Why are interest rates going up?

JohnCox25

As the the title says. Why are interest rates going up?

400ixl

Because inflation is going up, which drives up the Bank of England base rate which is used to try to control inflation. This then has a knock on effect that mortgage & loan interest rates, savings interest rates etc.

JohnCox25

How does interest rates going up control inflation?

FormulaDriven

In "normal" times, increasing interest rates makes it more attractive to save and less attractive to borrow, so the theory is that consumers will spend less, pushing down demand for goods so prices fall (or don't rise as fast).  At the moment, as the main factor driving inflation is probably energy prices, I suspect it has limited effect, but the Bank of England has its mandate and has to pull the lever it has to try to slow the pace of inflation. 

A second effect of raising interest rates is to make the pound more attractive to global money markets so the pound strengthens in value relative to other currencies, and importing becomes cheaper which should help to push prices down.  There's probably something in that, and if other economies (eg the US) are putting up interest rates, there is a need to keep up in the UK, otherwise pound will get weaker and weaker and imports will get more expensive (particularly oil which is priced globally in dollars).

400ixl

https://www.bankofengland.co.uk/knowledgebank/what-is-inflation may be a good starting point to read up on.

JohnCox25

Back in the 70's I remember interest rates going up to 15% (but that was for one day). Sometimes especially now, I think interest rate rises cause more unnecessary trouble. You don't need to raise rates if everything else is rising high anyway. I think our economy will come down with a bang because of higher interest rates! 

They (BoE) shut the stable door after the horse bolted. If interest rates should rise, the bank should have started years ago, but now I think rates should be left alone as the general high price rises of everything will take care of lowering inflation as people will cut back on everything including imports. Yes it may have been right when we had wage inflation, but I haven’t heard about strikes for years. (and that’s another topic, Reasons for strikes utilities privatisation and renationalisation) 

biscan25

Inflation comes in two parts, supply push and demand pull.
Supply push is what we are undoubtedly experiencing, imports and input factors have gone up extortionately, meaning that companies put up the costs to consumers.
Demand pull is currently negative. Soon to be very negative when people can't even afford to buy food.
There's also some 'fake' inflation in there, due to bandwagon jumping. E.g. a company putting their prices up by 10% because everyone is, and increasing profit margins as a result. The free market should in theory counter this over time.

So what can central banks do to counter inflation. Increase interest rates. More people will want the pound, as it gives more interest, so the pound strengthens and imports get cheaper. In theory people also save more, rather than spend, which reduces demand inflation. Both these factors are extremely tenuous in our scenario.

What are the negatives? More saving, less spending ---> Less tax revenue, less growth.
Stronger pound, exports more expensive to other countries -----> Less tax revenue, less growth, more negative balance of trade (exports - imports).

IMO the solution to the crisis isn't monetary, it's political. If anything the BoE is going in the wrong direction if helping the average people is the desired outcome (spoiler - it isn't)

JohnCox25

biscan25 said:

Inflation comes in two parts, supply push and demand pull.
Supply push is what we are undoubtedly experiencing, imports and input factors have gone up extortionately, meaning that companies put up the costs to consumers.
Demand pull is currently negative. Soon to be very negative when people can't even afford to buy food.
There's also some 'fake' inflation in there, due to bandwagon jumping. E.g. a company putting their prices up by 10% because everyone is, and increasing profit margins as a result. The free market should in theory counter this over time.

So what can central banks do to counter inflation. Increase interest rates. More people will want the pound, as it gives more interest, so the pound strengthens and imports get cheaper. In theory people also save more, rather than spend, which reduces demand inflation. Both these factors are extremely tenuous in our scenario.

What are the negatives? More saving, less spending ---> Less tax revenue, less growth.
Stronger pound, exports more expensive to other countries -----> Less tax revenue, less growth, more negative balance of trade (exports - imports).

IMO the solution to the crisis isn't monetary, it's political. If anything the BoE is going in the wrong direction if helping the average people is the desired outcome (spoiler - it isn't)

Thank you for this Biscan and I agree with you, also (imo) this Tory competition for leadership is making it worse, 9a boat adrift without a captain and a broken down motor) and this is not just Boris, it's the whole lot of them. (Government) 

As a political they have become even more Incompetent. 

Truss is going this way with the economy and Sunak going the other way with his ideas... 

Just not good enough. 

I thought the Tories were all joined up in thinking "This is the way we will build the economy. This is the way we will help people, small and large businesses. This is the way we help the NHS and so on. 

What have they been doing all of the years they've been in power? 

Btw I'm not a Tory basher, I’m just an ordinary bloke, nothing special, low education, no degrees, no O/A’levels, (Although I did receive a few distinctions and merits when I had a go at a HND course in the built environment, but ran out of money half way through and couldn't continue (so not an complete numpty;). 

I just see it for what it is, they wasted time and they are a total shambles (btw I was Tory but I think that all the political parties have no idea or any decent ideas as to what they have to do.) The Tories got lost on the way to utopia , Labour is still in the wilderness, and the Libs, Greens etc.... I pass 

sevenhills

There is also the value of our currency. In the USA they have increased interest rates more than the UK, so the Dollar is increasing in value.
We need to increase our rate more, to keep pace with the Dollar.

We like to comment, but do we really have enough knowledge to give a certain opinion?