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UK interest rates rise to the highest since 2009

ks.234

ks.234

Half way to Infinity
https://www.bbc.co.uk/news/business-61319867

How will raising interest rates control inflation?

According to the BBC “Raising rates makes it more expensive for consumers and businesses to borrow. The idea is this helps cool demand for goods and services, thereby taming prices.”

How does this make sense? Our current inflation is not caused by excess demand. How is the answer to food and energy prices going up, to cut off the demand for energy? If inflation continues to rise as predicted, the logical end of this approach is surely to cut off food and energy supplies altogether.

Is deliberately creating food and energy shortages really the only answer to inflation?
 
Sue Pertwee-Tyr said:
It's the only tool in the box. If all you have is a hammer, everything looks like a nail...
Click to expand...
Yes. But even in the narrow view of economics that we have now, there are at least two types of inflation, that is, cost push inflation and demand pull inflation. What we have now is clearly the first and just as clearly not the second

As there are at least two types of inflation with different causes, surely there should be at least two tools in the box!

https://en.wikipedia.org/wiki/Cost-push_inflation
 
It’s still ludicrously low, it should have been raised a long time ago. I hope it’s on an upward trajectory at last.
 
ks.234 said:
https://www.bbc.co.uk/news/business-61319867

How will raising interest rates control inflation?

According to the BBC “Raising rates makes it more expensive for consumers and businesses to borrow. The idea is this helps cool demand for goods and services, thereby taming prices.”

How does this make sense? Our current inflation is not caused by excess demand. How is the answer to food and energy prices going up, to cut off the demand for energy? If inflation continues to rise as predicted, the logical end of this approach is surely to cut off food and energy supplies altogether.

Is deliberately creating food and energy shortages really the only answer to inflation?
Click to expand...


Isn't it just because money will be tighter on the demand side so margins will be squeezed?
 
ks.234 said:
Yes. But even in the narrow view of economics that we have now, there are at least two types of inflation, that is, cost push inflation and demand pull inflation. What we have now is clearly the first and just as clearly not the second

As there are at least two types of inflation with different causes, surely there should be at least two tools in the box!

https://en.wikipedia.org/wiki/Cost-push_inflation
Click to expand...

It won't have much effect but as Sue says monetarism is now orthodoxy and monetarism posits interest rates as being the only key to this kind of thing.

The one useful thing it could do (in theory) is prop up the value of Sterling which is very relevant for imported inflation. But that rather depends on what other countries do with their interest rates, the US especially as oil and gas is mostly priced in dollars. As their interest rate is already climbing there's no benefit in pushing up ours beyond not suffering the consequences of being the only major country that leaves rates low. ie devaluation. In other words the best we can hope for is not making it even worse.

The US central bank guy last night was interesting (or horrifying) saying essentially their move was aimed at cooling down wage growth. In other words negating higher fuel/food costs with lower wages. Modern economists only care about gross totals.

He added that was his job (meaning his statutory obligation). So there is one big problem. The BoE are in the same statutory / theoretical bind.
 
Snufkin said:
Cheap money has affected asset values and put up the cost of housing which disproportionately hurts the less well off.
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Have you not been following the exchanges between ks and Ponty about the lack of correlation between interest rates and house prices?
 
Back in the mid-2000s when we had a mortgage and bugger all savings, mortgage and savings interest rates were high (circa 6% IIRC). In the last decade we've managed to build up a modest pot of savings having cleared the mortgage, which has effectively been eroded each year as inflation outstrips base rates. The delta has widened each year but 1%-2% interest rates in the face of 10% inflation is taking the piss. The economy needed to be weaned off these ridiculously low interest rates long before Brexit and Covid happened IMO.
 
ToTo Man said:
Back in the mid-2000s when we had a mortgage and bugger all savings, mortgage and savings interest rates were high (circa 6% IIRC). In the last decade we've managed to build up a modest pot of savings having cleared the mortgage, which has effectively been eroded each year as inflation outstrips base rates. The delta has widened each year but 1%-2% interest rates in the face of 10% inflation is taking the piss. The economy needed to be weaned off these ridiculously low interest rates long before Brexit and Covid happened IMO.
Click to expand...

2% interest rates???

Even that is the stuff of dreams these days.

0.2% is more like it.
 
Increasing interest rates won't have any effect in calming inflation as it stands as the causes of it predominantly aren't domestic.

All it will do is compound the problem and CoL issues for many without solving anything - as always, the wealthy might be mildly inconvenienced whilst the poor, working and middle-class will bear the brunt of the pain. Increasing rates now smacks more of the BoE being 'seen to be doing something' and as mentioned, the only lever they have is interest rates.

On the plus side, it does give them scope to reduce it again in future when the economy tanks and they can be 'seen to be doing something' when that time comes.
 
Low interest rates had a double whammy on house prices.
The actual interest rates meant that higher mortgages could be afforded. The very low rate meant that people could afford higher multiples of income as mortgages, which the lenders obliged with - the latter has been the killer/real fuel for property price increases.

That said, the great majority of UK mortgages are now fixed rate, or at least not floating, so increased interest rates will take an age to affect the spending of very many people. Over 90% of personal/private debt in the UK is property/mortgage debt.

Apart from interest rate changes, and unacceptably draconian fiscal manipulation, what else would reduce inflation?
 
What has caused inflation?
20% of the international world trade in wheat could have disappeared for at least a year. So all cereal prices have increased. That is stock and human food.
Russia exports around 60% as much oil as Saudi.
Russia is the largest exporter of natural gas.
Post C19 demand for fuels has soared far in excess of expectations. All have soared in price as a result.
Fertiliser production relies on natural gas, so what is being made (many plants are closed) has soeared in price. Many farmers will not buy it as it would not be economic to do so - better economics for them is to have lower yields.
Many farmers producing glasshouse crops could not make money burning gas to heat them, so they shut down production.
Everything material has to be transported if it is in trade.

Russia and post-covid economic activity have made for the perfect storm.
 
Sue Pertwee-Tyr said:
Have you not been following the exchanges between ks and Ponty about the lack of correlation between interest rates and house prices?
Click to expand...

There may not be a strong correlation, but I would argue that low interest rates ENABLE house price inflation. Other factors clearly at play (population growth vs house building, second homes).
 
Funk said:
Increasing interest rates won't have any effect in calming inflation as it stands as the causes of it predominantly aren't domestic.
Click to expand...

The pound is currently trading at around $1.25 !!! This causes UK energy prices to be higher than otherwise (since oil is priced in dollars). Since the US is raising rates the pound would be expected to fall unless the UK does the same.

The UK is an import dependent economy, so a weak currency will lead to inflation.
 
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