Friday 28 May 2010

Are the cracks starting to show in the Bank of England’s unspoken strategy

I’ve been suggesting for many months now and most recently here that the Bank of England want inflation which they think they can control. This is so they can allow the large UK government debt and the debts of the reckless general public to be inflated away (effectively a free bailout). Of course somebody has to pay for this and that will be the prudent savers amongst us. Additionally, keeping the Official Bank Rate at historic lows of 0.5% for so long, while allowing the inflation to occur, also helps the banks recapitalise themselves as they proceed to lend money out at rates far above this. Of course savers are again punished as the banks pay below inflation interest rates to the savers. So far (of course in my untrained opinion only) it’s all going to plan for the Bank of England except I saw a couple of cracks beginning to open this week.

Firstly, the Communication Workers Union which looks after 55,000 BT workers doesn’t like the management’s offer of a 2% pay rise very much. Instead they’ve clearly had a look at the Retail Prices Index and said we’ll have a 5% increase instead thanks. Of course if they don’t get what they want they will ballot for strike action. Can’t blame them really. Anything less than 5.3% is a real pay cut as that’s the current inflation rate. The concern is that if BT give them what they want they set a precedent for all the other Unions to follow. Before long everyone’s getting a 5% pay rise and the bidding up of prices (and of course embedded inflation) begins.

Secondly, according to the BBC Lloyds TSB and Cheltenham & Gloucester have said that ‘from 1st of June new borrowers, or current ones who switch deals, will have to revert to a Standard Variable Rate (SVR) without any ceiling, currently set at 3.99%.’ In contrast ‘current borrowers revert to a standard variable rate (SVR) of just 2% above bank rate, so currently paying 2.5%.’ That’s a big difference. ‘Lloyds acknowledged that it needed to introduce a higher SVR to make more money from its mortgage lending, as the cost of raising mortgage funds had become considerably more expensive and is no longer linked purely to the Bank of England's bank rate.’ So the raising of funds is starting to decouple from the Bank of England’s Official Bank Rate. Are the Bank of England starting to lose control?

As always do your own research.

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