Notes From Underground: Orwell that ends well with Mervyn King and the Bank of England

Two central banks issued their statements on interest rate policy. First, the FED STAID the course and left QE2 as it was/is and the language of the FOMC statement was almost verbatim from the December meeting. I am greatly bothered by the second paragraph again and the emphasis on “CONSISTENT WITH ITS STATUTORY MANDATE” (emphasis mine). The FED continues to hide behind the legislative directive of price stability and maximum employment. The FED reiterated that price pressures were negligible but that unemployment is elevated. So for all those in Congress, stop complaining for the Bernanke group is merely fulfilling its legal obligations.

The FED will pursue growth at all costs and while I seldom find common ground with Bill Gross, his real-time analysis called for the curve to steepen further. The long-end tried to rally, but the more GROSS opined on CNBC the faster the long end was sold, leading to the curve steepening. The end result was that POST-FOMC, the U.S.DOLLAR was sold against all currencies and the precious metals and equities also went bid, along with CRUDE OIL. If the 2/10 continues to widen, it will be a good test to see if the recent selloff in many risky asset classes reverse and the theory of steepening yield curves is tested. Remember, GOOD TRADING IS LIKE SCIENCE: IT ADVANCES ONE FUNERAL AT A TIME (–Max Planck).

After the FED it was the Reserve Bank of New Zealand’s turn to announce its monetary policy. Like the FED, the KIWIS held rates at 3 percent sighting some concern over the recent weak domestic data. The RBNZ was more cheery about the next year and hinted that KIWI rates would probably head higher. Unlike the U.S. DOLLAR, the KIWI rallied.

Today, the Bank of England’s Governor Mervyn King gave a speech–no, not the king’s speech–in which he rabidly defended the  MPC‘s
policy of holding to an interest rate of 50 basis points even as inflation has risen to a recent 3.7 percent. The tenor of the speech was Orwellian as King applauded the BANK for sticking to its belief even as it has met sharp criticism form the “nattering nabobs of negativity.” King says that while inflation is higher than the BOE would like it is not a bad thing for three reasons:
1. The fall in the value of the POUND has led to a rise in import prices especially in food but it has resulted in incresed manufacturing as exports have increased due to the weak currency. If you factor out the food and commodity price increases, which are the result of global pressures and which higher rates could not prevent, inflation would be considerably lower;
2. The rise in energy prices could not have been prevented by rising interest rates as again it is a global phenomena and raising domestic rates would not have halted the price increases but would have lowered domestic demand for all goods and increased unemployment; and
3. The recent increase in the VAT tax has momentarily increased prices as its impact feeds through the economy.
Mervyn the Wizard claims that the only effect raising interest rates would have had on the economy would be a further compression of real wages, putting further stress on final demand. If the analysts would isolate out these factors, inflation would be below target so in time these inflationary causes will be smoothed out and the BOE will have be proven correct in its prudence. In summary, I offer this quote from the speech:
“If the MPC had raised bank rates significantly, inflation might well have started to fall back this year, but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now. The erosion of living standards would have been even greater. The idea that the MPC could have preserved living standards by preventing the rise in inflation without also pushing down earnings growth further, is wishful thinking.”
I wonder: If the world’s central bankers can ever err, or, given enough time and money, they will always be proven right? Hmmm, I wonder: Is PIMCO buying steepeners in ENGLAND??

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One Response to “Notes From Underground: Orwell that ends well with Mervyn King and the Bank of England”

  1. Some Links Points and Figures Says:

    […] Some FOMC analysis, US, GB, NZ (Notes from Underground) […]

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