Interest rates

[Nick Jones]

https://www.theguardian.com/commentisfree/2023/jun/18/millions-are-facing-soaring-mortgage-rates-how-did-we-leave-them-so-vulnerable
 

There are many things I don’t understand, but quite high on the list at the moment is just why the “wise” at the Bank of England think that continuing to raise interest rates will have any effect on current levels of inflation.

I do understand the idea that when people have too much money in their pockets, consumer-driven inflation might be a thing than could be reduced by raising interest rates. However, this is not what is causing inflation now. Now is a supply side problem with commodity prices being pushed up by shortages. Shortages caused by Covid (mainly in China), shortages caused by Putin’s little adventure in Ukraine, shortages caused by weather and climate change. Also an unhealthy dose of corporate-bandwagon profiteering - ramping up prices because they think they can get away with it, and apparently they can.

None of this can be controlled by ramping up interest rates. All that does is make people even more desperate to get pay rises just to stay vaguely afloat.  Which they largely won’t get, not enough anyway. So, eventually they’ll sink, in large numbers. This experiment was tried before in 2008. It didn’t go well….. You could argue that the UK housing market is in serious need of a pricing correction, and maybe so, but the human costs will be be very high.

So are the BOE “wise ones” smarter than me… or not? Or are they among the the stupid ones (see other thread)? Of course, all this extra interest helps banking profit margins enormously…..

Not a direct/immediate problem for me, but I have kids who are/would like to be homeowners who will be in the thick of it.

And for those who think interest rates couldn’t possibly get much higher…. Shortly after we bought our first house in the early 90s, they hit (briefly) 15%……

[RogerH]

12 minutes ago, Nick Jones said:

https://www.theguardian.com/commentisfree/2023/jun/18/millions-are-facing-soaring-mortgage-rates-how-did-we-leave-them-so-vulnerable
 

 

And for those who think interest rates couldn’t possibly get much higher…. Shortly after we bought our first house in the early 90s, they hit (briefly) 15%……

............and the late 70's  that brought Maggie to the fore.

 

Roger

[AndyM]

When you only have one tool, it’s the only tool you can use.

Inflation has many causes and interest rates only makes borrowing more expensive for those who might borrow to pay inflated prices.

If inflation is caused by elevated commodity prices, raising the interest rates in one country won’t really influence that.

However inflation in the UK isn’t just about worldwide energy prices. However that is a convenient deflector from some of the big supermarkets and their suppliers to widen their margins. The sale of Asda to a major fuel retailer has reduced competition in the fuel markets.

Brexit hasn’t helped by the loss of cheap labour from the EU. In theory it might have been offset freeing more jobs for the natives and taking them off benefits but that doesn’t seem to have happened.