Bank of England and Interest Rates v Inflation

Bank of England and Interest Rates v Inflation

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.

Financial Spreads » "With FinancialSpreads.com you get all the normal
advantages of Spread Betting plus..." » read Financial Spreads review.

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.

Capital Spreads » "With Capital Spreads you get all the normal
advantages of Spread Betting plus..." » read Capital Spreads review.

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

Related Articles:

Strange FTSE Move and Bank Deposits, updated 02-Oct-08
Off to the races again and the going does not look like easing one jot for the time being. The late rally in the FTSE futures after the close of the cash markets seems to have been one of those strange...read article: Strange FTSE Move and Bank Deposits.

Where to Invest, updated 25-Sep-08
Yesterday I was asked what people should be investing in at the moment. This is a difficult question as investors are supposed to take reasoned decisions over events, as they see them, combined with the future prospects for the actions that they take. I had to say in all honesty that how can anyone possibly make a...read article: Where to Invest.

US Markets and the Poulson Bad Bank Strategy, updated 24-Sep-08
We still await the US Congress's ratification of the framework of Mr Poulson's Bad Bank strategy but law-makers are understandably a...read article: US Markets and the Poulson Bad Bank Strategy.

The Run on Banks and the Credit Crunch, updated 18-Sep-08
Everyone slams Northern Rock for its reliance on the money markets for its business model. Well we can now see that HBOS, BB, Alliance and Leicester, Lehman, Merrill, Bear Stearns etc etc had (effectively) the same model. And let us not stop there...read article: The Run on Banks and the Credit Crunch.

Gold Prices and the US Dollar, updated 18-Sep-08
It is plausible to assume that a weakening in the Dollar, coupled with an increase in global income, especially from emerging market economies, may have contributed to a boost in demand for...read article: Gold Prices and the US Dollar.

Spread Bet on UK Banks, updated 16-Sep-08
Of the FTSE 100 banks it is HSBC, RBS, HBOS and Barclays were the worst casualties in terms of writedowns and credit losses. Although the sector has incurred a large amount of writedowns, there remains a view that further losses are in the pipeline: analysts recently stated that...read article: Spread Bet on UK Banks.

Precious Metals Spread Trading Trends, updated 12-Sep-08
Gold may be at its lowest point for 2008 and other metals may be on the way down too but what were the five key influences on their meteoric price rise? Over the past five years the price of...read article: Precious Metals Spread Trading Trends.

World Economies, Tax and Inflation, updated 13-Aug-08
As the FTSE struggles to maintain the rallies of the last week traders try to add in the effects of 4.4% inflation. On the face of it Sterlings decline and the prospect of high interest rates for longer will drag on returns and clients are...read article: World Economies, Tax and Inflation.

Government Guarantees and Mortgages, updated 31-Jul-08
The headlines in the newspapers today will almost certainly focus on the 1.7% monthly drop in house prices which will be adding further pain onto an already hurting building sector. The net fall on the year is now over 8% and if you add in...read article: Government Guarantees and Mortgages.

Market Reaction can be a Fickle Mistress, updated 22-Jul-08
With virtually every piece of nasty medicine now consigned to the back of the dispensary the country can look forward to two or three years of drift as the incumbent administration looks to mitigate its current disastrous low in the polls. Out of the window has gone the...read article: Market Reaction can be a Fickle Mistress.

First Page << 1 2 3 4 5 6 7 8 9 10 11 12 >> Last Page

Also see:

Trading Features / Strategies Index – an index of all the Trading Features.

Q) Average Trading Results?

A) Get free trading tips, offers, price updates, important news and more! All Free - Click here!

Risk Warning: Spread betting and CFD trading carry a high level of risk to your capital and you may lose more than your initial investment. Spread betting and CFD trading 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.

The contents on CleanFinancial.com are for information purposes only and are not intended as a recommendation to trade. Nothing on this website should be construed as investment advice.

Neither CleanFinancial.com nor any contributing company/author accept any responsibility for any use that may be made of the above or for the correctness or accuracy of the information provided.

* Tax law is subject to change or may differ if you pay tax in a jurisdiction other than the UK.

1) Daily Trading Tips

2) Financial Tips

3) Financial Tipping