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5 "Tells" that the Stock Markets Are About to Reverse

Bank of England Interest Rate Policy Targets UK House Price Inflation

Interest-Rates / UK Interest Rates Feb 05, 2008 - 06:27 PM GMT

By: Adrian_Ash

Interest-Rates

Best Financial Markets Analysis Article"...Rising inflation in the cost of living didn't stop the Old Lady cutting interest rates in 2001, 2003 or 2005. Why change now...?"

WILL THE BANK of ENGLAND cut UK interest rates this Thursday?


Might Hillary and Barack have trouble getting together as running mates for November?

First up, the Bank of England's sole purpose in life is to target inflation. And annual inflation in United Kingdom real estate prices is now slowing far beneath the apparently magic 9% mark...

Whatever econometric model says 9% annual house-price growth is vital to the nation's well-being, the Old Lady has stuck to it since she gained "operational independence" back in May 1997.

And now falling inflation demands a rate cut...if by inflation you mean the decade-long bubble in real estate prices.

Check!

Next up, political pressure. The Bank of England is entirely independent of the elected government, of course, despite the policy team being appointed by the chancellor himself. And yet the Treasury has displayed an uncanny knack for second-guessing how the nine-member committee will vote.

"It has not gone unnoticed that the most successful forecaster of changes in [BoE] policy direction since 1997 has been Mr Ed Balls," as Stephen Lewis at Insinger de Beaufort wrote of the Treasury's chief economic advisor two years ago. "Before each of these events, he pops up on a public platform to approve the shift in advance. His insight into what is supposed to be an independent decision-making process is remarkable."

Fast forward to last month, and Ed Balls – now in charge of education – seems to have retained his magical powers of foresight, revealing live on breakfast TV that "our interest rates are low and are coming down."

Spooky, no?

"The Bank of England has got flexibility," Balls went on. "Inflation is low. We will see what happens in the next few months."

Won't we just! But not before the current chancellor, hapless Alistair Darling himself, sets the stage for a rate-cut, too.

"Because of the fact that we now have low unemployment," said the hopeless one at the end of January, "[and] we've got historically low inflation, low levels of interest rates and mortgage rates, the Monetary Policy Committee has room for maneuver."

Room for maneuver? Put another way – as the only US academic on the Old Lady's team did late last month – "worrying about inflation at this time seems like fiddling while Rome burns.

"The evidence from the housing market, and especially the commercial property market, is worrying," David Blanchflower gushed. "Consumer confidence is low in the UK . Interest rates are restrictive at their current levels and that is why I have been voting for cuts."

Poor Mervyn King! The Old Lady's chief pooh-bah stuck out like a sore thumb by refusing to slash rates when Northern Rock collapsed last summer. He's previously complained that "people in sensitive positions" shouldn't speak out on base-rate policy.

But then, people in sensitive positions are there because they like to decide what happens.

And everyone knows the Bank of England simply MUST cut interest rates...because its sole task is to defend "price stability".

"Mortgage approvals in December at 73,000 were below the lowest point in the 2004-5 housing pause and point to further housing weakness," writes David Smith in the Sunday Times. "Consumers are cautious and so is business. The CBI said January retail trading was the weakest for 15 months. Consumer confidence did not improve as much as it normally does between December and January, and remains weak."

Never mind that a new survey from Citigroup-YouGov says the Great British public now expects inflation to reach 3.3% from the last survey's 2.7% – "well above the 2% official target" as Smith admits.

Rising inflation in the cost of living didn't prevent the Bank of England from cutting interest rates in 2001, 2003 or 2005. Why should the Old Lady break the habit of her (independent) lifetime now?

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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Comments

Andy R
06 Feb 08, 21:20
Backed into a corner

Room to maneouver? I think not. Suppose we need a rise in interest rates to combat rising import prices - which, for a country with a trade deficit, is an important issue?

Could we don such a thing without invoking agonised screams from homeowners?

And why is inflation considered low? Because, for some perverse reason, house prices are excluded from the quoted value. This despite the fact that a roof to put over one's head is one of the more essential and widespread commodities in life.

The entire concept of the "boom" was misguided - it should have been labeled "the shortage", which it would have been if it had been oil rising rather than house prices


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