Inside Economics

Inside Economics

About the Blog

This is a space for me to comment on Economics both in terms of the specific bits if economics, how the discipline works and the academic politics. I might also be tempted into talking about the economy!

At Last.

Monetary PolicyPosted by Huw Dixon Sun, November 12, 2017 09:47:05

I am in China at present, but the recent increase of the interest rate to 0.5% even made the news here. However, welcome as the increase is, all it does is to reverse the disastrous mistake of the post-Brexit cut of August 4th 2016. Let us recall the nonsense spoken by Carney at the time. Carney argued that Brexit would lead to job losses of 250,000 and that further interest rate cuts were in the pipeline, as was a further extension of QE. “There is a clear case for stimulus, and stimulus now, in order to have an effect when the economy really needs it,” he said. The result was a slump in Sterling. In the aftermath of the Brexit vote, sterling had fallen from around $1.45 to $1.30. After the Bank's new policy it fell to $1.20 and below, to lows not seen since the 1980s. What happened after the recent reversal? Well, we see sterling back at its immediate post-Brexit level (todays rate is $1.32). And, recall that for most economists the post-Brexit world looks rather more dark than it did in mid-2016.

Since its August cut, there has been a largely successful public relations strategy of blaming all of the increase in inflation on Brexit. However, whilst Brexit played a role, the Banks own policy of easy money played only a slightly smaller role. I have not done the exact calculations or simulations, but as an off-the-cuff-Ball-park I would apportion "blame" for the increase in inflation about 60% to Brexit and 40% to the Bank of England. There has been a 3% increase in inflation since mid 2016. If the Bank had kept the interest rate unchanged at 0.5%, we would have now had inflation around 1.8%. The Bank's post-Brexit cut and general loosening added another 1.2%.

So, the Bank has at last reversed the mistake. Will they start the path back to normal: long-run nominal rates equal to the target plus a real rate of 1-2% (i.e. nominal rates around 3-4%)? The next couple of meeting of the MPC are crucial here. Will common sense prevail, or will there be prevarication and procrastination?









  • Comments(0)//insideeconomics.huwdixon.org/#post7