Now is the Perfect Time to Raise Interest Rates

UK inflation is at a 15-year low, 0.5% in December. This has been caused in part by the sudden plummet in oil prices, lower food prices, and also the high gas and electricity prices from last year dropping out of the sums. Economists are warning that we are on the verge of deflation. Deflation is classically considered a Bad Thing as consumers delay spending in anticipation of lower prices, and this has a knock-on effect to companies selling to those consumers. Meanwhile Mark Carney is keeping interest rates low while waiting for incomes to rise. He doesn’t want borrowers to suffer when their loan repayments increase. And a too-early rise in rates will, again classically, cause a decrease in inflation, the last thing he wants right now.It seems to me that a lot of this argument is baloney. And all of it is very obvious. If the price of oil falls is anyone really going to sit in front of daytime TV refusing to drive anywhere while waiting for even lower fuel prices? I think not. Elwood: “It’s 106 miles to Chicago, we got a full tank of gas, half a pack of cigarettes, it’s dark… and we’re wearing sunglasses.” Jake: “You don’t think it would make economic sense to wait until the price of gasolene falls further, do you?” Ditto food. I don’t know if economists get out of their ivory towers much but if they did they’d notice that at least something is inflating, and that’s people’s waistbands: people love to eat, and they ain’t gonna wait for those fries get even cheaper. Finally, the quirk in the energy prices dropping out of the calculations is neither here nor there. That all happened a year ago.

Conclusion: there’s no danger of consumers postponing their consumption and causing the deflationary spiral. Personally, I’m going to be eating more chips!

No, now is the perfect time to increase interest rates while those poor borrowers who overextended themselves can take it. They can acclimatize themselves to larger mortgage payments relatively painlessly.

And then if the cost of oil, food and energy do go back up it won’t be Carney’s fault if anyone suffers. He’ll be in the clear.

P

Related Posts

Where Do You Keep Your Offshore Money? Where do you keep your offshore money? The media is all upset about celebs, politicians, etc. having money in various offshore places, in order to ...
Bloomberg View Columnist Barry Ritholtz Interviews... Listen to Barry Ritholtz interview Paul Wilmott about quantitative finance, mathematical modelling, reputational risk, Tom Cruise, JK Rowling, Billy J...
Boris Johnson, Yanis Varoufakis And Sir Vince Cabl... Boris Johnson, Yanis Varoufakis and Sir Vince Cable all have something in common…. All three have been in the news lately with their interpretation...
Webcast – Paul Wilmott On “The Money F... Paul recently gave a talk in downtown Manhattan about his new book, co-authored with David Orrell, The Money Formula. Other topics get dragged in alon...
Jeremy Corbyn: My Part In His Ascent First, disclosure: I am rather right wing, from the school of "take some of my income in taxes but otherwise leave me alone, please." And as a general...
The Money Formula – New Book By Paul Wilmott... The Money Formula: Dodgy Finance, Pseudo Science, and How Mathematicians Took Over the Markets OUT NOW!!! Buy Paul's Latest book NOW on Amazon! ...
Ed Thorp: A Man For All Markets The book we've been waiting for, the full story of Ed Thorp's career in mathematics, science, gambling, and finance. An inspiration for us mortals. ...
We have adjusted our estimate of Mark Carney’... In August The Bank of England forecast growth in the UK in  2017 to be 0.8%. They have now adjusted that forecast to 2%. That's a factor of 2.5....

Be the first to comment

Leave a Reply