Interest Rates

[Tom8]

Silly question but how does adjusting interest rates slow inflation? I heard it discourages borrowing and more frivolous spending but surely that won't make any impact for a very long time especially with rates so low so what is the point?

Also on the news latest gov borrowing up and now the interest on that is staggering meaning they now have less to spend. Could that help drive down inflation?

If we did nothing what would happen?

[Welshbeef]

If we did nothing and other countries were increasing interest rates £ would devalue against those other countries (all else being equal).

So IF we only exported we would be in a great competitive position.
But we import loads more than we export so that means the price of goods coming in are now more £ than they were - this causes inflation.

[dmahon]

Mortgages alone. 1% increase on £200k is approximately £180 a month in interest. That can reduce buying power quite quickly across the population.

[Welshbeef]

dmahon said:

Mortgages alone. 1% increase on £200k is approximately £180 a month in interest. That can reduce buying power quite quickly across the population.

Yea

£180pcm mortgage
Petrol must be a similar monthly increase YOY
Energy £160 to £500-600(?) pcm
Food £180-220 per week

Crazy isn’t it.

[Mr Squarekins]

Welshbeef said:

If we did nothing and other countries were increasing interest rates £ would devalue against those other countries (all else being equal).

So IF we only exported we would be in a great competitive position.
But we import loads more than we export so that means the price of goods coming in are now more £ than they were - this causes inflation.

Doesn't a higher uk rate increase the value of the £ and make imports cheaper? reducing inflation, at least on imported goods, but unfortunately for uk manufacturers makes their goods more expensive in foreign markets and thus less attractive?

[vulture1]

Tom8 said:

Silly question but how does adjusting interest rates slow inflation? I heard it discourages borrowing and more frivolous spending but surely that won't make any impact for a very long time especially with rates so low so what is the point?

Also on the news latest gov borrowing up and now the interest on that is staggering meaning they now have less to spend. Could that help drive down inflation?

If we did nothing what would happen?

I took out a 15k loan to buy a car becasue it was 2.29%.

If rates had been a bit higher I would just have bought it outright.

So the low interest rate created a magic £15000 from thin air (or my future potential to spend) which causes inflation.

[jimmythingy]

When we had a mortgage in the 90s/00s an increase in the interest rate hit quickly (the next month) as nobody were on 1 - 5 year fixed deals but as these are the norm now doesn't it take longer to control inflation via rate increases.

[Welshbeef]

Mr Squarekins said:

Welshbeef said:

If we did nothing and other countries were increasing interest rates £ would devalue against those other countries (all else being equal).

So IF we only exported we would be in a great competitive position.
But we import loads more than we export so that means the price of goods coming in are now more £ than they were - this causes inflation.

Doesn't a higher uk rate increase the value of the £ and make imports cheaper? reducing inflation, at least on imported goods, but unfortunately for uk manufacturers makes their goods more expensive in foreign markets and thus less attractive?

It would do if where we import stuff from doesn’t - but they are increasing rates higher and faster than us so no unless we catchup we will have more inflation to come

[Mr Squarekins]

Welshbeef said:

Mr Squarekins said:

Welshbeef said:

If we did nothing and other countries were increasing interest rates £ would devalue against those other countries (all else being equal).

So IF we only exported we would be in a great competitive position.
But we import loads more than we export so that means the price of goods coming in are now more £ than they were - this causes inflation.

Doesn't a higher uk rate increase the value of the £ and make imports cheaper? reducing inflation, at least on imported goods, but unfortunately for uk manufacturers makes their goods more expensive in foreign markets and thus less attractive?

It would do if where we import stuff from doesn’t - but they are increasing rates higher and faster than us so no unless we catchup we will have more inflation to come

Agreed. I think we've explained for the OP the one way in which rates can influence inflation. The second as mentioned above is to theoretically suck some demand out of the domestic economy by making saving attractive. Of course, right now the inflation is global and supply led, so that screws that influence

Edited by Mr Squarekins on Thursday 23 June 23:23

[tighnamara]

vulture1 said:

I took out a 15k loan to buy a car becasue it was 2.29%.

If rates had been a bit higher I would just have bought it outright.

So the low interest rate created a magic £15000 from thin air (or my future potential to spend) which causes inflation.

Surely it is not as simple as that, the increase in energy, material, crops etc must have a big part to play and that is only being pushed one way with the ongoing Russia / Ukraine conflict.

How does increasing interest rates itself bring down inflation when the above commodities will still be at a high this everything still being more expensive to purchase.

I’m may be missing something as don’t get the interest rate increases being the saviour to bring inflation down in the current climate.

So rates go up people have more money to find to cover mortgages etc and the continuing increase to daily living costs.

Edited by tighnamara on Thursday 23 June 23:19

[vulture1]

Rates go up, less money to spend, less likely to borrow more money = less demand in the economy. Less demand lowers prices. Inflation falls.

Its a blunt "tool" but the only one central banks really uses.

[Jon39]

Tom8 said:

Silly question but how does adjusting interest rates slow inflation? ...

Not sure whether this point has already been mentioned.

When domestic inflation is caused by excessive borrowing and spending, then increasing interest rates should slow consumption and therefore reduced inflation.

However, now it is the world price of gas and oil that has increased (much of our electricity is generated using gas), therefore that is one major contributory factor causing inflation in the UK to increase.

Raising UK interest rates will not reduce the world price of gas and oil, so the Bank of England is partly helpless this time.

[vulture1]

yep could tackle inflation by increasing massively supply of oil and gas which lowers all costs.
But the world hates black energy now and only wants green.

[Terminator X]

vulture1 said:

Rates go up, less money to spend, less likely to borrow more money = less demand in the economy. Less demand lowers prices. Inflation falls.

Its a blunt "tool" but the only one central banks really uses.

"less money to spend" in a time where the cost of everything is shooting up seems to be folly though, no?

TX.

[cuprabob]

Terminator X said:

vulture1 said:

Rates go up, less money to spend, less likely to borrow more money = less demand in the economy. Less demand lowers prices. Inflation falls.

Its a blunt "tool" but the only one central banks really uses.

"less money to spend" in a time where the cost of everything is shooting up seems to be folly though, no?

TX.

I think at the moment, it's just to show they are doing something. As inflation is being diven due to external factors as opposed to excessive consumption.

[wisbech]

Terminator X said:

vulture1 said:

Rates go up, less money to spend, less likely to borrow more money = less demand in the economy. Less demand lowers prices. Inflation falls.

Its a blunt "tool" but the only one central banks really uses.

"less money to spend" in a time where the cost of everything is shooting up seems to be folly though, no?

TX.

But with low interest rates and high inflation you quickly death spiral, as everyone spends their money as soon as they get it rather than see it eroded by inflation, so higher demand, and prices go up more.

Basically, to reduce inflation, we all need to be a bit poorer for a while. Can be done by increasing interest rates, which also increases unemployment (so even less demand)

[Simpo Two]

vulture1 said:

yep could tackle inflation by increasing massively supply of oil and gas which lowers all costs.
But the world hates black energy now and only wants green.

Yep. 'Green' is a luxury that requires wealth. So it works for some, but not all.

How much of our energy bills is 'green levy'? That could be taken off for starters. When the st hits the fan, people want 'affordable' not 'eco'.

[ghost83]

If ppl have less money to spend on items basically it causes inflation to drop

The worst case as this happens is ppl wanting to keep their old lifestyles so they start striking and demanding more money so they can continue to live as they were this will then make inflation and interest rates worse which is currently what we are seeing!

It’s not sustainable so what will happen if these strikers get the pay rise when it all crashes at some point there are going to be a lot of job losses as a result

All avoidable if people are sensible and cut back

[g4ry13]

As rates go up the incentive to save increase. At these paltry rates it doesn't offer much of a return. But (being extreme), imagine if rates were 20%. You would probably try and put all your cash in the bank and save it rather than buy that shiny new TV you had your eye on.

Interest rate changes are lagging and can take a year before having any real effect. Unless the change is drastic rather than 25-50bps every few months.

[hotchy]

ghost83 said:

If ppl have less money to spend on items basically it causes inflation to drop

The worst case as this happens is ppl wanting to keep their old lifestyles so they start striking and demanding more money so they can continue to live as they were this will then make inflation and interest rates worse which is currently what we are seeing!

It’s not sustainable so what will happen if these strikers get the pay rise when it all crashes at some point there are going to be a lot of job losses as a result

All avoidable if people are sensible and cut back

Yep they'll all celebrate without realising half them will be out of a job by the end of the year. Nobody using the trains? Don't need the staff etc. Work from home has caused a massive drop in passenger numbers so wouldn't be suprised to see a big drop in staff if they've to pay an increased rate