Where should Interest rates go?

The Bank of England is currently in a bit of a tricky situation. Do they cut Interest rates to help economic growth, raise them to combat inflation, or simply leave them alone?

Interest rates have remained at around 5% for some time now, and this is in response to inflation being at 4.4%(August 2008) far above the BOE's target of 2%. Some, therefore, argue interest rates should go up even more to get inflation back down to the Banks target. It is important to keep inflation down, because it can result in second round effects such as wages rising, which then causes inflation to go up even more.

However the BOE, also has to consider Economic growth, which has severely slowed, in fact the UK's economy neither grew nor shrank in the second quarter of 2008. In order to stimulate the UK's economy the bank should really cut interest rates to stimulate demand, and also things like the housing market, which has slowed massively due to the credit crunch.

So what should the bank do? Cut interest rates to help the economy, or raise them to combat inflation? Well it is my belief the bank should cut interest rates. This is because yes higher inflation can lead to second round effects such as higher wages, but i do not believe we will see this. This is because as the economy slows, many more people will become fearful of losing their jobs, and will therefore not go demanding 5% pay rises to combat inflation. We have definitely not seen this yet (except oil tanker drivers). Furthermore if the economy goes into a major economic downturn inflation will not even become a problem because consumer spending, and spending in the economy as a whole will massively decrease. Finally interest rates mainly control inflation, which has been caused by demand. The inflation, we are seeing is caused by rising commodity prices, such as oil, gas and food. Therefore, raising interest rates is having little effect on inflation, because these types of goods are things we have to buy no matter what (they are inelastic). The price of these goods are also expected to come down in the near future, thus easing inflationary pressure.

The BOE, therefore in my opinion, should worry less about inflation, and concentrate more on the very fragile economy, like the FED did in the USA.

The Bonkers TUC

Right, I don’t know about how many of you have heard about the TUC‘s plan to introduce a super-tax on the rich, but I’m against it wholeheartedly!

Now I have no problems with a bigger tax on the rich per se, as I believe that if such a tax were to exist then it wouldn't necessarily harm the rather deep pockets of the "elite." It may also bring in some extra funds for a treasury which, thanks to a certain Mr Brown, is significantly out of pocket at the moment. This in turn may provide some sort of help for an economy is on something of a downturn, hint hint Mr Darling/Mr Brown. Thus I don't believe a tax on the very rich would necessarily be a bad thing. Shocked, aren't you?

However, don't get the idea that I am backing what the TUC have suggested. They are suggesting a super-tax on those who earn more than £100,000, which I think is utterly preposterous. As the previous article stated, now 1 in 100 tax payers have jobs which pay salaries of over £100,000. A large tax on these people would, in my view, be totally un-just. I know several people in the north, who are on these salaries. However to earn it, they have to commute to London weekly, often spending up to 4 nights away from their families. This, inevitably leads to stress and I believe that another huge tax on these people will be even more stressed. (A weak argument I know, but I have witnessed it firsthand.)

My other argument (probably the more relevant one) is that those in the highest bracket of tax are already being taxed too much. Those who earn £34,600 or more are forking out 40% of their income to tax. Those who are earning £100,000 p.a. are realistically earning around £60,000. But that is before ludicrous energy bills which are costing everyone a massive amount these days. Then there are mortgage repayments, ever more important in this era of banks not lending to each other. In addition there are food prices which are soaring thanks to huge demand from the emerging economy. But that's beside the point. I'm trying to convey the message that a super-tax would not be beneficial to many people.

With the very rich, the tax wouldn't affect their lifestyles in any way shape or form, with the exception of maybe having to buy a cheaper car. However with those with salaries of £100,000 the tax would affect them on such a scale that it is unrealistic to introduce the tax.

Monthly report (Aug 08)

This month has been one of the most successful TPN months so far, a big thank you goes out to Sam, Paul and Kunal who have all provided us with very interesting and thought provoking articles about the state of the UK politically and economically and the emergence of India.

Some stats for Aug:

highest amount of visits: 29 (Aug 22nd)
Total amount of visits: 547
Avrg time on site: 1m 46 Secs

Visits by countries (top 6)
UK (82.88%)
US (10.96%)
Australia (2.74%)
Spain (2.05%)
Thailand (0.68%)
China (0.68%)


By Cities (T.10)
London (56.85%)
Watford (6.16%)
South Tyneside (6.16%)
Newcastle (4.11%)
Edinburgh (2.74%)
Sydney (2.74%)
Malaga (2.05%)
Poway (1.37%)
Washington (1.37%)
Glasgow (1.37%)


In total:
highest amount of visits: 59 (Jul 19th 07)
Total amount of visits: 3,625
Avrg time on site: 59s

Top 10 Countries:
UK (44.89%)
US (28.45%)
Canada (4.09%)
China (3.49%)
Malaysia (2.04)
France (1.87%)
Germany (1.36%)
Singapore (1.28%)
Australia (1.02%)
Turkey (0.85%)

Top 10 Cities:
London (16.44%)
Washington (7.07%)
New York (4.43%)
Ann Arbor (2.81%)
Birmingham (2.30%)
Edinburgh (2.21%)
Hangzhou (2.21%)
Cumbernauld (1.62%)
KL (1.53%)
Singapore (1.19%)