A licence to print money

Well no, actually. The amount of paper cash wont actually rise from the current c. £40bn mark after the MPC’s decisions to embark on quantitative easing .

The money created instead will be flooded into high street and commercial banks in an attempt to get them lending once again – “back at 2007 levels” if you believe our PM. Which you shouldn’t.

Essentially, in spite of what some on the MPC have argued – that the transition mechanism of monetary policy is broken – they today decided that inflation in Britain will soon fall below 2 per cent. It may even go negative.  So:

Accordingly, the Committee also resolved to undertake further monetary actions, with the aim of boosting the supply of money and credit and thus raising the rate of growth of nominal spending to a level consistent with meeting the inflation target in the medium term.

 

Interest rate decision: the choices

Tomorrow the MPC will announce that Alastair Darling has given permission to the governor of the Bank of England, Mervyn King to begin quantitative easing. The Bank’s purchase of government gilts and assets is designed to increase liquidity and, ultimately, increase lending.

Firstly, this wont work. The only thing printing money is likely to achieve is an immediate devaluation of the currency and, with no significant exporting sector, is unlikely to act as a fiscal stimulus. But more on that tomorrow.

For tonight, let’s look at the three options available to the MPC re: interest rates.

1. 0.5 per cent cut

Expected by almost everyone. In spite of David Blanchflower’s assertion that the “transition mechanism of monetary policy is broken” the Bank is likely to continue easing central credit conditions in a bid to encourage lending.

 

Round the houses

It’s becoming clear that, over the last decade, house prices have been wildly and unsustainable high. The news from Nationwide today that house prices have fallen 18 per cent in the last year is both arresting and oddly comforting.

Too many young people have been unable to even claw at the first rung of that Jacob’s housing ladder. Far too many mortgage borrowers were forced to take loans that they must have known would lead to negative equity.

Bankers, politicians and regulators have all landed in the public blame cross-hairs when, in a way, they should turn the gun on themselves. Private debt is a product of individual greed and capitalist competition, yes. But it was also, in many cases, the only way that people could afford to get a place of their own.

 

Hate to say I told you so…

Yesterday it was Ben Bernanke who tacitly handed over control of the global economy after the Federal Reserve’s base lending rates hit rock bottom – zero percent.

Today, Britain’s counterpart, Mervyn King, has admitted that he and the institution he represents – the Bank of England – no longer have control over inflation.

If Alastair Darling expects a letter from Merv to explain what the Dickens is going on with the Consumer Price Index, he’ll be disappointed. Merv has sovereign stamped his last letter on inflation for a while; he is suspending predictions during this period of “shocks and disturbances”.

Inflation is still persisting in spite of an eight percent fall in oil prices compared with October. But this will fall – of course it will as people spend less.

Mervyn King has recently come in for criticism due to what was perceived as dallying. If interest rates should now be at 2 percent, why were they at 5 two months ago? The answer is simple: ignorance is bliss.

It grates me as much as the next man whenever I hear Mr. Darling’s woefully optimistic predictions, but they have some merit. People who here that the economy is fine will be slightly more inclined to spend and, in turn stimulate growth (or at least stave off shrinkage).

Once you tell people that we are in serious trouble, they, for some reason, trust you. They stop spending on the anticipation that prices will fall further and deflation becomes a self-fulfilling prophecy. They must think you’ve got an economics degree or something.

 

Interest rate decision – how low will they go?

The Bank of England is today charged with the arduous task of staving off a deep and prolonged recession by cutting interest rates.

With the slump in oil, food and house prices threatening a damaging spiral of deflation, the Bank, it is agreed, must act quickly and act decisively.

So how low will interest rates go?

Larry Elliott isn’t sitting on the fence or anything, but he reckons the cut will be between 1 and 1.5 percent.

The Time’s Gary Duncan says that two thirds of City analysts are betting on a 1 per cent cut. And if there’s one thing that City analysts know how to do, it’s bet.

$1.48 to the pound is not yet a crisis, according to the Telegraph. Another halving of interest rates should precipitate that.

While we’re on the pound, the Independent’s Jeremy Warner argues that it has been too high recently. Interest rate cuts should go some way to addressing the balance.

The FT reports that bumper rate cuts have already begun in Sweden. They’ve only gone and cut 175 points, making even the most radical City analyst look a little soft.

Bloomberg have solved it. It’s definitely going to be 1 percent. You heard it there first…

But the markets are not so sure, according to City AM.