Thursday, July 22, 2010

Implications of Negative Short Term Rates

A senior Bank of England official named Dale expressed thoughts written up in a British newspaper as follows:

Mr Dale stressed the "huge" monetary stimulus the Bank was continuing to administer to the economy, with the bank rate at 0.5 per cent, a 300-year low, and the injection of £200bn directly into the economy via the Bank's "quantitative easing" programme. The impact of a lower bank rate, especially on those with tracker mortgages, has meant a substantial bonus in lower mortgage payments every month.

But Mr Dale added: "Since the spring of 2006 inflation has been above target for 41 out of 50 months and for two years it has averaged over 3 per cent. Now, we can come up with all sorts of clever and real reasons to explain our view but at some point people will say 'inflation just seems higher than it used to be' and that is a very substantial risk".

(The Bank of England was formed in 1694 to be the U. K.'s central bank; so the term '300-year low' is really an all-time low.)

Do you think that short rates under 1% and official inflation over 3% is either fair or sustainable?

Either a major economic collapse or higher short-term rates appear needed to achieve a more stable situation, at least in the U. K.

Given that Britain has acted as the U. S. "poodle" for quite some time, how different are things in the U. S.?

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