Well, no, not really

First, Sunak sets interest rates. I know there is a pretence that the Bank of England does, but he can over-rule them. He might need to do so now.

Sunak/BoE sets short term interest rates. Short term nominal interest rates that is. The longer the term the more the market sets and not the BoE/Sunak.

However, matters get more complex. Because you cannot both have control of interest rates and also have control of the money supply. Because the way that you control the one is by the other. Therefore you can only set the one and have to adjust the other to reach that setting.

Which means that if you can only control, fully, one of the two then inflation is something you cannot control. Or, perhaps, you can control inflation but only by setting the money supply/interest rates to do so.

All of which in turn means that you don’t in fact control real interest rates, you control nominal ones.

2 thoughts on “Well, no, not really”

  1. The fact that huge splurges of money since the GFC have led to asset price inflation but not retail price inflation means that macroeconomists don’t know what they are talking about. So why exactly should I pay attention to them this time?

  2. Take, for example, the 2.75% Treasury 2024 Gilt. You might expect it to be yielding 2.75%. Spud would expect that. Instead it is currently yielding 2.52%, with a redemption yield of 0.14%. In Spud’s world, a compelling investment, given that you will pay £109 today for £2.75 interest per annum until 7/9/2024 and then get back £100. How much of this is directly determined by the Government or BoE, other than the coupon rate? What, in fact, is the interest rate?

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