In my view central banks are playing with fire with all this printing of money. I thought that Mark Carney might shake things up a bit at the Bank of England and my goodness it needs a shake up having failed to spot the financial crisis and then persistently failing to reach its inflation target. Well the latest idea is that interest rates will continue to be at record lows of 0.5% until unemployment which is currently 7.8% fall to at least 7%. There are two provisos (i) so long as there is not a 50% or greater chance that inflation will be above 2.5% or (ii) the low interest rates risk financial instability. The idea of the "forward guidance" is that the prospects of low interest rates for some time to come will encourage investment and consumption in the real economy. Well, since when inflation was 5.2% the Bank of England had not predicted a couple of years before that there was much chance that it would be above 3% then don't expect them to use the first excuse ! Next, it is low interest rate policies that can be the cause of financial instability by encouraging investors into risky assets - the low interest rate policy of Alan Greenspan after the dot com bubble crash was a significant contributor to the housing market bubble and crash. We are now likely to have low interest rates for a couple of more years and possibly till mid 2016 - that will be 8 years of record low rates. This is artificially pushing up stocks and the high end property sector and enabling governments to over borrow a great recipe for the next disaster !
The real reason for low interest rates is to penalise savers and benefit debtors and of course to bail out the banks, even today Mark Carney has made this clear stating:
"“Governor [Mervyn] King and his colleagues made tremendous progress on improving the balance sheets of the banks. We need to finish the job.”
So lets be honest the inflation target is effectively no longer operational, it is about squeezing real wages for the rest of us to bail out the reckless banks. A bad start Mr Carney.
The real reason for low interest rates is to penalise savers and benefit debtors and of course to bail out the banks, even today Mark Carney has made this clear stating:
"“Governor [Mervyn] King and his colleagues made tremendous progress on improving the balance sheets of the banks. We need to finish the job.”
So lets be honest the inflation target is effectively no longer operational, it is about squeezing real wages for the rest of us to bail out the reckless banks. A bad start Mr Carney.
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