading to sharp increases in asset prices… Since such increases are not supported by economic fundamentals, any increase in wealth will be seen as transient. As a result, households are unwilling to increase spending and in the end, the real economy fails to rebound.”

And the Reserve Bank of Australia Governor, Glenn Stevens, said: “Central banks can provide liquidity to shore up financial stability and they can buy time for borrowers to adjust, but they cannot, in the end, put government finances on a sustainable cours… They can’t shield people from the implications of having mis-assessed their own lifetime budget constraints and therefore having consumed too much.”

They are only two voices among many. But they are voices from economies which have weathered the financial crisis better than most.

A very dangerous road

UK banknotes carry the legend “I promise to pay the bearer”. This promise is wearing thinner with every passing month. The pound has lost 95% of its purchasing power over my lifetime alone. Strip away all the jargon about concentrating on targets other than inflation and the essential message is: “It’s not working. We’re panicking. Let’s print more money.”

That central bankers and politicians are considering debasing the pound still further in a vain and futile attempt to stave off the consequences of their own actions beggars belief and must be challenged. If they travel down this road, they will hit an obstruction and run full tilt into a barrier made of all those tin cans that keep being kicked down the road.

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19 Comments

1. helen

   December 17, 2012 at 5:37 pm

   If George Osbourne and his top civil servants do not get out their calculators and face what effect the enormous wave of Pensioners who stripped of their savings will now need to claim Pension credit etc is going to do to his budgets he and they will prove to be total idiots

   Merve and the MPC are a bunch of old foggies who equally will not face the reality of the immense damage they alone have caused to the UK economy

   WE need to protect savers not rob them or the country has no future at all

   Recommend (17)
2. Terry

   December 17, 2012 at 7:57 pm

   Ta-da! We did it! We inflated away the countries debt and deficit!!!!

   Too bad we trashed the real economy, ruined purchasing power, made food, energy and housing unaffordable.

   I remember reading about the BoE’s inflation remit years ago, how even then missed targets were routine and the consequences minimal.

   The UK is great if you HAVE NOTHING. If you plan on being engaged, employed, looking to better yourself and grow do yourself a favour and do it somewhere else, your efforts and outlook aren’t acknowledged here. Brain drain will become a BIG problem here. UK won’t attract the best talent.

   Low and medium income people would be better off spending all their money and have the state look after them in old age, at least the states spending keeps up with inflation! The profligate are stealing from the prudent, banks privatise profits and socialise losses. Zero Percent Interest Rates fuel Speculators vs Savers!!!

   Recommend (29)
3. Dr Gianfranco Novarino

   December 17, 2012 at 8:20 pm

   I find it absolutely unbelievable that the think-tanks want to get us all out of the recession by starting a new boom-and-bust cycle all over again. It is an irresponsible, short-sighted strategy which is clearly in favour of the rich minority to the detriment of everyone else on low and middle incomes. Mr Carney, please go home.

   Recommend (19)
4. frances

   December 17, 2012 at 9:39 pm

   Terry

   I am afraid you are totally and utterly wrong if you think benefits like Stare Pebsion keep up with inflation

   Nothing could be furthur from the truth

   Saga estimate Pensioner inflation is 10%
   the ONS admit its over 7%

   Hence with lousy CPI which in no way whatever represents Pensioner spending on the basic nessecities of life Pensioners will always see a reduced standard of living year on year

   Thats precisely why the current low interest rates ad effects of QE have totally devastaed Pensioner incomes and they sure as heck cannot afford to spend at all

   Recommend (9)
5. John.

   December 18, 2012 at 3:45 pm

   “Merve and the MPC are a bunch of old foggies who equally will not face the reality of the immense damage they alone have caused to the UK economy ”

   Helen, they don’t need to. Their BoE insider trading has ensured they’ll all be put out to grass on very fat pensions indeed.

   Bunch of crooks the lot of them, the reckless banksters, too big to fail, too big to jail. Every one but those who’ve caused the damage are going to be made to pay, how else can their privileges and obscene millionaire lifestyles be maintained.

   Recommend (10)
6. Bryan Strome

   December 20, 2012 at 4:27 pm

   Viewed from Canada, this going to be really fascinating to see what Mr. Carney does over there in the UK!

   His track record in Canada from 2008 to present:

   A) Inflation has gone from 3.6% early in his Term to 1.2% now.
   B) No quantitative easing…other than a very brief period at the height of the financial crisis in 2009….probably just to placate the Americans.

   Recommend (3)
7. frances

   December 20, 2012 at 5:33 pm

   Bryan do please explain what was done in Canada to acheive that …i sure hope its raising interest rates for starters

   Recommend (4)
8. Z

   December 21, 2012 at 1:52 am

   Let’s hope that Mr Carney has got more about him than the current MPC bunch.

   Only yesterday the current MPC members stated for the Wall Street Journal that the pound sterling is currently “too strong” for the economic recovery and they want to trash it even more to lead to “an export led recovery”.

   http://online.wsj.com/article/SB10001424127887324461604578188814139238322.html

   King was talking about this “export led recovery” years ago when they first trashed the pound, but exports have actually gone down since then. So much for trashing sterling, effectively negative interest-rates and high inflation…

   Of course, the MPC members are very well protected from this failing experiment (or is it to rob the prudent to line the bankers pockets even more), while millions of responsible people and the economy suffer for it. And the current “tories” are all for it. No wonder UKIP are gaining huge ground.

   Recommend (5)
9. Bryan Strom

   December 21, 2012 at 3:22 pm

   Hello Frances! At the height of the financial crisis, Mr. Carney dumped the benchmark interest rate right down to .25%. However by mid 2010, he started raising it in 1/4 per cent increments. About 16 months ago, the national benchmark interest rate reached 1.00%.

   Since then, Mr. Carney has indicated he would like to raise interest rates further….and he states so in his monthly Bank of Canada statements. However, with US and other countries having rock bottom interest rates, if he raises interests further, then there is a danger of too much investment flowing into our savings vehicles, and this would raise the value of the Canadian Dollar too high….and then our export industries would go into decline. That’s the thinking…

   Meanwhile if I shop extremely carefully, I am currently still able to get 2.25% on a 2 years GIC. (Term deposit) Most regular banks however only offer about 1.3%. There has been a slight decline in their offerings, as of late.

   Recommend (3)
10. frances

    December 21, 2012 at 3:47 pm

    Well if he does thatb here Pensioners might as well order their coffins and funerals because i for 1 cannot exist on a 1 or2% interest rate its impossible

    Recommend (11)
11. Bryan

    December 21, 2012 at 4:46 pm

    I never said it was great. I’m just telling you what happened…

    Recommend (2)
12. Bryan

    December 21, 2012 at 5:43 pm

    Properly, you should all know about Bank of Canada Govenor, Mr. Carney and Canada’s relatively healthy economic situation, already. Canada is a powerhouse G8 country, after all: #1 supplier of oil to the US, not Saudi Arabia. #2 trading partner with the U.S., on par with China in that regard. However, your BBC (along with American Business News) has a blindspot with regard to Canada. It’s like, we exist in “vapor”. Instead, BBC focuses on other micro countries and continues their unrelenting fixation on America, America, America…which is a bit like the Canadian media always talking about Germany and never once mentioning the UK.

    Recommend (5)
13. frances

    December 24, 2012 at 8:58 pm

    Z

    The remit for appoimting a new Governor of the B of E was INTEGRITY

    Since he was kidnapped and cajolled by Osbourne i would suggest he is simply a puppet
    of the current useless administration which has no intention whatever of honouring the
    PROMISES
    Cameron Clegg and Osbourne made in 2009
    Instead they and Merve have
    cooked the books and conjured up more and more ways to rip off Pensioners and savers

    Recommend (9)
14. Z

    December 27, 2012 at 2:15 pm

    Frances

    I fear that you are correct about Carney. Osborne and the other 6 figure salary treasury staff will choose policies of whatever will give them the best for themselves and their rich friends. They will try their best to try to not lose money on their property portfolios and other assets, and they will keep on choosing the ZIRP, QE, and high inflation to keep on stealing from savers and pensioners to make sure of it.

    Debasing the UK pound to “increase exports” (in their words) is not working and they know it.

    Now take a look at Sweden. Their currency is one of the strongest performers in the world. They have no QE, no ZIRP, and inflation is as good as zero. Taxes are decreasing too and their exports are increasing.

    So much for debasing the UK pound to “increase exports” . The real reason for QE/ZIRP is to steal from the prudent to pay for the losses of the rich elite and Carney will ordered by Osborne to continue it.

    Recommend (13)
15. Lupulco

    January 3, 2013 at 4:22 pm

    Relief was felt internationally.
    European stock markets soared Wednesday, making a bright start on the first trading day of 2013, as investors welcomed news that the United States has clinched the deal.
    Asian shares also rose sharply. Hong Kong shares, for example, ended 2.89 percent higher on Wednesday.

    BUT not all observers found the development encouraging. China’s official news agency warned Wednesday that the United States was heading towards an “abyss” — fiscal deal or no deal.
    “As the world’s sole superpower, the United States is clearly not Greece,” the Xinhua news agency said. “But economics and common sense do not lie.

    “People, or governments, can overspend for some time, but they simply cannot live on borrowed prosperity forever.”
    China, which has the world’s biggest foreign exchange reserves, is a major buyer of US Treasury debt.

    NOTE; China’s Comments after US agree to Budget [02 Jan 2013]
    ================
    Does this mean that China is getting fed up with the miniscule % rates that it is getting on Government Bonds.

    It as been buying shares in decent Companies that have a good dividend payout and track record. Also it as been topping up on Gold etc when the price as been right.

    Is it now saying to Western Governments/Banking Cartels. Enough is enough it about time you get your houses in order, or we refuse to buy Government money at these rates.

    Could be the beginning of the end of cheap finance for speculators. Anyone who as not taken the opportunity over the past 4 years or so can expect some pain.

    Maybe with a new broom in the BoE he may decide to raise MLR by increments over the next 2 years, back to historical levels?

    Recommend (4)
16. John.

    January 5, 2013 at 12:12 pm

    Lupulco..

    Not a chance. The artificially low interest rate gravy train / wealth transfer has been spectacular for those holding monopoly money ponzi scheme debt and property, mainly the slum lords, banksters (with their cash cow property “investors”) and of course the ever willing government cronies with their snouts buried deep in the trough. I expect more of the same for as long as government and their bankster overlords can get away with it. Since the only effective opposition is likely to be open revolt by national populations, who’ve generally been dumbed into submission, the only realistic constraint on kleptocratic western governments doing what the banksters tell them, is simply running out of people with any wealth left to steal.

    I suppose eventually they’ll have to start consuming each other.

    Recommend (12)
17. Anne

    January 24, 2013 at 4:41 pm

    I fail to see how average earnings have risen by 10% as quoted in the article `Does the New Governor want Higher Inflation`. As a Council worker, I have received NO cost of living rise since 2009,when I received an increase of £1.50 a week..Along with many other colleagues,we have seen no rise in our wages for almost five years.With the present Government and Bank of England`s deliberate policies, income has been badly debased.
    How do `the brains` behind it all,expect the economy to grow, when what they have caused is a continual downward spiral of no growth. The state of the country`s mess has been created (or caused) by Government and the Bank of England either through incompetence or deliberate policy.Personally I can only believe it to be the latter.
    Oh,and ask the Government and the Banks why people themselves have so much debt. This is because people were encouraged by these very` institutions` to take out loans they could never afford, in addtion to the encouragement of having,not a handful of cash,but a handful of credit cards.There are those of us who refuted any idea of a credit card and SAVED for our purchases.It would seem that we are being punished for our prudence in making sure we could pay our way,with the Government continuing to believe that `spending` and ` debt` is STILL the right way forward,in their admittance of ` wanting saving to be discouraged and spending encouraged`. and the Government trying to buy its way out of its own debt by the means of printing money to falsely and unwisely decrease the pecentage of their own irresponsible debt burden which they term `the deficit`.

    Recommend (2)
18. Alistair

    January 25, 2013 at 10:25 pm

    The sad truth is that we are living in a false reality. Life goes on as if the economic problems are just boring news items to switch over. The fact is that the debt problem is probably too big to cure and the government are stealing savers money to keep anarchy from exploding onto our streets. Anyone with any money should turn it into bricks and mortar and install electric fencing and a gun turret. Seriously, anarchy is only a matter of time.

    Recommend (2)
19. Alistair

    January 25, 2013 at 10:39 pm

    The saddest thing of all is that we savers have IMMENSE power to change government policy if only somebody could get us all working together. Like the ants in the movie Ants, if we all got together and did something like each withdraw 1000 pounds on the same day, the banks would be sh…ting themselves. So why is no one getting us all taking collective action together? I am suspicious of this organization Save Our Savers. How do we know they are not secretly backed by government to act like they represent us, but in reality their main purpose is to stop us collectively taking action that could seriously threaten banks and government? Remember how fuel tanker drivers nearly brought the country to its knees in a week. Savers could do the same if they all acted together. We mustn’t forget that the banks hold OUR money, so we must have a say on our interest returns. Someone needs to get something done. Save Our Savers is a fake.

    Recommend (6)