They lied and lied and lied

Martin Weale has warned of an imminent rate rise

Last week, Martin Weale of the Bank of England said “Interest rates could rise within a year, and risk going up sharply if inflationary pressures begin to build.”

And that sentiment had the markets jumping (or should I say falling?) to attention. Well, of course it would. When interest rates rise, that’s when the house of cards finally topples.

The West is over-borrowed, and rising rates would cripple governments, businesses, and individuals alike. But just as importantly, low rates are exactly what have gee’d up most investment assets classes over the last five years. Is it all about to go pear-shaped?

The truth is, nobody knows exactly when the big rate reset will come. Here at The Right Side, I’ve been a proponent of the ‘rates will stay lower, and longer, than anyone believes’.

And investing in stocks and fixed-interest off the back of this belief has seen great returns over the last five years or so.

Sure, we don’t ignore market signals. But it always pays to put them in context.

What’s causing inflation?

Monetary Policy Committee member Martin Weale was wheeled out last week to warn about an imminent rate rise. His rather spurious argument goes along these lines: the economy is doing rather well. That means people are buying more stuff. And there’s not enough ‘capacity’ (the ability to create goods and services) to allow this growth in demand to continue without pushing up prices. We should get ready to see inflation rise, and in order to tame it, rates will be going up. Quite possibly sooner than the markets believe.

Now, of course, there are some elements of truth in this idea – if there’s scarcity of supply, prices tend to go up. But are we really living in such a world? I mean, when inflation has gone up in the recent past, was it down to large queues developing at the hairdressers, or butchers? Was it a lack of baked beans on the shelf?

No. Where inflation has cropped up, it’s been down to rising global energy and commodity prices. It’s been because the pound was been weak. Yes, possibly because some clever pricing strategies and collusion in specific sectors like aviation, insurance and banking. But price rises have rarely been driven by limited capacity.

The truth is, these guys are regularly wheeled out to send out the same message. To give the sense that rates are about to go up. They need to do this to placate angry savers, and in a vain effort to quell the housing market.

There’s always an excuse

Bonds, stocks, house prices… all these things are ‘priced off’ low interest rates. And last week’s market weakness was directly proportional to the fact that ‘players’ now believe rates may rise sooner than expected.

Well, it’s the market’s prerogative to jump on every utterance from a central bank, or after the publication of some bit of data. But over the medium  to long term, this is all just market noise.

Over the last five years or so, the market has consistently priced in an imminent rate rise. And it’s always been wrong. During the financial crisis, the ’emergency rates’ were seen as just that, an emergency level. And then, the curve has always kind of factored in rising rates a year or two out.

But it’s funny how when that year or two is up, the rise never occurs. Something always seems to crop up which justifies low rates. Yet, they maintain the illusion that rising rates are just round the corner.

And I’ve got no doubt something will crop up again. I don’t know what. Geopolitical tensions, bad employment data, a swooning stock market. Who cares? The central banker will find an excuse to keep rates bolted to the floor. Of course they do. And in the UK, the biggest borrower of them all still needs to find some £80bn a year to balance the books, so of course the planners need rates to stay low!

When the levee breaks

The only thing that can possibly change the situation is if inflation really does take off. And I’m not talking about the type of gentle inflation in Martin Weale’s computer models. You know, the type of inflation the central banks forecast, ie, the forecasts and formulas that never work!

I’m talking about proper inflation. The type that is completely unpredictable. The type of inflation that’s borne of public psychology.

So, the trap is set. Raise rates and risk financial apocalypse. Keep rates low and risk an unpredictable explosion of inflation.

Obviously, the planners go for the latter option. After all, what sane person would induce a controlled collapse? Better to go for the uncontrolled type. You can always blame that on events outside your control.

Let’s look on the bright side. This means more asset price inflation for the moment. And anyway, over the medium to long term, we can still look to other markets for sanity. Markets such as Africa, the Far East… or even… yes, Russia!

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  • richstead

    Re; interest rates. We always hear that higher interest rates dampen inflation, but curiously we have had record low interest for a very long time and tinflation has nonetheless stayed low. Japan likewise had very low interest rates for years and years, and the government there spent far more that they had been receiving in taxes. Instead of Inflation, which the rule book specifies, they had deflation.

    Higher interest rates are I think designed to curb excess lending, and apart from the Housing market now they have htis new help to buy, there is no excess lending by the Banks, is there? Higher interest rates I suggest give a signal that higher inflation is expected, so companies will up their prices to protect themselves against this anticipated inflation, and so cause it. Am I right?

  • porky

    Re- Booming Africa etc March12th.
    There is a good article concerning above to be found on
    BBC World Service , Schedules Page, March 23rd.,3.32 am
    In The Balance ,African Enterprise.
    This BBC Site is a good source of business info.

  • mikeT

    It seems to me that China’s problem will keep demand for commodities subdued, plus it looks like the US might finally start to export some of its natural gas surplus (eventually) and don’t we have fracking to look forward to? So the inflation outlook looks ok except….
    I’m still puzzled by QE money printing. It is clear that none of this new money has hit the real economy yet. because the US banks have just deposited it back with the Fed. But what happens next? Will the central banks drain this liquidity by selling back their bonds(meaning presumably yields will rise) or will they keep the bonds and get rid of the rate they pay on deposits, forcing this “wall of money” into the real economy through frantic bank lending? Or will it be a “managed” (oh dear) mix of the two? I think a thoughtful article from MW about QE unwinding would be useful.

  • r

    I am very confident that Bengt is right. There will be no increase in interest rates before May, 2015, because, if nothing else, it will blow the government’s assisted housebuying scheme out of the water because house prices will immediately drop and we will begin to see what a house-price bubble we have been living in.

    What happens after the election is anyone’s guess; the adverse effects of public psychology could easily kick in.

    The hard fact is that our successive governments have borrowed and borrowed and the debt is now impossible to repay. An increase in interest rates – whenever it will happen – will highlight this massive debt for everyone to see. Worldwide.


  • Chester

    That central bankers want to keep rates at historic lows and stoke inflation is not in question, but they are not masters of the universe

    Central banks can only manipulate interbank rates – they do not “control” underlying interest rates. The bond market does, and rates rise when it is spooked by fear of default, an event which is probably just over the horizon

    Look to Southern Europe for live examples of what happens to underlying interest rates in a credit crisis. Central banks postured and denied reality ’till they croaked, but they lost control to the bond markets

    Look at 10 yr US treasuries – an explicit goal of QE infinity was to keep rates nailed to the floor. What happened? Rates have doubled to just under 3% since helicopter Ben pronounced his dictat

    Of course they will lie and pretend – with their very survival on the line, they are unlikely to admit they control nothing but a capacity to cheat, counterfiet and de-base. History clarifies their record to anyone who questions the hype and crackpot financial reporting. It will be interesting so see how many CB’s will survive the next phase of the deflationary crash, once their part in the financial meltdown is more widely understood

  • Pensiion60

    What if all Austerity and Welfare Reform had made the UK make IMF’s mistake with Greece?

    After all, the Coalition has spent more in 4 years on Welfare Reform admin than Labour did in last 13 years of their terms in office.

    If all welfare reform admin stopped tomorrow, replaced by:
    – an automatic Citizen Wage of £1,750 per month tax free and not means tested for adult citizens,
    – an automatic Citizen State Pension for all aged 60 now lost payout till 66 or even 70, linked to average wages of around £26,000,
    so replacing all admin of benefits and all the tax credits lost,
    would this not pay off all national debt tomorrow?

    Would all the Austerity Jobs lost in welfare reform admin by expensive management, not fund a massive rise in purple jobs (free carers in your home for disabled, old and long term patients) and frontline services, so saving hugely on NHS hospital admissions, so saving on that front as well?

    Would the end of all Jobcentres, the entire Department of Work and Pensions including Minister of same, and the sacking of all private contracts in welfare admin, not save billions upon billions in public spending?

    Would not the input of money into the economy of an Automatic Citizen Wage,
    not curtailed by Income Tax, thus breathe light into the economy still struggling to come out of recession?

    Would not the input of money to pensioners, not create thousands of jobs in shops and cafes on the high street and revive the town centre from its current ghost town scenario? Instead as now leaving pensioners destitute and so needing more benefits, not less forever in old age:

    The state pension is payable to people whether they retire or not from work, or go on to further jobs.

    How to pay off national debt and come into surplus:

    – pension linked to average wages from 60,
    – part-time or full-time job it matters not when now part-timers lose housing benefit if cannot get a full-time job so end of all admin costs with sanctions regime,
    no benefits admin by automatic pensions and citizen wages,
    no bedroom tax admin and costs by just housing single people with no kids in Premier Inn or Travelodges with a block booking,
    full citizen wage for all citizens between 18 to 59.

    Do we not only pay off the national debt (deficits don’t matter, we’ve had one for 300 years just fine), but come into surplus?


    Then more people could reach out to self-employment with a guaranteed basic income, a growth area for the mature in years, who could then offer young people jobs, instead of spending public money on Workfare that offers nothing to local businesses in the community by not rising customer footfall.

    Then without contributions to Europe or paying for salary and expenses of MEPs from the UK, that money could be invested in nil business rates til the recession is over.

    So no meltdown and a surplus. Solved!

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