Home > The Merk Perspective > Merk Insights > November 18th 2003

Bank of England warns it may not be able to fight inflation

Axel Merk, November 18th 2003
This article was written by Merk Investments before the Merk Hard Currency Fund was launched.


Merk Insights provide the Merk Perspective on currencies, global imbalances, the trade deficit, the socio-economic impact of the U.S. administration's policies and more.

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Today, the Bank of England (BoE) issued a note that that it may not be able to raise interest rates as much as necessary to fend off inflation because of high levels of consumer debt. Both BoE Governor Mervyn King and deputy director of financial stability Andrew Large, talked about the dangers of high levels of consumer debt in a rising interest rate environment.

Mervyn King said "There is a risk that heavily-indebted households will be badly affected by changes in [..] interest rates. [..] Everyone needs to think carefully about the amount of debt which they can afford."

Andrew Large said "If a substantial change occurred it would, in the first instance, impact on monetary policy and our ability to meet our inflation targets."

The Bank of England raised interest rates earlier this month which may prompt consumers to save or to repay debt should they anticipate further rate increases.

If anyone is still wondering why Greenspan talks about deflation and brushes inflation risks aside despite a falling dollar, rising commodity prices, and an overheated housing market in the US, the Bank of England provided the answer: Greenspan is scared that the perception will change - there is no need to have interest rate increases to have the US consumer collapse, the US consumer only needs to be worried that interest rates may go up. Rather than addressing debt levels, Greenspan hopes to heat up the US economy so heavily so that a rise in interest rates can be swallowed by the consumer and the economy.

Greenspan's policies are akin to pushing the gas pedal to the floor in a car that has lost traction. It looks like Greenspan has picked up a manual on how to steer a race-car - instead, he should look up how to drive on a slippery winter road.

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