Bank of england

The week began with grim projections about petrol prices, and has been coloured by the twin topics of tax and inflation since. So, a decent opportunity to look back on the fuel protests of 2000, in the latest shot from the Spectator archives. Here's a piece from the time, by Coffee House regular, and Spectator theatre critic, Lloyd Evans:   Do you want a smack in the mouth?, Lloyd Evans, The Spectator, 16 September 2000 As I write this, the gravest crisis in our island story is unfolding before my eyes. The great four-star emergency of September 2000. Where it will lead, no one can tell.

Even governors can be wrong. The Bank of England’s quarterly inflation report is expected to downgrade its original growth forecasts and predict a sharp increase in inflation, albeit one that peaks this year and returns to the target rate by 2012. A spike in inflation is scarcely surprising given the planned VAT rise, and the Bank’s original growth forecasts were, like Alistair Darling’s forecasts, absurdly over optimistic – predicting 3.4 percent growth next year and 3.6 percent the year after. The Bank’s revisions needn’t trouble George Osborne, whose forecasts of 2.3 percent growth next year and 2.8 percent in 2012 were drawn from the OBR. However, the OBR may have over-estimated recovery too.

Alistair Darling has just forced George Osborne to the dispatch box to explain the regulatory measures that he will announce at Mansion House later today. Osborne confirms that some powers will return to the Bank of England and that an independent commission, under Sir John Vickers, will take into account competing views on capital, leverage and liquidity requirements. Retail and investment banking will be split under the new arrangements. This is effectively the end of the tri-partite system. Alistair Darling defends the tri-partite system in its entirety, arguing that no one will understand from 'this dog's breakfast' who now regulates the banks - talk about undermining confidence, which the opposition was condemning less than half an hour ago.

Only a week into his new job, and George Osborne has already had to exchange letters with Mervyn King about inflation.  And here's why: the CPI index hit 3.7 percent in April, up from 3.4 percent in March.  Which is worrying enough when looked at in isolation – but when put alongside headline rates from other countries, it becomes damning.  In China, it's 2.8 percent.  In France, 1.9 percent.  In Germany, 1 percent.  In the Eurozone as a whole, 1.5 percent.  And in the US, 2.3 percent (for March, with the latest figures out tomorrow).  Indeed, thanks in part to quantitative easing and the removal of the VAT cut, inflation in the UK is now well ahead of almost any other major economy you could care to mention.

Brownies galore in our PM’s interview with the Economist. So many, in fact, that I thought I do a quick Fisk:   The Economist: The big worry seems to be the deficit—the deficit. What should the message should be? Gordon Brown: I actually think that the first thing that we’ve got to do as a global community—and I said it this morning and I’ll say it again—is that the reforms of the global financial system are not complete. As far as Britain is concerned, we are dealing with a one-off hit as a result of globalisation. FN: Let us pause, here, to consider the brazenness. Brown’s policies pumped the UK economy up with the steroids of debt. The banking collapse hit us harder than any country because he took the wildest risks.

Faisal Islam, Channel 4’s economic correspondent,  is one of the journalists who best understands what the Bank of England’s institutional view is. So it is interesting to see him writing this today: “I’m convinced that at Threadneedle Street, they were shocked by the limpness of Britain’s exit from recession. They have been running their big computer model in the past weeks. When it reveals new economic forecasts next Wednesday, we are likely to see a marked downgrade to Britain’s economic prospects.” Politically this could have an impact as Labour’s, to put it charitably, extremely optimistic growth forecasts are what allow it to claim that it will cut the deficit in half in four years.

With inflation continuing to "surprise" on the upside, how long can the Bank of England keep justifying printing money? Now we learn that the Bank of England had printed £193.5 billion to finance government spending by the end of last week. So we are only four weeks to the next MPC meeting – but there is only £6.5 billion of new money left for them to pump out before they hit their £200 billion limit. Then we enter the scary territory I outlined in an earlier post.  And Brown is still left needing around £15 billion of Gilt sales a month to finance his fiscal debauchery. The Gilt market was fine while Brown's appointee's to the MPC were willing to keep the printing presses rolling to the tune of £1 billion a day through the summer.

The inflation surge is now upon us. The CPI rate again “surprised” to the upside – Britain is the only major economy in the world to have inflation doing this. But given that the Bank of England’s printing presses have been working overtime to fund a fiscally irresponsible government then little wonder things are different here. To understand just how unusual the UK situation is, consider the below graph: despite suffering the longest recession in G20, we have one of highest rates of inflation in the developed world. The next few months will see this push higher, potentially reaching 4 percent in March and busting the 2 percent target.

Today’s revised GDP data confirms that the UK remained alone of the world’s major economies in recession in the third quarter of this year*. The fact that the UK remains mired in recession long after most economies have recovered makes clear how uniquely badly positioned the UK economy was to handle a downturn.  While some investment banks continue to argue that this performance reflects the inability of the Office of National Statistics to calculate the data correctly, there is good reason to believe that this huge underperformance is grounded in reality. Economic history teaches that bank crises are amongst the worst things that can ever hit an economy. The collapse in credit availability and soaring bank margins have posed very substantial risks to economic growth.

The UK inflation rate again “surprised” to the upside today, registering at 1.5%. As the above chart shows, the UK now has by some margin the highest inflation rate in G7. Were it not for the temporary VAT cut – which takes about 1% off the current CPI rate – the rate would be moving quickly above the Bank of England’s target of 2%. It would seem that the deflation threat, used as justification for the Bank of England deciding to finance the Government’s deficit this year through printing money, has not transpired. A severe recession and rise in unemployment has hit the economy, but this seems to be one where wages stagnate but the prices of what we consume continue to rise.

Readers of the Spectator will know George Trefgarne’s work, and today he delivered an important report on the dangers of Quantitative Easing. I urge Coffee Housers to read the speech. It provides an interesting and relevant insight into historical precedents for the policy and how to manage it, and gives a balanced analysis of the current policy’s pros and cons. Trefgarne concurs with Mark Bathgate’s critique. There is little evidence that QE has stimulated money supply, as banks are using the cash to re-balance their lop-sided books. QE is funding the government’s debt habit. The IMF estimates that QE has reduced the benchmark 10-year interest rate on government debt by up to 1%, currently standing at 3.5%.

With another £40bn disappearing down the black hole known as the British Banking sector, the financial cost of the economic and banking collapse is now only rivaled by the two World Wars in it’s cost to the UK taxpayer. Rather than going to support credit to business or households, the further £25bn of “newly printed money” announced today is likely to go to help prop up the Government debt mountain.   The above chart shows how the Bank of England has been using quantative easing since March. 98.8 per cent has been used to purchase Gilts. As fast as the Debt Management Office “sells” Gilts to the “market”, the Bank of England shows up and buys them.

This morning the inflation figures were released for September.  They show that the economy is in ongoing deflation, as it has been since March 2009, with the annual change in the Retail Prices Index (RPI) standing at -1.4 percent.  At the same time, the policy index used by the Bank of England to determine its interest rate and quantitative easing policies – the Consumer Prices Index (CPI) – saw its annual rate of inflation fall to 1.1 percent from 1.6 percent. Some press commentary suggests that the fall in CPI inflation to 1.1 percent suggests there is now a threat of outright deflation next year.  This is wrong.  The country is already in deflation.  The CPI is not a measure of the cost of living in the UK.

Many CoffeeHousers will give a horse laugh to the idea of “green shoots” – especially the idea of Gordon Brown winning a fourth term because a grateful nation will thank him for a recovered economy. It’s a delusion, nothing surer, and the same one Callaghan and Major suffered from. In both cases, there were firm signs of an economic recovery – but the electorate never forgave the government which landed them in the mire. But is Britain recovering? We’ve seen a few developments lately which, given the fun and games elsewhere, have gone unnoticed. So here’s a catchup. Pick up the financial pages, and you’ll find numerous stories of success: bonuses are back, the corporate debt market has recovered, house prices are moving.