Bank of England and Interest Rates v Inflation
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Trading Features / Strategies from Simon Denham of Capital Spreads.
What can we say...Today is all about the BOE and MPC...period.
The markets might huff and puff for the morning session but everything will have a central bank focus as short term traders attempt to flatten out risk and longer term traders well...just hope.
Reams will be written about what the Bank of England should do, would do, will do and wants to do. A bit will be written about what various vested interests want them do (generally cut rates) but not much will be written about the whole ‘independent bank’ experiment and whether it is in fact working.
Many will have seen the first ten years of its varying pontifications as evidence of how well it was doing. Inflation was low and seemed defeated and the economy was purring along and ‘Our Gordon’ was preening himself over how clever he was.
The problem was (and still is) that inflation was only ever under control because of the global economic conditions at the time and would probably not have been significantly different if the MPC had made even the smallest of steps to bring us into line with European Rates. As it is, after ten long years the UK still has rates (and here I mean lending rates not the official Base Rate) around 175 bps above Germany, pretty much where is was at the start but on the other hand the same amount above Italy, Spain, Greece, Ireland etc. Countries who we were more used to seeing rates several hundred points above ours! High rates appear to be endemic in the British financial structure.
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Unfortunately the BOE is given one remit and one only, ‘inflation’, and it is given one tool and one tool only to fight it with, interest rates. It has no control over the money supply side of the equation and it is here that we look at the second part of the equation – ‘Gordon’s Preening’. The only reasons that the economy was doing well was because it was a) floating on a sea of personal debt and b) because the government was busily ransacking our pension schemes and building up huge levels of future liabilities to spend money on ‘edukashun’ (sic) and ‘health’. In the meantime investors have wondered why their savings have slowly dribbled away in value and what happened to that nice little nest egg invested for their future.
The FTSE 100 is not far away from the level it was at back in 1997 AND, remember, the FTSE is not a like for like comparison. It continually kicks out the poor performers and replaces them with shiny new stronger constituents. So even in this survival of the fittest scenario the fittest have merely stood their ground. Even worse, many of the recent additions are not really UK companies at all and the only reason that there has been any strength at all in the FTSE 100 over the past year has been because of companies such as Antofagasta (Chile), Kazakhmys (Kazakhstan), BHP (Australia) and BP, Shell, and Rio (Global but definitely not UK). Even companies such as Vodafone and HSBC (the only bank stock to have done reasonably this year) are increasingly global rather than domestic.
It is hard not to come away from an analysis of central bank policy over the last ten years with the feeling that virtually whatever they had done would have made no difference. With no control over the money supply, particularly the Treasury, the bank is never going to fulfil its remit except by default.
No cut today is expected. It would be a surprise if the ‘old economists’ making up the MPC came to any other decision. How they expect high rates to affect food and energy prices I do not know but they will continue to fight the good fight with our money.
The above comments do not constitute investment advice and neither Capital Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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Risk Warning: Spread betting carries a high level of risk to your capital. You may lose more than your initial investment. It may not be suitable for all investors. Only speculate with money that you can afford to lose. Please ensure you fully understand the risks involved and seek independent financial advice where necessary.
Article provided / approved by Capital Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
'Bank of England and Interest Rates v Inflation' edited by SD, updated 05-Jun-08
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