A few months ago, Silvana Tenreyro, a professor at the London School of Economics and a member of the Bank of England’s Monetary Policy Committee (MPC), gave a great speech in the US that went unnoticed here in the UK.
The Anglo-Argentine economist noted that it was the bank’s job to set interest rates based on what will happen in the future – not what is happening now.
It’s the most insightful point, and one that gets to the heart of the deepening division on the future direction of interest rates.
Tenreyro, who has been one of the most lenient MPC members since joining six years ago, went on to warn that interest rates are already higher than the economy can bear, and inflation will fall below the 2 percent target as a result from the bank.
The future is already here. The recent interest rate hikes are indeed having an effect, as we see with rising government bonds and interest rate futures.
To the point: LSE Professor Silvana Tenreyro (pictured) who sits on the Bank of England’s MPC Committee gave a great speech in the US
Higher rates do their job. Mortgages are skyrocketing, offers are being withdrawn and house prices are falling.
It’s not so much a pressure you feel in the economy, but the screeching of the brakes being applied in households as consumers rein in their spending.
If mortgage rates reached 6 percent, as some predict, analysts think homeowners’ mortgage payments would be as heavy as 13 percent in the late 1980s, leading to negative equity for many.
Therefore – as we have argued before – the Bank should pause and wait to assess the impact that the 12 rate hikes so far have on consumer spending and demand and, indeed, on future wage demands.
If it goes ahead with another hike quickly on Thursday, it would act not only rashly but dangerously, potentially pushing the country into recession.
The danger now, Tenreyro said, is that those who want to raise rates will become Milton Friedman’s “fool in the shower” who burns themselves by being too impatient.
As the great Chicago economist said, “If the fool turns on the water and it gets cold, he will keep turning the tap on, and in the end, because he is impatient, he will burn.”
It is equally bizarre that the Bank seems to notice little of the sharp fall in the money supply that is taking place.
This is certainly a positive sign after years of economic bloat with quantitative easing, first after the financial crash and then during the lockdown to fund the furlough scheme.
The prices of houses, raw materials and energy are falling. As Friedman also said, “Inflation is always and everywhere a monetary phenomenon.”
Not much has changed.
It’s another reason why Chancellor Jeremy Hunt’s constant meddling with his non-stop comment that the Bank should do whatever it takes to ‘squeeze inflation out of the system’ is so damaging.
Politicians are supposed to stay out of monetary policy. It’s almost as if he’s willing to force the bank to overdose, sending the country into recession.
It’s a pity that next week’s MPC meeting will be Tenreyro’s last. We need her wise words.
The hawks would do well to listen to her better this time if they want to save the country from catching fire.
Pricey soda
SODA’s decision to cancel the London IPO has been heralded as a major blow to the City and the stock market.
And that is of course disappointing. Still, there are credible reasons why investors didn’t fall head over heels for this Turkish delicacy: the Ciner family, owners of WE Soda, have no public record in the UK.
And according to analysts, the owner hoped to get a quote at a high of between seven and 10 times earnings, taking advantage of the current high price for soda ash.
That’s much higher than the average of its industry peers, which are valued at five times. It sounds like the float failed for old-fashioned reasons – it was too pricey – rather than having any impact on the health of London’s capital markets.
Soft drinks will be welcome again in London if they can’t get the right price in New York.
Back to basic
More black stuff is making a comeback.
National Grid is in talks with Drax, the massive power station in North Yorkshire, about bringing coal-fired units back to life to stop blackouts and prevent winter blackouts.
It seems that burning coal is more reliable than shipping wood pellets 2,000 miles from Mississippi to Selby to be green. Funny that.
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