MPC hawk argues ‘a stitch in time…’

You’ve only got yourself to blame, gentle reader. You shouldn’t have borrowed and spent so much when interest rates hit a half-a-century in 2003.

Nor should you have borrowed and spent more money again when the real rate of interest – allowing for inflation – hit a 25-year low at the start of 2007.

‘The sooner households begin to acknowledge the consequences of higher interest rates,’ said Bank of England member Tim Besley yesterday, ‘the greater is the chance of a smooth adjustment towards a level of consumption consistent with maintaining the inflation target in the medium term.’

Put another way, ‘Stop enjoying yourselves or we’ll hike base rates again!’ And then who’ll be sorry, eh?

Don’t do it, Tim! “The decision to raise the base rate this month will feel like another nail in the coffin for many borrowers, with very little breathing space since May’s rate hike,” warns Jonathan Cornell of Hamptons International Mortgages. ‘The MPC should carefully assess the impact of past rises on inflationary pressures before it takes further action,’ nods Michael Coogan, head of the Council of Mortgage Lenders.

But the Old Lady’s man has gone deaf, it seems. ‘Since joining the MPC, I have been pushing for higher rates,’ Besley went on in his speech to the Centre for Economic Policy Research yesterday. ‘My apparent desire to raise rates, perhaps more quickly than some of my colleagues on the MPC, has been fuelled by a belief that we would be better placed to bring inflation to target in the medium term by doing more sooner. Moreover, the peak of rates may eventually be lower by moving earlier.’

And so we’re back to the question: to fix or to float? Estate agents and mortgage lenders think the Bank of England has gone far enough already. So does the bond market; long-dated gilts ended Thursday yielding less than short-dated bonds. ‘Compared with base rates of 5.75%,’ notes the Lex column in the FT today, ’20-year yields are now 75 basis points lower. Only three months ago the difference was about 50 basis points, and a year ago long-term bond yields were above base rates.’

Indeed, the last time Britain’s yield curve was this ‘inverted’ – a signal that the bond market thinks the economy will slow sharply – was in 2001. Back then, as Lex adds, ‘there were widespread fears about a global slump.’

But UK Plc managed to avoid a slump in late 2001, even as the United States and Europe dipped their toes in recession. ‘We’ve avoided a slowdown for the last 15 years running, in fact. Just this morning, the Office for National Statistics reported that GDP grew by 0.8% between April and June, beating the 0.7% rise seen in the first quarter of 2007 and capping a record 60 consecutive quarters of growth.

‘There are 12 million children alive in Britain today who have never experienced anything other than a rising economy,’ notes David Smith at the Sunday Times. ‘The previous record run was 19 quarters, from 1985 to 1990.  A long run in the ‘golden age’ of the 1950s and ’60s was six or seven quarters, and four or five was more typical.’

‘Such was the stop-go nature of economic policy in the ’60s,’ smiles the man at The Times fondly. Here in the brave new century of New Labour, by contrast, we’re all much wiser and smarter – most especially our fiscal masters and monetary fiddlers. The Bank of England has steered us past both the rocks of inflation and the sandbanks of slump. Gordon Brown abolished boom-bust a decade ago.

All we’ve had since is ‘boom! boom!’ – but repeating the catchphrase of Basil Brush, a tired old glove-puppet fox, seems an odd way to approach running the country. Bust follows boom as sure as floods follow rain. Not every time, to be sure. But after a real downpour, you might just wish you’d got sandbags to hand.

‘It is a widely accepted proposition in the economic profession,’ as the European Central Bank notes in its most recent policy statement, ‘that a change in the quantity of money in the economy will be reflected in a change in the general level of prices.’ So perhaps the Old Ladies really have seen off the inflation risk already – soaring world energy and food prices aside. The quantity of money sloshing round the UK rose last month at its slowest rate since Nov. 2005. The annual growth rate in broad M4 month sank from 14.7% to 13.3%.

But all told, however, the UK money supply has now swollen by £1.03 trillion since June 2002. That’s a greater expansion in cash and credit than the previous 15 years put together.

Boom! Boom! Got your umbrella ready…?

By Adrian Ash for The Daily Reckoning. You can read more from Adrian and many others at

Adrian Ash is editor of Gold News and head of research at, the fastest growing gold bullion service online