Thursday 10 June 2010

The Bank of England holds the UK Bank Rate at 0.5%

The Bank of England today held interest rates at 0.5% for the fifteenth month in a row and decided to do no more quantitative easing (QE). This was no surprise to me and just continues with the unspoken strategy that I have previously suggested the Bank of England have formulated. Meanwhile in the real world the retail prices index (RPI) has risen from 4.4% to 5.3% and the measure supposedly followed by the Bank of England, the consumer prices index (CPI), has risen from 3.4% to 3.7%.

I’m now starting to wonder if the Bank of England may get their wish of inflating the debts of the reckless (including the government) away with the small acceptable side effect of punishing the prudent savers as they see the value of their assets eroded away. The markets just don’t seem to be forcing interest rate increases. The Bank of England are still safely on the tight rope.

I’m also wondering if the other side effect of this policy will be that the real earnings of people who choose to work are cut through this inflation. It’s a sneaky way of increasing the UK’s competitiveness without telling the Average Joe that he’s taking a pay cut. Why am I thinking this? Some examples:

- Personal anecdotal. The company that I work for has announced that we will be getting a small increase this year however it will be nowhere near inflation. Therefore the employees at my company are taking a pay cut.

- The strike by British Airways cabin crew is starting to look like BA might win. While Unite are going to ballot again I’ve seen a couple of papers saying that BA cabin crew are now starting to say that they need to earn some money. If BA win then their crew (rightly or wrongly) will take a real pay cut but also importantly will encourage other employers to stand their ground.

- BT’s management have held their ground on their 2% pay offer. CWU are going to ballot their members but it looks like management standing their ground here also. Interestingly Prospect who represent the white collar members of BT have accepted the 2% pay rise. So these guys and girls have already taken a pay cut.

- The public sector is likely to have savage cuts when the emergency budget is presented this month. I think employees will be more interested in keeping their head down to try and keep their jobs rather than start asking for big pay increases.

Of course only time will tell.

As always do your own research.

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