Βι¶ΉΤΌΕΔ

Your line of logic beggars belief - I gave up after the first few paragraphs.
Perhaps OK for students of Economics but try talking to a student of Philosophy.

And what do you think the odds of a rate rise are this month?
Betfair are offering odds of 11 to 2 against a 1/4 point rise.

I'm no serious student of economics, but I'd like to know if there is any evidence at all that interest rate rises really do control inflation. At best one might argue that a higher interest rate makes it less attractive to borrow money, thereby reducing the likelihood that those without money will spend, or rather invest. But what of those with money?

"Baby boomers" are now reaching the stage in life where they have financial surpluses. Many BBs have paid off their mortgages & no longer need to borrow for other major purchases. If they have savings, surely an interest rate rise will increase the supply of money to this age group? Or does the theory rely on middle-aged & older folk voluntarily curbing their spending in a way that the generally younger & skint half of the population won't do? Perhaps when BBs hold the purse strings, a reduction of interest rates would be the best way to reduce the money supply?

Perhaps we're all barking up the wrong tree anyway. With 200,000 people & their savings exiting the UK annually, the money supply won't be the critical factor in inflation. Then we'll be forced to ask exactly what really controls inflation, if anything? I may be wrong here, but if as a supplier of goods & services I raise my prices, then presumably that is inflationary. So what is the real determinant of inflation? It could be the price of the fuel basic to all economic activity. In that case, I may be doing more to curb inflation by installing solar heating & fuel cells on my roof and a wind turbine in the garden. But hey! The cost of all that installation has to be paid for, so if richer middle aged folks do this, it will seriously reduce the money supply, on the other hand if skint youngsters do the same it is inflationary.

Seriously, I don't think interest rates are a real control factor in inflation. Possibly our recent sustained low inflation period has been the happy result of North Sea oil revenues, but this has now come to an end. Watch out borrowers, interest rates will rocket sky high until some economics expert discovers that this has no effect whatever upon inflation, all it does is to redistribute money from the skint to the wealthy. Then what will they do?

As usual the BoE reacts rather then proactively decides. The base effects in the inflation numbers as a result of hikes last year in key price baskets e.g energy will start to take effect and lower the headline rate of inflation - so although the recent rate hike was a surprise it was an imprudent one for a variety of technical and non-technical reasons which the BoE should have been aware of. However reality is not the MPC's strong point. My call, if anyone cares, and lets forget this 33% chance nonsense (ie its up, down or stay the same) is that that rates have peaked at 5.25% and given the reactive nature of MPC it will start cutting rates by the end of the year as the inflation numbers soften - this will add another pressure on MPC if the headline CPI heads towrads the 1% mark because then we are looking at - wait for it a letter to no 11 to explain what MPC will do. Inflation policy is full of reality gaps

a) the inflation target does reflect the reality that we all pay for stuff that is included in the headline numbers ie RPI and so CPI is a false sense of security

b) Interest rates do not really have any impact because of financial innovation (fixed rates, 0% credit etc) and also because it is one weapon that has to address a variety of complex challenges.

c) MPC is helpless when those prices rise outside its control eg energy companies hike prices.

The real downward pressure on inflation has been caused by Labour's tax policy ie the middle income earners have been squezzed to assist the low and high income earners; lets not forget the nice trick of raising NI, which is a tax in all but name, but Labour kept its promise not raise tax rates) and this has also been aided by the China price and companies looking to reduce labour costs.

Concerns over subprime lending in US will add another weight to the side of the scales where the MPC doves are sitting - rate cuts by the end of the year!!!

There is nothing like the fear of a credit crunch and the usual stuff about US sneezes etc to coerce most Central Bankers to induce liquidity especially when the yen carry trade may be ending.