Monday, December 26, 2005

Pump up the volume

Back in early 2004 the Bank of England was in the middle of a robust interest-rate hiking campaign. It opened the year at 3.75% and by August 2004 was up to 4.75%. Consumer inflation was never a real problem, with British CPI running in a 1.0-1.5% range at the time. It was really about housing prices, and the central bank's dramatic action took the air out of the UK housing bubble for sure. Annual housing inflation across the UK (per Nationwide) hit its most recent peak of 20.3% in July 2004 and has been tumbling ever since, hitting a low of just 1.8% in Septemer with a slight bounce since then, settling at latest measure at 2.4% in November. In the sixteen months since July 2004, five have seen SA monthly price declines. As a consequence, RPI inflation (which includes housing) has plunged from 3.5% in late 2004 to 2.4% in November 2005.

The UK bond market has decided that the BoE has had enough. The Bank cut interest rates by 25 basis points in August 2005 and the widespread belief seems to be that another cut in the works.
U.K. government bonds had their biggest weekly advance in six months after comments from Bank of England policy makers spurred speculation interest rates in Britain will be lowered further.

The rally in bonds sent two-year yields to their lowest since mid-October as the minutes of the bank's last rate-setting committee meeting showed Stephen Nickell voted for an interest rate cut, while the rest voted to keep rates on hold. BOE Chief Economist Charles Bean said in an interview on Dec. 18 the bank won't necessarily ``sit here until the spring doing nothing.''

``Bean was the first source of joy for the bond bulls, followed by the Bank of England minutes, which followed on to the GDP figures,'' said Stuart Thomson, a fixed-income strategist at Charles Stanley Sutherlands in Edinburgh, Scotland. ``We had a triple whammy of good news.''
Time to pump up the volume?

I suspect this is a lesson for future Fed behavior as well. With US core inflation remaining quite low and stable, with housing prices still out of control and consumer spending spilling red ink everywhere, and with global production showing signs of beginning to outstrip consumption again, the Fed is storing up ammunition in these latest rate hikes as much as it is fruitlessly trying to reign in American consumption. If the ECB is going to cut back on supplying liquidity to the global economy, the BoE and later on the Fed are most likely to stop in to stem the stem of the tide.

39 Comments:

At 2:35 PM, Anonymous Anonymous said...

Holiday greetings to you and yours General. Glad to read this post on the UK economics window which I do think is viewed by the WH and the Fed as a proxy for America's economic decisions. [Fuggedabout all that CPI-U stuff.]
The cookie crumbles despite the reports (esp BBC) to the contrary or more accurately, despite the absense of reports.

 
At 11:58 PM, Anonymous dryfly said...

Maybe I'm just old fashioned... but with all that red ink spilling all over and inomes flat for most folks (at least for those at or below median income)... how does a new series of rate cuts and more cheap debt help them or the economy as a whole... here or in the UK? Am I the only one smelling the Japanese disease?

I mean I get how dragging it out a few months more helps a certain faction get past Nov 2006... but is there more to it than that or is 'the next election' really all there is?

 
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At 12:24 PM, Anonymous Anonymous said...

The Nationwide source claims that a 'soft' landing has already been achieved in the UK. Despite 9 consecutive increases in the UE rate, these pundits believe that affordability will be fully restored in 4 years. (Or in the worst case scenario 8 years, depending on house price inflation assumptions.)
Ignoring much IMHO.

I do not find enough information on the houses that are selling at the 'stable' prices (let's cut to the chase and just look at m/m --the y/y prices are misleading). I want to know if the current flat prices buy you more house today than a month ago. I want to know if the volume of houses compared to last month is as flat as the prices were. I want to know if more first time buyers are in this month and I want to know how they are managing this while foreclosures stats suggest existing 'owners' are not managing. I want to know what industry is taking over, (the exports to Europe), from the 20% y/y driver that housing provided until 2004.
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At 12:36 AM, Anonymous Anonymous said...

That thar EU central bank (ecb) jest might be uh-pumpin' and uh-dumpin' liquidity in anticipation of uh EYEranian ohl bourse that reeeeputedly will open fer bidness 'bout March, 2006 and price ohl and gas in Euros. Seems like ewe would need quite a heap uh new euros to monetize all that ohl and 25% of the world's natural gas. If'n ewe didn't pump and dump liquidity purty quick ewe could suddenly find yerself with too few euros chasin' too much ohl and gas. Kinda makes ewe wonder if'n there really is goin' tuh be uh air war agin Eyeran. Whoooooweeee, General, what're we gonnna dooooo when someone starts pricin' ohl and gas in Euros? And then in Colones, er whatever they calls Veneeeeezuelan currency? Wah, it'll be uh gol'danged cornucopia of ohl currencies.

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