Targeting (House-Price) Inflation
By Adrian Ash
February 6, 2008
Yes, the Bank of England is mandated to target
inflation. But inflation in house prices...?
MIGHT THE BANK of ENGLAND cut UK interest rates this Thursday?
Would Hillary Clinton and Barack Obama have "issues"
getting together as running mates this November?
First up, the Bank of England's sole purpose in life is to target
inflation. And annual inflation in United Kingdom real estate prices is now
slowing far beneath the apparently magic 9% mark...
Whatever econometric model the Bank are using, it seems to say 9% annual
house-price growth is vital to the nation's well-being.
The Old Lady has stuck to it since she gained "operational
independence" back in May 1997. And now falling inflation demands a rate
cut once again...if by inflation you mean the decade-long bubble in real estate
prices.
Next up, political pressure. The Bank of England is entirely
independent of the elected government, of course, despite the policy team being
appointed by that very same government. It recently re-appointed the
long-suffering "inflation hawk" governor, Mervyn King, for another
five year term.
Safe in his job until 2013, will the Trimmer play ball with the
Treasury's uncanny knack for second-guessing how his nine-member committee will
vote?
"It has not gone unnoticed that the most successful forecaster
of changes in [BoE] policy direction since 1997 has been Mr. Ed Balls," as
Stephen Lewis at Insinger de Beaufort wrote of the Treasury's chief economic
advisor two years ago. "Before each of these events, he pops up on a public
platform to approve the shift in advance. His insight into what is supposed to
be an independent decision-making process is remarkable."
Fast forward to Jan. 2008, and Ed Balls – now in charge of
education – seems to have retained his magical powers of foresight, revealing
live on breakfast TV that "our interest rates are low and are coming
down."
Spooky, no? Destiny wears red, by the way...
"The Bank of England has got flexibility," Balls went on.
"Inflation is low. We will see what happens in the next few months."
Won't we just! But not before the current chancellor, hapless
Alistair Darling himself, sets the stage for a rate-cut, too.
"Because of the fact that we now have low unemployment,"
said the hopeless one at the end of January, "[and] we've got historically
low inflation, low levels of interest rates and mortgage rates, the Monetary
Policy Committee has room for maneuver."
Room for maneuver? Put another way – as the only US academic on
the Old Lady's team did late last month – "worrying about [consumer
price] inflation at this time seems like fiddling while Rome burns.
"The evidence from the housing market, and especially the
commercial property market, is worrying," David Blanchflower gushed.
"Consumer confidence is low in the UK. Interest rates are restrictive at
their current levels and that is why I have been voting for cuts."
Poor Mervyn King! The Old Lady's chief pooh-bah stuck out like a
sore thumb by refusing to pour money into the interbank lending market when
Northern Rock collapsed last summer. He's previously complained that
"people in sensitive positions" shouldn't speak out on base-rate
policy.
But then, people in sensitive positions are there because they like
to decide what happens. And everyone knows the Bank of England simply MUST cut
interest rates...because its sole task is to defend "price stability"
– and house prices are now looking awfully unstable.
"Mortgage approvals in December at 73,000 were below the
lowest point in the 2004-5 housing pause and point to further housing
weakness," writes David Smith in the Sunday Times. "Consumers
are cautious and so is business. The CBI said January retail trading was the
weakest for 15 months. Consumer confidence did not improve as much as it
normally does between December and January, and remains weak."
Never mind that a new survey from Citigroup-YouGov says the Great
British public now expects inflation to reach 3.3% from the last survey's 2.7%
– "well above the 2% official target" as Smith admits.
Rising inflation in the cost of living didn't prevent the Bank of
England from cutting interest rates in 2001, 2003 or 2005. Why should the Old
Lady break the habit of her (independent) lifetime now?
The Bank of England's non-stop housing-bubble policies of the last decade have
twice presented even basic-rate taxpayers in the UK with the stark choice of
gearing up and throwing themselves into the property market or earning less than
zero in the bank after tax and inflation.
On the old, much-preferred Retail Price measure of inflation, the
one-in-eight workers paying higher-rate income tax have been offered the grand
sum of 0.6% per year in real base rates since the Old Lady gained her
independence in 1997.
Any wonder that the Gold
Price in British Pounds Sterling has shot higher – and continued to shoot
higher, hitting record highs day after day at the start of 2008, even as the
housing bubble collapses under the weight of fraud, idiot investors, and
over-supply?
British savers still unsure about Buying
Gold may not, of course, double their money in the next five years. But
they'll hard put to do it, it seems to us here at BullionVault,
in either cash-deposits or even real estate – no matter how aggressively the
Old Lady tries to devalue the Pound in their pocket.