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Central banks do indeed rule by changing interest rates. But by far the most important influence is what they say they’re going to do to interest rates:

However, Mr Bailey said that increasing rates to the 5.25pc level recently expected by markets would trigger a two-year recession and cut household real incomes by £800 in 2023.

He said this should serve “as a reminder that we should not increase Bank Rate too far”, and added: “We can’t make promises about future interest rates but based on where we stand today, we think Bank Rate will have to go up by less than currently priced in financial markets.”

Expectations management that’s called.

This is also why the ‘Tater’s idea that central banks should lose their independence is such a bad idea. Because the power of management depends upon belief in those expectations. And it’s just one of those things, that markets are more likely to believe someone independent of the political process than they are someone a part of it.

Think on it. Imagine Spud was in political power (or the people who were believed his ideas) then we’d get interest rates right now being lowered, spending and money printing increasing. This would increase inflation substantially. For entirely political reasons. Well, OK. But that’s different from the current BoE aim of getting us back to 2% inflation.

Therefore, political control would mean that the aim of 2% inflation could – would – be over-ruled whenever there was political reason to do so. Belief in the Bank doing what it says it would do would therefore decrease.

As is in fact the main finding of the effects of central bank independence. It’s not that they’ve conquered inflation. It’s that interest rates have been lower in the same circumstances than they would have been with political control of them. The risk premium for some Chancellor doing the Barber dash for growth with both loose fiscal and monetary policy has receded. The absence of that risk premium is the amount by which interest rates have been lower than they would have been with political control.

11 thoughts on “Expectations!”

  1. The only expectations I can see is which muppets – the politicians or the BoE – are going to make a ruin of the economy. There only a very fine distinction between the two.

    Oh by the way. Andrew Bailey went to Queens’ College, Cambridge, where he gained a bachelor’s degree in History (promoted to MA by seniority in 1985) and a PhD from the Faculty of History, University of Cambridge.
    Then again, Mark Carney studied at the University of Oxford’s St Peter’s College and Nuffield College, where he received masters and doctoral degrees in the same field in 1993 and 1995, respectively.
    Before that, Mervyn King was Cambridge.
    Our finest minds, eh?

  2. “The risk premium for some Chancellor doing the Barber dash for growth with both loose fiscal and monetary policy has receded. ”

    But the risk premium that the governor of the BoE will turn the printers on full flow because the government of the day wants to pay everyone to stay at home and do nothing has increased………

    The BoE is in the politics business now. You can’t pretend that its somehow above all that. The Governor is making political decisions left right and centre, and there is no democratic control over him, or those decisions. You assume the BoE has the best interests of the UK at heart and therefore they should be left to ‘do their thing’ unmolested by anything as grubby as the electorate. I say the entire Uk political and administrative class are working against the best interests of the electorate, and they all need to be brought to heel, BoE included.

  3. The BoE role changed when it got into the money printing business. Before that it had a fairly technocratic role – maintain a level of price inflation via interest rates. When the economy started getting over heated raise them, cut them when things looked a bit peaky. There wasn’t a great deal of room for manoeuvre in that role.

    But then it got caught up in MMT and QE. Suddenly it had the power to print money and change the economic climate over night. To enable the government of the day to do things the markets would not allow them to. This has changed their political horizons from being locked in a broom cupboard to contemplating the steppes of Russia. Control of a country’s money supply is the ultimate power. Ask Liz Truss. She didn’t have it, Andrew Bailey did, and he did for her.

    Give me one good reason why Andrew Bailey should have all that power and not a jot of political control over how he wields it.

  4. If Mr Bailey has proved to have been a bit of an arse for much of his career my expectation is that he will continue on those same lines.

  5. One thing to bear in mind if Spud were in power is that it’d be an update on Keynes thinking for sure in that we wouldn’t have to wait until the long run for everyone of us here who is a contributor on this blog to be dead in fairly short order I’d imagine..

  6. At least Mervyn King’s degree was in Economics

    Aren’t economists sporting degrees the key problem?

  7. There’s little that’s wrong with King’s mind – he’s one of the shrewdest observers going. (Carney I’m not so sure about: his ideas about the relative sizes of post-Brexit German and British GDP, which he has expressed repeatedly over the past few weeks, suggests that he is ignorant of some pretty basic stuff).

    As for Bailey, his judgement and temperament have been found wanting in several instances, which have led to mistakes – but these attributes can’t really be taught, so I don’t see why blame should be laid at the door of educational institutions that taught him four decades ago.

  8. What isn't political?

    Is the political constraint of 2% inflation the real problem, because indexation is a much better solution?

  9. Still waiting for our host to give me one good reason why Andrew Bailey should have the power to decide which democratically elected government lives and which one dies.

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