Was the interest rate increase necessary?
Discussion
Louis Balfour said:
Against a background of a cost of living crisis and external shocks to the financial system, how will an increase in interest rates, particularly a relatively modest one, control inflation?
Listening to the governor this morning and reading between the lines, it probably won’t. But they have to pull all the levers they have. The line “please don’t ask for a pay rise” was particularly interesting.
You have sort of answered it for yourself. Cost of living increases = inflation. The only tool to fight inflation = interest rate rises (*)
(*) Okay, you can also take heat out by increasing taxes ... which they are already doing. Turning off the QE pump has also been done. Bringing that printed money back in, is a little harder.
(*) Okay, you can also take heat out by increasing taxes ... which they are already doing. Turning off the QE pump has also been done. Bringing that printed money back in, is a little harder.
Isn’t it terrifying.
Normally inflation is driven by salaries rising in a competitive economy and meaning more demand for goods.
Now we have policy makers terrified that poor and middle earning people might get a pay rise that’s sufficient to meet rising costs… rather than the slow erosion of earnings power vs more subversive levels of inflation we had before.
This all pretty much sums up their game.
They just don’t like that this could all mean salaries catch up with where costs have been going for the past decade.
Which ultimately means wealth disparity reversing.
We can’t have poor people being relatively better off at the relatively unnoticeable cost to the very wealthy
Normally inflation is driven by salaries rising in a competitive economy and meaning more demand for goods.
Now we have policy makers terrified that poor and middle earning people might get a pay rise that’s sufficient to meet rising costs… rather than the slow erosion of earnings power vs more subversive levels of inflation we had before.
This all pretty much sums up their game.
They just don’t like that this could all mean salaries catch up with where costs have been going for the past decade.
Which ultimately means wealth disparity reversing.
We can’t have poor people being relatively better off at the relatively unnoticeable cost to the very wealthy
Mr E said:
Louis Balfour said:
Against a background of a cost of living crisis and external shocks to the financial system, how will an increase in interest rates, particularly a relatively modest one, control inflation?
Listening to the governor this morning and reading between the lines, it probably won’t. But they have to pull all the levers they have. The line “please don’t ask for a pay rise” was particularly interesting.
55palfers said:
For those with savings, a rate rise is well overdue.
Just a shame the banks are so tardy in applying it. Again!
Most banks won't apply it in any meaningful way, it's not in their interest to. Lending will have it applied immediately and margins will be widened to savings. The banks are awash with liquidity to the point there is little to no incentive for the banks to offer anything meaningful interns of customer rates thanks to the governments own CBILS and BBILS lending. Just a shame the banks are so tardy in applying it. Again!
Which is another reason why a 25bp increase seems like it'll have little to no effect. Inflation is rampant and requires significantly more than an interest rate being increased from basically zero to just above zero. Still you'd have thought it's in the governments interest to maintain inflation where it is to help devalue their massive debt burden.
Gin and Ultrasonic said:
Got to laugh at this - Andrew Bailey whose pay is >500k per annum!
Yeah, it's funny us getting told not ask for payrises by the chap who has just increased the cost of borrowing, on the same day that we're all being told that our energy bills will be going up 50%.Louis Balfour said:
Against a background of a cost of living crisis and external shocks to the financial system, how will an increase in interest rates, particularly a relatively modest one, control inflation?
Just like Scotland introducing 19%, 21% tax rates all they are doing is justifying their own job by doing something but not actually doing anything at the same time. We can see a sharply slowing economy (thanks to Brexit, Covid and Rising Prices) we need rate cuts not rises, and there is no way this rise won't be reversed by the summer.
The idea that rising prices = interest rate rise is wrong (or if being polite over simplistic). The current factors leading to high inflation stats are the cost of oil and second hand car prices, which have their roots in supply chain disruption due to Covid. How will raising interest rates reduce those costs?
The responses to Demand-pull inflation should be different to those for Cost-push inflation
Before anyone gets excited about the inflation rate today, the average rate over the last 5 years is 2%, bang on the BoE target.
The idea that rising prices = interest rate rise is wrong (or if being polite over simplistic). The current factors leading to high inflation stats are the cost of oil and second hand car prices, which have their roots in supply chain disruption due to Covid. How will raising interest rates reduce those costs?
The responses to Demand-pull inflation should be different to those for Cost-push inflation
Before anyone gets excited about the inflation rate today, the average rate over the last 5 years is 2%, bang on the BoE target.
Louis Balfour said:
“Please don’t ask for a pay rise.”
Yep, that should work.
I'm a small business owner and pay my 12 employees industry leading salaries that are, genuinely, as much as I can afford to pay them. In a consultancy business where fees are under significant pressure but other costs are rising.Yep, that should work.
I understand exactly where Andrew Bailey is coming from.
BobToc said:
Fittster said:
We can see a sharply slowing economy (thanks to Brexit, Covid and Rising Prices) we need rate cuts not rises, and there is no way this rise won't be reversed by the summer.
There is no chance of thatBegbies Traynor
"· 589,168 UK businesses reporting significant financial distress during final quarter of 2021, a 5% rise on the previous three months
· 106% rise in County Court Judgments (CCJs) - a key early sign of future insolvencies as creditors are now actively using courts to recover debts
· As Covid reliefs unwind, financially distressed companies brace for full force of debts to hit
· Pressure ratcheting up almost across the board, with only one sector of the 22 covered by the "Red Flag Alert" (RFA) research showing an improved position
· Situation even worse for companies already teetering on the brink of failure, with critical financial distress up 7% year-on-year in the final three months of 2021
Begbies Traynor's "Red Flag Alert", which has monitored the financial health of British companies for the past 15 years, now paints a particularly worrying picture for UK businesses with increasing numbers falling victim to pressures which have been building since coronavirus began piling up problems in the economy almost two years ago.
The latest data indicates that the debt storm which has been brewing for years, but had been held off by measures to provide breathing space for companies, could now be about to hit, sending shockwaves through many industries.
https://www.investegate.co.uk/begbies-traynor--beg...
You don't raise rates in the face of a recession.
Mr E said:
Louis Balfour said:
Against a background of a cost of living crisis and external shocks to the financial system, how will an increase in interest rates, particularly a relatively modest one, control inflation?
Listening to the governor this morning and reading between the lines, it probably won’t. But they have to pull all the levers they have. The line “please don’t ask for a pay rise” was particularly interesting.
Bowser87 said:
Most banks won't apply it in any meaningful way, it's not in their interest to. Lending will have it applied immediately and margins will be widened to savings. The banks are awash with liquidity to the point there is little to no incentive for the banks to offer anything meaningful interns of customer rates thanks to the governments own CBILS and BBILS lending.
Which is another reason why a 25bp increase seems like it'll have little to no effect. Inflation is rampant and requires significantly more than an interest rate being increased from basically zero to just above zero. Still you'd have thought it's in the governments interest to maintain inflation where it is to help devalue their massive debt burden.
A lot of govt debt is index linked these days.Which is another reason why a 25bp increase seems like it'll have little to no effect. Inflation is rampant and requires significantly more than an interest rate being increased from basically zero to just above zero. Still you'd have thought it's in the governments interest to maintain inflation where it is to help devalue their massive debt burden.
Mr Whippy said:
Isn’t it terrifying.
Normally inflation is driven by salaries rising in a competitive economy and meaning more demand for goods.
Now we have policy makers terrified that poor and middle earning people might get a pay rise that’s sufficient to meet rising costs… rather than the slow erosion of earnings power vs more subversive levels of inflation we had before.
This all pretty much sums up their game.
They just don’t like that this could all mean salaries catch up with where costs have been going for the past decade.
Which ultimately means wealth disparity reversing.
We can’t have poor people being relatively better off at the relatively unnoticeable cost to the very wealthy
You can't just raise salaries because the price of stuff goes up. The economy doesn't work like that. If the relative value of something like gas goes up because there's less of it available, then that's that. It's more expensive relative to other prices and salaries. £1 buys you less of it than it did last week. 1 hour's labour buys you less of it than it did last week. You want to keep buying as much as you did before? Buy less of something else or earn more. You can't escape this. Let's say you double salaries. All that happens is that the prices of everything would double as well. And that includes gas. Gas would be just as expensive relative to other prices and salaries as it was before.Normally inflation is driven by salaries rising in a competitive economy and meaning more demand for goods.
Now we have policy makers terrified that poor and middle earning people might get a pay rise that’s sufficient to meet rising costs… rather than the slow erosion of earnings power vs more subversive levels of inflation we had before.
This all pretty much sums up their game.
They just don’t like that this could all mean salaries catch up with where costs have been going for the past decade.
Which ultimately means wealth disparity reversing.
We can’t have poor people being relatively better off at the relatively unnoticeable cost to the very wealthy
That's why the BoE says "don't ask for excessive pay rises". It's because they don't work. They don't make people better off. You get more banknotes in your pocket but the banknotes are worth less.
Edited by ATG on Friday 4th February 10:55
Dr Jekyll said:
Bowser87 said:
Most banks won't apply it in any meaningful way, it's not in their interest to. Lending will have it applied immediately and margins will be widened to savings. The banks are awash with liquidity to the point there is little to no incentive for the banks to offer anything meaningful interns of customer rates thanks to the governments own CBILS and BBILS lending.
Which is another reason why a 25bp increase seems like it'll have little to no effect. Inflation is rampant and requires significantly more than an interest rate being increased from basically zero to just above zero. Still you'd have thought it's in the governments interest to maintain inflation where it is to help devalue their massive debt burden.
A lot of govt debt is index linked these days.Which is another reason why a 25bp increase seems like it'll have little to no effect. Inflation is rampant and requires significantly more than an interest rate being increased from basically zero to just above zero. Still you'd have thought it's in the governments interest to maintain inflation where it is to help devalue their massive debt burden.
point reduction in index-linked gilt issuance compared to 2019-20.
https://assets.publishing.service.gov.uk/governmen...
In addition to interest rates, the other tool that the BOE has to combat inflation is QE or rather reversing QE. By tapering/reversing QE (the UK has currently introduced £895B of new money through QE) the money supply will be reduced and inflation should fall or not rise as quickly.
I expect to see the bank starting to reverse QE - from memory I think this could happen as early as March '22 by not rolling over maturing gilts.
This would also likely have the effect of increasing real interest rates.
I expect to see the bank starting to reverse QE - from memory I think this could happen as early as March '22 by not rolling over maturing gilts.
This would also likely have the effect of increasing real interest rates.
Gassing Station | Finance | Top of Page | What's New | My Stuff