I’m no economist, how does this work?
Discussion
I’m struggling to understand why the BOE or related press thinks that interest rates will make any difference to what seem to be the key underlying causes of inflation. From what I can see, it’s all supply side e.g energy shortage not people using shed loads, car shortages, driving prices up, not excesss demand. So assuming that the majority of people aren’t spending like crazy on excess consumption, why would interest rates make a material difference. I mean, if I have to pay an extra £400 on mortgage for example it doesn’t mean I can use much less energy or buy less food. Am I missing something ?
Very very simply, unlike previous history - there is no money supply issue. A fact exacerbated by C19, which meant that lots of money was saved by households and many companies because it couldn't be spent on products or capital investment etc, along with lots of money pumped into the economy to keep those who would normally earn their money through the supply of goods and services in business.
E.g. a barman was still paid, and the bar company got relief/loans even though the creation of that money - though consumer spend was not happening, and the consumer still had the money which they can spend today.
As supply hasn't spooled up at pace, there continues to be a lot of money in the system, and unfulfilled demand which has driven up prices. If IRs stay low, it remains cheap to borrow more money, which continues to increase prices as demand still outstrips supply.
Ergo, reduce the attractiveness of borrowing reduces the increase of money into the system - which reduces price inflation.
Recession is a red herring concept here. Its a fact of trying to contract the unsustainable growth. It should not be an excuse for individual households to be terrified into not spending.
E.g. a barman was still paid, and the bar company got relief/loans even though the creation of that money - though consumer spend was not happening, and the consumer still had the money which they can spend today.
As supply hasn't spooled up at pace, there continues to be a lot of money in the system, and unfulfilled demand which has driven up prices. If IRs stay low, it remains cheap to borrow more money, which continues to increase prices as demand still outstrips supply.
Ergo, reduce the attractiveness of borrowing reduces the increase of money into the system - which reduces price inflation.
Recession is a red herring concept here. Its a fact of trying to contract the unsustainable growth. It should not be an excuse for individual households to be terrified into not spending.
The Ch4 news in house economist gave a good overview of this tonight.
There are two things driving inflation - external/global pressures that we can't do much about such as energy, then there's internal pressures.
The internal pressures are, for example, companies deciding to pay employees more money because of inflation. This would in turn drive inflation further and make the problem worse/spiral. Raising IR reduces a company's ability/appetite to pay higher wages.
The consensus seems to be that raising IRs won't in and of itself reduce inflation, rather it'll stop inflation from rising further than it otherwise would. The hope being that inflation will burn itself out.
ETA, here's the 3min link: https://www.channel4.com/news/why-did-the-bank-of-...
There are two things driving inflation - external/global pressures that we can't do much about such as energy, then there's internal pressures.
The internal pressures are, for example, companies deciding to pay employees more money because of inflation. This would in turn drive inflation further and make the problem worse/spiral. Raising IR reduces a company's ability/appetite to pay higher wages.
The consensus seems to be that raising IRs won't in and of itself reduce inflation, rather it'll stop inflation from rising further than it otherwise would. The hope being that inflation will burn itself out.
ETA, here's the 3min link: https://www.channel4.com/news/why-did-the-bank-of-...
Edited by ben5575 on Thursday 4th August 22:40
Inspectorclueso said:
I’m struggling to understand why the BOE or related press thinks that interest rates will make any difference to what seem to be the key underlying causes of inflation. From what I can see, it’s all supply side e.g energy shortage not people using shed loads, car shortages, driving prices up, not excesss demand. So assuming that the majority of people aren’t spending like crazy on excess consumption, why would interest rates make a material difference. I mean, if I have to pay an extra £400 on mortgage for example it doesn’t mean I can use much less energy or buy less food. Am I missing something ?
As the US are raising interest rates, more money looking for a better return heads to the US making the dollar appreciate against the pound.Oil is priced in dollars so a higher dollar against the pound makes oil more expensive, and you and everyone else has increased travel costs, which is inflationary.
Raising UK interest rates means more international money buy pounds raising the price of the pound or stopping it falling further against the dollar thus meaning oil does not become more expensive via currency movements.
Most commodities are priced in dollars eg wheat, gas, copper, etc so you can see how quickly we can 'import' more inflation and the knock-on problems that will cause
The real problem is that the raising of interest rates from 'emergency' levels was left so long by the previous BOE governor. This should have happened slowly and controlled in the mid-2010's and thus given us wriggle room now.
There is no plan B so all efforts are designed to protect the pseudo-capitalist system which the policy makers sit high up in.
Given that we’ve had low interest rates and QE for over 10 years presumably contributory to the current state of affairs in no particular order are Brexit, Government’s economic response to Covid, Russian exploitation of fossil fuel dependence, and in the case of vehicle price inflation manufacturing parts shortages.
Is the UK affected more in comparison to other Western countries due to Brexit and our Covid response being unique and how much is the Government’s response to Covid the cause of current inflation?
Sunak was eulogised during 2020 (apart from criticism from @ExcludedUK ) but had I been Chancellor I could easily have flooded the economy with cash giveaways that invited malfeasance from the planet’s criminal underworld against the UK taxpayer.
Why is his lack of competence not being mercilessly exposed particularly as he is currently seeking higher office.
On a personal level the main education for me has been what’s the point of (a) grafting/working long hours. I take the piss as far as I can push it. (b) voting when the amateurish pillocks do things like this?
Given that we’ve had low interest rates and QE for over 10 years presumably contributory to the current state of affairs in no particular order are Brexit, Government’s economic response to Covid, Russian exploitation of fossil fuel dependence, and in the case of vehicle price inflation manufacturing parts shortages.
Is the UK affected more in comparison to other Western countries due to Brexit and our Covid response being unique and how much is the Government’s response to Covid the cause of current inflation?
Sunak was eulogised during 2020 (apart from criticism from @ExcludedUK ) but had I been Chancellor I could easily have flooded the economy with cash giveaways that invited malfeasance from the planet’s criminal underworld against the UK taxpayer.
Why is his lack of competence not being mercilessly exposed particularly as he is currently seeking higher office.
On a personal level the main education for me has been what’s the point of (a) grafting/working long hours. I take the piss as far as I can push it. (b) voting when the amateurish pillocks do things like this?
Edited by Franco5 on Thursday 4th August 22:39
Edited by Franco5 on Thursday 4th August 22:40
Edited by Franco5 on Thursday 4th August 22:41
Where does the additional money come from when rates rise? My (very) limited understanding is that the highest Reeth banks get their money from the bank of England, and so when rates rise, they just make more money to give to banks which they pass onto savers?
On that note, how does changing the interest rate end up affecting Fx rates?
On that note, how does changing the interest rate end up affecting Fx rates?
TheLurker said:
Where does the additional money come from when rates rise? My (very) limited understanding is that the highest Reeth banks get their money from the bank of England, and so when rates rise, they just make more money to give to banks which they pass onto savers?
On that note, how does changing the interest rate end up affecting Fx rates?
Second part, higher interest rates attract more global money seeking a return to buy pounds, pounds in demand, stronger currency, better FX rate, helps us to maintain our purchasing power? If we kept on doing furlough and keeping rates low, eventually other countries would lose faith in our pound being good value and demand more of them for the same stuff, are imports cost more, ie the pounds we hold buy less.On that note, how does changing the interest rate end up affecting Fx rates?
Re the first part there is no additional money, not sure what you mean by that, if you have the time and inclination watch this series, its a bit hyperbolic but it has some very good explanations of the system.
https://www.youtube.com/watch?v=iFDe5kUUyT0&t=...
edited as no.4 is more relevant to your question
Edited by Scootersp on Friday 5th August 13:00
Edited by Scootersp on Friday 5th August 13:07
This guy is 82 and still razor sharp.
Once economic advisor to Ronald Reagan, the last time inflation was a real problem.
I reckon he knows what he's talking about.
https://www.youtube.com/watch?v=viO4Gww7-B4
Once economic advisor to Ronald Reagan, the last time inflation was a real problem.
I reckon he knows what he's talking about.
https://www.youtube.com/watch?v=viO4Gww7-B4
Franco5 said:
There is no plan B so all efforts are designed to protect the pseudo-capitalist system which the policy makers sit high up in.
Given that we’ve had low interest rates and QE for over 10 years presumably contributory to the current state of affairs in no particular order are Brexit, Government’s economic response to Covid, Russian exploitation of fossil fuel dependence, and in the case of vehicle price inflation manufacturing parts shortages.
Is the UK affected more in comparison to other Western countries due to Brexit and our Covid response being unique and how much is the Government’s response to Covid the cause of current inflation?
Sunak was eulogised during 2020 (apart from criticism from @ExcludedUK ) but had I been Chancellor I could easily have flooded the economy with cash giveaways that invited malfeasance from the planet’s criminal underworld against the UK taxpayer.
Why is his lack of competence not being mercilessly exposed particularly as he is currently seeking higher office.
On a personal level the main education for me has been what’s the point of (a) grafting/working long hours. I take the piss as far as I can push it. (b) voting when the amateurish pillocks do things like this?
What do you mean by that you take the piss as far as you can push it?Given that we’ve had low interest rates and QE for over 10 years presumably contributory to the current state of affairs in no particular order are Brexit, Government’s economic response to Covid, Russian exploitation of fossil fuel dependence, and in the case of vehicle price inflation manufacturing parts shortages.
Is the UK affected more in comparison to other Western countries due to Brexit and our Covid response being unique and how much is the Government’s response to Covid the cause of current inflation?
Sunak was eulogised during 2020 (apart from criticism from @ExcludedUK ) but had I been Chancellor I could easily have flooded the economy with cash giveaways that invited malfeasance from the planet’s criminal underworld against the UK taxpayer.
Why is his lack of competence not being mercilessly exposed particularly as he is currently seeking higher office.
On a personal level the main education for me has been what’s the point of (a) grafting/working long hours. I take the piss as far as I can push it. (b) voting when the amateurish pillocks do things like this?
Edited by Franco5 on Thursday 4th August 22:39
Edited by Franco5 on Thursday 4th August 22:40
Edited by Franco5 on Thursday 4th August 22:41
The high price of fuel and energy isn't because of the high price of oil and gas on the world market. Yes, the price is high, but it's been higher in the past and fuel and energy prices to the consumer were nothing like they are now.
The real issue is the £ being in the toilet. Oil and gas is traded in $, and with the £ being so weak, it's pushing the cost up to unseen levels. An interest rate rise should help the £ strengthen, and hopefully reduce the cost of buying oil and gas.
The real issue is the £ being in the toilet. Oil and gas is traded in $, and with the £ being so weak, it's pushing the cost up to unseen levels. An interest rate rise should help the £ strengthen, and hopefully reduce the cost of buying oil and gas.
TwigtheWonderkid said:
The high price of fuel and energy isn't because of the high price of oil and gas on the world market. Yes, the price is high, but it's been higher in the past and fuel and energy prices to the consumer were nothing like they are now.
The real issue is the £ being in the toilet. Oil and gas is traded in $, and with the £ being so weak, it's pushing the cost up to unseen levels. An interest rate rise should help the £ strengthen, and hopefully reduce the cost of buying oil and gas.
Perhaps we should have tried to join the dollar and not the euro... how different would that make things?The real issue is the £ being in the toilet. Oil and gas is traded in $, and with the £ being so weak, it's pushing the cost up to unseen levels. An interest rate rise should help the £ strengthen, and hopefully reduce the cost of buying oil and gas.
As for interest rates vs inflation, I think the idea is that higher interest rates = less money for people (with debt) to spend = stops prices rising. Or something like that. But listening to Andrew Bailey on the news yesterday it did seem to join up, and without any obvious spin. It made me wonder who is best to run the economy - the BoE, or a Chancellor who's at the mercy of the voters and so will say/do anything to get re-elected?
Edited by Simpo Two on Friday 5th August 15:57
Tomanybikes said:
Interest rates have been far to low for far too long and with QE to try and keep the indebted happy they have painted themselves into a corner and they have only one tool at their disposal and there using it.
This is IMO exactly the point. It really is that simple.Footling about with the detail of interest rates can have no effect other then putting further financial pressure on people who are already under pressure. Most particularly, the government giving people money to help with "the cost of living crisis" will have exactly the opposite effect of interest rate rises. The total picture makes no sense whatsoever.
Panamax said:
Most particularly, the government giving people money to help with "the cost of living crisis" will have exactly the opposite effect of interest rate rises. The total picture makes no sense whatsoever.
Agreed - but they have to do it or get voted out... that is fatal flaw of a democracy. Meanwhile the media report how much money BP has made, followed by an interview of somebody pleading poverty next to a food bank...Could the standard of living have kept on going up for ever? I can't think so.
BlackG7R said:
This guy is 82 and still razor sharp.
Once economic advisor to Ronald Reagan, the last time inflation was a real problem.
I reckon he knows what he's talking about.
https://www.youtube.com/watch?v=viO4Gww7-B4
Yes, this guy does speak real common sense. "If you tax the rich more, then they're incentivised to earn less or shelter their income, thus they produce less. If you give the less well off more money, then they're less incentivised to work, thus producing less. GDP goes down." Once economic advisor to Ronald Reagan, the last time inflation was a real problem.
I reckon he knows what he's talking about.
https://www.youtube.com/watch?v=viO4Gww7-B4
I do wish socialists would learn economics and see the damage they do, continually trying to screw the often hard working and most productive members of society.
Living in Scotland, the marginal tax rate for anyone earning more than £43,630 is 54% (41% income tax, 13% national insurance). I think £43,630 per annum is far from being wealthy. Anyway, lots of people don't want to pay 54% tax so pay into their pensions, etc. Thus, there is less money in their pockets to spend in the economy. Total tax take does down. What a surprise!
Socialists are c**ts!
Simpo Two said:
Agreed - but they have to do it or get voted out... that is fatal flaw of a democracy. Meanwhile the media report how much money BP has made, followed by an interview of somebody pleading poverty next to a food bank...
Could the standard of living have kept on going up for ever? I can't think so.
Yes and no mention of the $22b in profits Pfizer made. Where are the calls for a windfall tax on the pharmaceutical companies, or the PPE companies?Could the standard of living have kept on going up for ever? I can't think so.
RichTT said:
Yes and no mention of the $22b in profits Pfizer made. Where are the calls for a windfall tax on the pharmaceutical companies, or the PPE companies?
Yep exactly, all the drugs companies made money out of C-19 whilst energy companies laid of thousands and took huge losses...In all the negative media reports of oil company profits, none of them mention how much the government is taking, at least until 2025, 65% of the profit after near 50% of petrol is other forms of tax anyway
So all this "profit" is flowing back into the government/taxman pockets ...supposedly to benefit us right ?
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