Another reply from the UK Treasury to my campaign for democratic reform at the Bank of England

11th January 2012 by Shaun Richards

Today has opened with the news that one of the main energy suppliers in the UK, EDF energy has announced plans to reduce its gas bills by 5% from February 7th of this year. I notice that some elements of the media in their rush to present this news are announcing that it has cut prices rather than it plans to. But it does raise the issue that as the increase  in the rate of Value Added Tax which took place at the beginning of 2011 falls out of the annual rate of inflation soon we will see the headline rate fall. I suspect also that there was some price-cutting over the Christmas period and we will see a temporary benefit from the delay in the introduction of a 3 pence increase in fuel duty (from January to August). Accordingly the headline annual rate of Consumer Price Inflation is likely to be 3 point something early in the New Year as opposed to the 4.8% it was most recently measured at.

Not everything is falling however

The first point to make is that prices are still rising simply that they are likely to do so more slowly for a while. There remain upwards influences from what I call institutional inflation in the UK. For example average rail fares have just risen by 5.9% and on a more personal level the annual ticket for using my local running track has risen by 6.1%. If we look at the approval of the HS2 line yesterday ( for foreign readers this is a new main rail hub from London to Birmingham initially and then later to go further north) I wonder if the inevitable cost overruns will lead to upward pressure on rail fares as it progresses over the next decade. A bit like the £2.4 billion bill for the 2012 Olympics became £9 billion or so.

In addition we see that whilst the commodity price surge of 2011 has calmed down and to some extent reversed the price of oil has remained firm. I discussed this only on Friday in more detail but as I type this a barrel of Brent crude is priced at US $113.20 which is up 16.42% on a year ago and of this,somewhat disturbingly, approximately half of this rise has taken place since December 19th (8%). Over the past 24 hours the price of Orange Juice futures has followed the pattern described in the film Trading Places as we have seen the price of OJ rise by 11% and I notice today that the Financial Times is saying that it’s price has risen to a 34 year high. Actually the more I investigate this the more I am reminded of the plot in trading places with some talking of fungicide problems and others of weather colder than expected.

The fundamental point is that some inflationary influences remain and on the 7th of December I wrote again to Mark Hoban who is the Financial Secretary to the Treasury to make this fundamental point.

1. The trajectory of inflation as I have discussed above looks likely to continue to be higher than one would expect in our current and likely economic circumstances.

In other words the policy of the Bank of England is failing. For those who wish to review my original suggestion for reform I will repeat it below and I will also put a link to my article of the 28th of November where I discussed Mr. Hoban’s first reply.
My suggestion for much needed reform at the Bank of England

I have a policy recommendation and it does indicate quite a change. As the role of the Monetary Policy Committee has changed and expanded more than could have been forecast when it was introduced back in 1997  there now needs to be new checks and balances on its power. My suggestion for a change is that MPC members should stand for election as they are currently much more powerful than many of our elected representatives.

Mr Hoban’s latest reply


A critique of the reply

Firstly he certainly does not agree with the former head of the European Central Bank Msr. Trichet. You see Msr.Trichet was very proud of the fact that the ECB had achieved an average inflation rate of 1.97%. Whereas Mark Hoban tells us that such a performance would mean.

Interest rates would be changing all the time,and by large amounts,causing unnecessary uncertainty and volatility in the economy.

Instead Mr Hoban feels that the Bank of England should operate such that inflation.

can be brought back into target within a reasonable time period

As it has been over target for two years now and most recently more than double it, what is a reasonable time period Mr. Hoban? It was kind of him to already answer this question in his letter without me even asking as he later tells us.

Monetary policy operates with a time lag of about two years

Ah yes the same two years as it has now been over target.

So if we factor in the current situation which is of a weakish recovery and possible relapse we are left with the thought that inspite of the official denials we are getting an implicit confession that policy is not aimed at the 2% inflation target.

Readers may like to peruse closely the fifth and sixth paragraphs of the letter which are in response to my point that increasing the amount of Quantitative Easing when inflation is way above target is an odd thing to do when the Bank of England itself says that QE stimulates the economy. The Bank of England has changed its website on the subject of QE as it now mentions “projected inflation” as its rationale rather than exisiting inflation which is sneaky to say the least. The reason for this is quite plain how can you achieve an inflation target by using a stimulus when you are way above target?

Bank of England forecasting failure

Mr. Hoban tells us that inflation is “expected to fall back sharply in 2012 and 2013 as temporary factors pushing up inflation wane”. Let us consider this and as evidence I present a letter from the 5th of November 2009 from the Governor of the Bank of England Mervyn King to the then Chancellor Alistair Darling.

On balance, the Committee believes that the prospect is for a slow recovery in the level of economic activity, so that a substantial margin of under-utilised resources persists. That will continue to bear down on inflation for some time to come, offset in the short run by the impact of the past depreciation of sterling.

Yes there you have it they were telling us projected inflation will fall ahead of the current inflationary episode. If you want more examples of their forecasting failures there are plenty in the article I have linked to above. I will leave it to readers to decide whether these continual errors are deliberate or the result of incompetence.

An area which remains unaddressed

In addition to the issues described above I challenged Mr. Hoban on the issue I describe below.

To this I would add that the new Extended Collateral Term Repo (ECTR) Facility is in effect an admittal from the Bank of England that it should not have accelerated the withdrawal of the Special Liquidity Scheme. I have argued that the withdrawal of the Special Liquidity Scheme was a mistake for a year now and the link below is from then to prove the point.

Quantitative Easing update

This afternoon the Bank of England plans to purchase some £1.7 billion of UK Gilts (government bonds) in the maturity range 2022 to 2036.

 Late Running

Apologies for today’s post being behind time. I had a problem scanning the letter and had to try an alternative system.




21 thoughts on “Another reply from the UK Treasury to my campaign for democratic reform at the Bank of England”

  1. Drf says:

    Shaun, when you have inveterate liars and thieves in control of the BoE it is pointless writing letters to them exposing their failures.  They do not want to pay any attention, and are intent to continue with their ongoing deceit! (It is similar with government and Quango consultations.) They play the game of supposedly responding, but their responses deliberately parry the real issues and the truth. They follow the ways of their master, and their eternal destiny will be the same as his.

  2. Drf says:

    Meanwhile after all the claims that weak Sterling would enable a flood of exports, we see now again this morning that the balance of payments deficit is still widening, because exports have fallen again. This as with all the other REAL economic parameters shows that the complete policy is based on lies and intentional theft from the poor and middle classes; in fact just the same as their mates – the Banksters, whom most of these disastrous policies have been implemented to support.

    1. Anonymous says:

      Hi Drf

      Yes what did happen to the rebalancing of the economy that we were promised from the devaluation?

      I think you will like this which I was going to put into today’s article but with the scanner debacle run out of time to do. I saw it on HPC posted by OnlyMe and it showed that the UK’s trade balance had steadily deteriorated since the introduction of the MPC in 1997 to 2008 when that chart ended.

      I do not seem able to put it on here so I will add it to tomorrow’s article.

  3. Anonymous says:

    Hi Shaun

    I thought I would compare Mr Hoban’s reply to Mr Osborne’s remit letter of 23 March 2011. Price stability is the legal task of the BoE defined by the 2% target ” at all times”. If CPI diverges from target by 1% either way due to “shocks” and “disturbances” and if raising/lowering interest rates / QE may increase volatility in output the qualification says that explanations must be provided with policy measures to bring it back to target. Osborne is always free to revise the target at the time of the Budget.

    Not sure how this fits with Mr Hoban’s letter. It looks as if the target is now defined by it’s qualification as opposed by the ” 2% at all times” bit.

    1. Anonymous says:

      Hi Shire

      Thank you for the comparison. As I put in the article I was concentrating more on the Bank of England’s website which I am sure has changed over time from inflation to projected inflation.

      That caught my attention as of course throughout the episode of elevated inflation the MPC has forecast or projected inflation on or even less accurately below target.

      But with your point and mine I think we can be sure that there is a drip drip weakening of the target. Personally I put it down to presentation as missing it in reality does not seem to have bothered those in charge much if at all.

  4. Anonymous says:

    It is good I think that you continue to make this case. The government and the Bank of England seem to be in cahoots with each other and it is not as if their policies are doing well is it?

  5. ChrisLongs says:

    Perhaps you should write to Ed as Labour appear bereft of new ideas. Why have a dog and bark yourself?

    1. Anonymous says:

      Hi Chris

      Why not indeed? I have to confess that I had not thought of that and it is certainly worth a try. Thank you.

    2. Anonymous says:

      labour could try to emulate the Canadian Liberals & NZ Labour party.

      Honestly running a balanced budget is cheaper in the long run. It saves money by reducing the interest bill paid to bankers. Real social democrats should try to pay teachers more than they pay interest to bankers.

  6. Loafalot says:

    I support your campaign to have members of the BoE face election / re-election. Frankly the central banks globally are stuffed full of doves … independent my arse.

    To repeat the point I raised a couple of weeks ago: I think the BoE are buying up (nearly all!?) the gilts because it’s ultimately the only way to raise interest rates from the zero bound without bankrupting the banks. When IR’s eventually rise, gilt prices will fall sharply, and the BoE (i.e. UK taxpayer) will take the hit, rather than the banks who will be awash with printed cash. That’s what all this QE is about IMO. Could someone please ask Mervyn King whether I’m right?!?

  7. Davidmicheal Lilley says:


    I have recently been introduced to your site via your hyperlink on a BBC comment.

    I shall continue to read your blog as you introduce lots of numbers and the results of your research and I like this attention to detail. But I sometimes must disagree and this is one such occasion.

    I always follow Mervin King’s speeches and responses to the Select Committee and I always see a professional giving excellent comment on his sphere of influence.

    Many comment that the MPC has not met its 2% inflation target for some two years but I think their remit is a little larger than “2% at all costs”.

    I considered Ben Bennanke’s coming to office and taking the US base rate from 1 to 3.5% in straight sets and Mervin taking ours from 3.5 to 5.5% in straight sets to be a coordinated attack on their respective house price bubbles. They prevented further house price inflation but the bubbles were already too large and we witnessed the consequencies of the US housing bubble bursting and both Ben and Mervin had to quickly bring down interest rates to near zero to avoid a depression. They then had to intoduce QE as it was the only way to stimulate their economies once the interest rate cutting tool had been exhausted.

    US QE1 and 2 and our £200b of QE1 and £75b of QE2 have not led to inflation. They have very low inflation and ours has been due to the VAT rise and higher import costs due to our market devaluation of 25% some two years ago. Oil and commodity price rises were unpredictable.

    As Mervin is forced to point out again and again and yet again he cannot predict the future but only make a judgement as expressed in his fan charts.

    But we all know that now is not the time for interest rate rises and Ben Bennanke has gone as far as stating that they will not rise in three years. We have stimulated and stimulated to kick-start our economies but it has not led to a turnaround. Debt and deficit prevent further stimulus and QE3 is therefore on the cards here and not a rise in interest rates in the face of temporary inflation.

    The ECB wrongfooted when it raised its base rate last year but this has now been corrected. New leadership at the ECB has quickly reduced their interest rate by 33.3% to 1% and they have now introduced backdoor QE to the tune of 0.5t Euro.

    We are on the right track to do what is absolutely necessary, prevent a second great contraction, a second Great Depression. But we could go further if we introduced G20 pro-rata QE and let countries that aren’t “too big to fail” to fail.

    1. Anonymous says:

      Hi David and welcome to my part of the blogosphere.

      There is no compulsion to agree on here! Indeed a debate is welcomed and the comments section  with its regular frequent civilised and well-informed debates is a clear strength of this blog.

      As to my views on QE there is a section on here which covers them from the early days. However if you wish to read the comments on ones before March 2010 then you need to check them on my Notayesmanseconomics blog as only the articles were transferred onto here.

      In the end there is invariably something to agree on.

      “As Mervin is forced to point out again and again and yet again he cannot predict the future”

      Amen to that! I will agree with you and Mervyn on that one…

    2. John mccusker says:

      “But we all know that now is not the time for interest rate rises” Well, speaking as one of the “all”, I don’t know that. In my opinion interest rates should be increased to the point at which money and assets are properly priced. There would, of course, be adverse consequences for those who borrowed too much. However the zero interest regime has very adverse consequences for those who did not borrow too much. How about moral hazard? All policy currently is aimed at rewarding the feckless at the expense of the prudent. Apparently this is to continue for years, yet this policy is clearly not working. Better get it over with now, get money and assets properly priced, let the bankrupts fail (including most banks) and start all over again. Painful for some, no doubt, but the current situation is painful for many. Somebody has to pay the price for some disastrous misjudgements- how about it being those who made the misjudgements? 

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