UK inflation exceeds Bank interest rate for first time since 1981


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Despite my protestations that inflation is due to fall sharply over the next six months, I do have to point out that real interest rates are not only negative in the U.S. all the way across the curve, they are also negative in most of the emerging markets and now in the UK as well. If that’s not the definition of easy money, what is?

Interest rates have fallen below the cost of living for the first time in 27 years.

In a landmark moment for the Bank of England, Britain now has negative real interest rates, news which will heighten calls for the Monetary Policy Committee to raise borrowing costs.

Retail price index inflation (RPI) – the most comprehensive measure of living costs – rose to 5pc last month, according to the Office for National Statistics.

The rate was actually slightly above 5pc – the current level of the Bank’s base rate – although it was rounded down to one decimal place.

RPIX, the measure which excludes mortgage payments and was until recently targeted by the Bank, rose beyond even this to 5.3pc.

Telegraph, 13 Aug 2008

Fed Funds is only 2%. Inflation in the U.S. is 5%. Here are the treasury rates below — all with a yield below 5% right across the curve (source:Bloomberg).

U.S. Treasuries

3-Month0.00011/13/20081.8 / 1.83-0.03 / -.03120:22
6-Month0.00002/12/20091.98 / 2.03-0.037 / -.03920:27
12-Month0.00007/30/20092.11 / 2.17-0.07 / -.07320:00
2-Year2.75007/31/2010100-18+ / 2.450-05½ / -.09020:28
3-Year4.87507/31/2011106-03 / 2.720-09 / -.09820:14
5-Year3.37507/31/2013101-00+ / 3.150-16 / -.10920:33
10-Year4.00008/15/2018100-25½ / 3.900-23 / -.08720:35
30-Year4.50005/15/203899-12 / 4.541-01 / -.06420:35

Note the following quote from the Telegraph article:

When real interest rates – namely after inflation has been subtracted – are in negative territory, it puts the economy in the unusual position where it becomes “more attractive to spend rather than to save,” according to Philip Shaw of Investec. “At the current rate, borrowing is more attractive than saving.”

This is the sort of thing that causes bubbles in the first place.

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