Thursday, 4 March 2010

UK Bank Rate held at 0.5% while McDonald’s is deemed safer than UK government debt

Today’s chart must be the most boring I have ever posted. This is because the Bank of England held interest rates at 0.5% for the thirteenth month in a row. I can’t say that I’m surprised by this decision but I still think it irresponsible when you have a Monetary Policy Framework that you are supposed to operate within which includes the Government’s inflation target of 2%. Meanwhile back in the real world the Retail Prices Index (RPI) is running at 3.7% and the Consumer Price Index (CPI) is running at 2.8%. The Bank of England are making excuses like inflation in the short term is high due to the reinstatement of increased VAT and falls in the pound. I won’t go on about this as I’ve talked about all this before except I will say when these factors were moving in the other direction the Bank of England were quick to lower rates.

The pound has fallen by about 4% in recent weeks against other major currencies. When this feeds into further inflation do they just keep the same excuse going – it’s all caused by import prices rising because of falls in the pound. I’d love to be able to say to the Bank of England - “No that’s not correct Mr King. What’s happening is that on the world stage my buying power is being eroded. This is both my savings being held in pounds plus my earnings which are also held in pounds. Additionally in the local market you are devaluing my purchasing power. Every day that I go to work I am taking a pay cut over what I received yesterday.”

Another interesting piece that I saw today demonstrating how well the economy is being run by the Bank of England and this current government is news that in the credit default swap market the cost of insuring UK government debt has now risen above that of insuring both McDonald’s and Pepsi. The cost of insuring £6.6 million of government debt is now £56,000 per year compared with £31,000 for McDonald’s and £33,000 for Pepsi. With this type of effect how long can the government go on stealing from the future generations through debt issuance before the bond market responds aggressively?

Meanwhile on the other side of the world what appears to be a prudently run country, Australia, has had its central bank, the Reserve bank of Australia, raise interest rates by 0.25% to 4% this month. This is despite their CPI inflation sitting at 2.1%.

As always DYOR.

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