How is raising interest rates supposed to help with the kind of inflation we are having now?

[marty21]

I kind of forgot that the recent very low rates are far from normal & there’s only really been anything close to it before in the crash to post war bit.View attachment 335796

I was speaking to my mum about high interest rates, she had a 17% mortgage interest rate when the BOE rate was 15% , early 80s - it was a struggle to make the payments, but I don't think they held at that high rate for very long (not sure on how long) .

 

[Elpenor]

Looking like my 10 year mortgage fix at a shade over 2% is the best decision I’ve made this year.

 

[cupid_stunt]

I was speaking to my mum about high interest rates, she had a 17% mortgage interest rate when the BOE rate was 15% , early 80s - it was a struggle to make the payments, but I don't think they held at that high rate for very long (not sure on how long) .

There was some wild swings in the 70s & 80s.

 

[UnderOpenSky]

Looking like my 10 year mortgage fix at a shade over 2% is the best decision I’ve made this year.

Really wish I'd done that rather the years we did.

 

[platinumsage]

.

 

[kabbes]

Personal opinion here: leaving aside other factors and concentrating purely on econometric ones, I think that about 3-5% is the sweet spot for interest rates. More than that and debts become a knife edge. Less and you start getting other problems (not least that inflation is more volatile).

This is no comment on what should be done in the here and now, just a general context-free observation.

 

[wemakeyousoundb]

Might dampen house prices which went up 11% in the last year ffs....might decrease rents also, which my friend who is moving this month says its hitting £900 a month for a 4 person flat share in south london

£900 for 4 person is pretty cheap, or is that per person?

 

[pesh]

£900 for 4 person is pretty cheap, or is that per person?

It would be a miracle

 

[MickiQ]

£900 for 4 person is pretty cheap, or is that per person?

Is that for one room in a flat with 3 other people in it? That's fucking bonkers.

 

[ska invita]

£900 for 4 person is pretty cheap, or is that per person?

Per person

 

[UnderOpenSky]

Is that for one room in a flat with 3 other people in it? That's fucking bonkers.

Apparently it's grim up North

 

[MickiQ]

Apparently it's grim up North

It's clearly a lot grimmer down South

 

[Smokeandsteam]

The Bank of England has just raised interest rates to 1.75 % – the biggest rise for 27 years.

This will make the cost of living crisis worse increasing mortgage payments at the same time as rising energy/food prices and deliberately mischaracterises the causes of the current inflation spiral.

The BoE know this. They know that the two drivers were rising prices - corporate profit and price gouging and non-labour costs - are unaffected by interest rate rises. But what ‘the markets’ expect is what they will do. Those pontificating on here previously on the value of the ‘independence’ of the BoE will be quiet for a period I expect.

 

[platinumsage]

The Bank of England has just raised interest rates to 1.75 % – the biggest rise for 27 years.

This will make the cost of living crisis worse increasing mortgage payments at the same time as rising energy/food prices and deliberately mischaracterises the causes of the current inflation spiral.

The BoE know this. They know that the two drivers were rising prices - corporate profit and price gouging and non-labour costs - are unaffected by interest rate rises. But what ‘the markets’ expect is what they will do. Those pontificating on here previously on the value of the ‘independence’ of the BoE will be quiet for a period I expect.

Did you read their accompanying report? What are they mischaracterising exactly? As I said above, the increase in rates is not to combat supply-side inflation but to stop it becoming embedded e.g. the report states the following:

“The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In view of these considerations, the Committee voted to increase Bank Rate by 0.5 percentage points, to 1.75%, at this meeting.”

 

[8ball]

Exactly! The idea is to make people spend less but that would only have any impact on people who have savings deciding to not buy non-essentials anyway isn’t it ? Which how would that help with the price of the things people actually need.

Because there are lots of people still buying non-essential stuff. They have lots of money.
If it becomes more attractive to invest, some of them will do so, removing money from general circulation and into pots that may encourage economic growth, which can counter the stuff:money ratio problem by increasing the amount of stuff.

The alternative would be to remove money specifically from the areas where it is still being spent freely by taxing the rich.

Which, as we all know, is unthinkable.

 

[bimble]

Because there are lots of people still buying non-essential stuff. They have lots of money.
If it becomes more attractive to invest, some of them will do so, removing money from general circulation and into pots that may encourage economic growth, which can counter the stuff:money ratio problem by increasing the amount of stuff.

The alternative would be to remove money specifically from the areas where it is still being spent freely by taxing the rich.

Which, as we all know, is unthinkable.

When you say invest you don’t mean invest you mean just leave their money in the bank ? Because the investing people actually investing in the making of more stuff would not help would it .
The idea is the opposite, I think: that if interest rates are high, people with spare ££ will be less willing to invest money than they would do otherwise, and it's the things they'd invest in that are competing for the same stuff (fuel raw materials transport costs etc) that are already making everything too expensive.

 

[8ball]

When you say invest you don’t mean invest you mean just leave their money in the bank ? Because the investing people actually investing in the making of more stuff would not help would it .

Investment would be favourably drawn to things not intensive in requirements that are not in short supply (which, admittedly, is maybe not that much given the way our economy is set up).
The idea is that it stops so much money being around chasing goods and puts it in a place where it can contribute towards increasing the number of goods in circulation.

1.75% seems quite a nonsense given the kind of inflation we're looking at tbf.

Anyway, that's just my non-economist understanding of the idea behind what they're doing.

 

[bimble]

Investment would be favourably drawn to things not intensive in requirements that are not in short supply (which, admittedly, is maybe not that much given the way our economy is set up).
The idea is that it stops so much money being around chasing goods and puts it in a place where it can contribute towards increasing the number of goods in circulation.

1.75% seems quite a nonsense given the kind of inflation we're looking at tbf.

Anyway, that's just my non-economist understanding of the idea behind what they're doing.

But raising interest rates why would that make people more likely to invest?

Did you read their accompanying report? What are they mischaracterising exactly? As I said above, the increase in rates is not to combat supply-side inflation but to stop it becoming embedded e.g. the report states the following:

“The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In view of these considerations, the Committee voted to increase Bank Rate by 0.5 percentage points, to 1.75%, at this meeting.”

how though by what mechanism is it supposed to help make the problem better or make it less long lasting ?

 

[Smokeandsteam]

Did you read their accompanying report? What are they mischaracterising exactly? As I said above, the increase in rates is not to combat supply-side inflation but to stop it becoming embedded e.g. the report states the following:

“The labour market remains tight, and domestic cost and price pressures are elevated. There is a risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In view of these considerations, the Committee voted to increase Bank Rate by 0.5 percentage points, to 1.75%, at this meeting.”

Yes. It’s utter nonsense. They’ve hiked interest rates to solve a risk that a) does not currently exist and b) is unlikely to looking at current settlement levels.

In fact what the BOE is doing is almost certainly increasing the depth of the coming recession as spending is depressed further and growth becomes even more sluggish

 

[Gromit]

It won't work. The root of the current inflation is oil prices. The increase in the cost of oil has fed through into higher prices for everything else.

Classic economic theory has raising interest rates as putting a brake on inflation exactly the way bimble says. But I can't see how it would work here with oil being the cause. And how much of that is due to Ukraine?

Not just oil. Food inflation due to 1. Bread Basket of Europe was Ukraine Russia. 2. Fertilizer shortages due to the war.

 

[Pickman's model]

Yes. It’s utter nonsense. They’ve hiked interest rates to solve a risk that a) does not currently exist and b) is unlikely to

In fact what the BOE is doing is almost certainly increasing the depth of the coming recession as spending is depressed further and growth becomes even more sluggish

if people with (afaik) no formal economics education can see the utter foolishness of what they're doing it speaks poorly to their economic literacy that they think they'll make matters better.

 

[8ball]

But raising interest rates why would that make people more likely to invest?

Because the interest on various investments rises.

 

[Pickman's model]

Because the interest on various investments rises.

yeh but that relies on having a surplus you can afford to invest. and at the moment even more than usual that's not going to be the case for the vast majority of people.

 

[8ball]

yeh but that relies on having a surplus you can afford to invest. and at the moment even more than usual that's not going to be the case for the vast majority of people.

See posts prior to the one quoted.

 

[bimble]

I

Because the interest on various investments rises.

i don’t think that’s how it works .The Bank of England doesn’t control how much people make from whatever they might invest in.People more likely to invest ( as in buy shares or whatever) when interest in the bank is low.

 

[8ball]

I

i don’t think that’s how it works .The Bank of England doesn’t control how much people make from whatever they might invest in.People more likely to invest ( as in buy shares or whatever) when interest in the bank is low.

All sorts of investments interest rates follow the BoE's base rate.
Also, saving is encouraged by making borrowing more expensive.

I'm not saying I think it will work, or that I agree with them, I'm just trotting out the standard Economics 101 blurb on trying to steer an economy by means of tweaking the money supply, which matches the moves they are making.

 

[Spymaster]

I

i don’t think that’s how it works .The Bank of England doesn’t control how much people make from whatever they might invest in.People more likely to invest ( as in buy shares or whatever) when interest in the bank is low.

If you had some money to put away and you had a choice between an account that pays 5% and one that pays 10%, where would you put it?

 

[platinumsage]

If you had some money to put away and you had a choice between an account that pays 5% and one that pays 10%, where would you put it?

Exactly

If your savings account pays 0.1% and prices are rapidly increasing, you'd better buy that new garden furniture right away, even though you won't need it for a year or two.

If your savings account pays 10% and price rises are now tailing off, you'd make a tidy sum by waiting a year or two until you actually need that new furniture.

 

[A380]

When you're young you might feel the people in charge must know more than you do about how things work but as you get aulder it becomes obvious it's like they're in an auld signal box, trying to avert disaster pulling levers at random with no notion of what they might do

And a signal box that has only one lever…

 

[bimble]

All sorts of investments interest rates follow the BoE's base rate.
Also, saving is encouraged by making borrowing more expensive.

I'm not saying I think it will work, or that I agree with them, I'm just trotting out the standard Economics 101 blurb, which matches the moves they are making.

I think you mean something different to what is usually meant by ‘invest’. You seem to mean, leave your money in the bank, or in some bank-rate based savings account thing. Which yes obvs that’s what it’s supposed to do make people who can save save.
So interest rates going up doesn’t help businesses make more stuff I’m pretty sure. Which is what you were suggesting before.
It makes it harder for them to borrow, and makes people less likely to buy shares instead of leaving their £ in the bank .