Thank you to those who replied to my question about the UK’s relationship with the European Union. I notice that some were implying views that I had not really said so let me refine/restate my point in case I had not made it clear. I feel that our membership has been misrepresented by our political class as we are continually told that the EU is vital for our trade and our future and usually this comes with the implication that leaving would be a disaster. My response to that is we have consistently run a trade deficit with the European Union so in fact the European Union as a whole will always be very keen for our trade. So we need not fear that they would ever abandon us as our trading pattern favours them rather than us. If it is important for the UK it is even more important for nations which as a whole have a trade surplus with us. I see a mismatch between this situation and the fact that our political class have seen a massive expansion in jobs and salaries for themselves as a result of our membership of the European Union. Sometimes I feel that they cannot see the difference between their own interests and ours. Accordingly I feel that we have more influence in Europe than we have deployed so far and that we should find a way of using it. I am not saying we should stay or go as for a start that is highly political and I avoid politics but simply we have operated under a misconception.
A chance to raise UK official interest-rates
Today the UK Monetary Policy Committee meets and at mid-day there is a chance that they might raise interest-rates. This is the first meeting for quite some time that we might get a change. Now the probability is rather low but it exists and it is a little higher than implied by the result of the 62 economists polled by Bloomberg who all voted for no change. Perhaps one or two voting for a rise would be about right. In terms of history the MPC has often moved on the results of official quarterly Gross Domestic Product figures and the last headline was -0.5%. Also last time round whilst 2 members did vote for a rise this means that 7 did not and we would be relying on members who have been willing to accommodate inflation being over target for month after month suddenly reversing course. I noticed one article which suggested that Spencer Dale might switch sides. This might have been influenced by the speech he gave in the autumn entitled “inflation,inflation,inflation”, however he is hardly a hawk on such matters as in his own speech he pointed out that inflation had been over target in 41 out of 50 meetings he had voted in!
Why they might raise base rates
The first point is that consumer price inflation has been consistently over target and at 3.7% is nearly double the official target of 2%. Next week we will get the latest figures and it is quite possible I will be able to take the nearly out of the last sentence. In my view Retail Price Inflation is a better measure and apart from a level of 4.8% being higher in absolute terms it exceeds it old target by 2.3% rather than the 1.7% of the current one. This often gets forgotten in the debate. These figures are being influenced by world commodity price trends which show few signs of abating.
This was reinforced by the British Retail Consortium which published its latest survey of shop prices yesterday.
Overall shop price inflation increased to 2.5% in January from 2.1% in December. Food inflation accelerated to 4.6% from 4.0% in December. Non-food inflation increased to 1.3% from 1.1% in December.
It had a good go at spinning these figures but as you can see the spin hit the rather inconvenient truth that all its measures had risen!
Added to this is the fact that manufacturing in particular is still doing reasonably well in the UK. I wrote in my article on Tuesday the 8th of February about how well it had been doing and this is still true overall in spite of a 0.1% monthly dip in December. For example, according to the Office for National Statistics manufacturing production rose by 4.4% in December when compared with a year earlier. Also industrial production rose by 3.6% when compared with a year earlier and November’s figures were revised higher by 0.2%. So overall not quite as strong as November’s but still good. We also should factor in that the National Institute for Economic and Social Research recorded an increase of 0.5% in economic output for the fourth quarter of 2010.
Regular readers will be aware that I feel that the UK has a persistent inflation problem and that the MPC should respond to it with an increase in official interest-rates. I would have raised them beginning back in late 2009 as it was plain that a problem was building. I know that this comes as a shock to some as it is a different view to the consensus presented by the mainstream media. So let me make some basic points.
1. Even if UK base rates were 2% this compares with a “neutral” base rate of around 4.5%, so my policy is still expansionary merely less so.
2. There are many other interest-rates apart form the base rate and many of these are not taking much notice of it. I write often about bond yields and longer-term interest-rates which have been rising for some months and are now more than 1% higher than their lows. There are also very wide divergences between base rate and many market interest-rates such as overdraft and credit card rates which are often well into double figures. If you look at savings rate you can also get 3%, a mere 2.5% over base rate! So in effect it is as much for show as effect.
3. I would also operate to stop bank “profiteering” as described above.
4. I cannot stop the rises in commodity prices but I can respond to likely secondary effects of it such as rising inflationary expectations.
5. Think of the pain inflation has caused the UK economy in the past then add that to our current situation! If it should accelerate further imagine the quandary we will be in then.
In essence we have a difficult choice to which there is no easy answer. However I feel that there is a wrong answer and that so far the Monetary Policy Committee has taken it.
Portugal and her financial difficulties
Here is a more extreme case of a country affected by long-term interest-rates. Her ten-year government bond yield closed at 7.32% yesterday which is a new high in her time as a Euro member. Firstly I think there is food for thought for the UK in this and our inflationary situation. The point is that markets can force longer-term interest-rates much higher if they lose faith in a country not that Portugal has the same inflationary problem as us which she does not. Should this happen to us we would be in a much worse situation that trying to act more promptly. Here there is a similarity as Portugal and the Euro zone are forever blaming market forces and the so-called “Wolf Pack” for events which are the consequence of their actions.
Returning to Portugal and her situation, I have felt for some months now that she should call in the International Monetary Fund. As she has a balance of payments problem she could do so without involving the European Union although it is more likely that she would involve it too. Unfortunately my calls for prompt and indeed pre-emptive action have been ignored and it is likely that the situation will decline to such a state that Portugal goes into such an arrangement on her knees. We have yet to find out what would happen if a country acted promptly and decisively. We do however know what happens when they do not as the example of both Ireland and Greece is that whilst the ship gets temporarily shored up it is still a long way from its home port and looks likely to sink before it gets there.
Update 11:40 am
Today Portuguese government bond yields have surged again and the European Central Bank has stepped in again reversing its recent policy and pointing out that it appears to be the only buyer. Central banks appear unable to stop manipulating markets and determined to create false ones.
As time goes by we get more details on the so-called rescue package and both the EU and IMF have provided more information this week. However there have also been signs of what has dogged Ireland all along that her banking sector is in fact in an even worse state than we have been told. The Chairman of Anglo-Irish Bank gave a speech this week suggesting that the Irish banking sector will need an extra 50 billion Euros of funds. This not only way exceeds the estimate of the Governor of the Central Bank of Ireland who has stated that ten billion Euros will be needed but also much more than the 35 billion that is in the rescue package for this purpose. We are in danger of a rather familiar deterioration here….
The UK banking-sector Project Merlin
This was announced to a great fanfare yesterday. However some Eagle-eyed observers have spotted these points in the statement.
these five banks have agreed to aim to foster more demand, such that their intention for gross new lending in 2011 is now higher than what was actually delivered in 2010………….Each bank’s lending expectations, capacity and willingness, as set out above, will be subject to its normal commercial objectives, credit standards and processes and regulatory obligations, as well as the availability of the required funding.
If we are to behave like a command economy we will have to do better than “intention” and “aim to” and “normal commercial objectives” have no place at all!
The Football Association
This was on my mind as I watched England win last night (apologies to Danish readers). I keep hearing people say that the FA has virtually no power these days and that the power resides with the Premier League. I wondered what these people with no power paid themselves and in the latest accounts I could find for the 2008 calendar year Directors remuneration totalled £938,000. Not bad for a group with no power! Added to this one Director received £1,289,000 as compensation for loss of office,quite a lot when you compare it to the total for all the Directors.