What will happen to base rate/interest rates?

Mumum

Hello,
If Liz Truss lowers tax, this reduces interest rates? 
Building society is meeting this Thursday to review their products, do you think, in light of Truss' new alleged policies, the fixed rates will go down?

400ixl

Bank of England sets the base rate rather than HMRC who deal with taxes.

The BoE has an obligation to control the rate of inflation, there may be a positive or negative affect on the inflation rate as a result of a tax cut but that could go either way at the moment. But that is all future speculation, the building societies will be reacting against what they can see in front of them today. I would have thought a very very low chance they would be looking at reducing their fixed rates at this stage. 

InvesterJones

Mumum said:

Hello,
If Liz Truss lowers tax, this reduces interest rates? 
Building society is meeting this Thursday to review their products, do you think, in light of Truss' new alleged policies, the fixed rates will go down?

Lowering tax does not reduce interest rates. Interest rates are set by the bank of England in order to try and control inflation back to a target of 2%.

The effect of lowering taxes depends on which taxes - cuts to VAT will reduce inflation assuming people don't buy more in compensation, thus could ultimately reduce interest rates. Cuts to income tax or national insurance give people more money in their pocket which tends to increase inflation, so could ultimately increase interest rates.

Additional borrowing by the government and/or other measures which the market thinks are bad for the economy would likely cause the pound to decrease in value, which is also inflationary, and would result in increased interest rates.

So in conclusion, we'll have to see - many of Truss' announced policies would seem to be worse for inflation and therefore result in an increase in interest rates, which may or may not be passed on by banks offering fixed rate savings.

Martico

Consensus is that interest rates will rise further this year, in order to combat inflation.
If anything, releasing more liquidity into the system via tax cuts right now would further stoke inflation, and mean interest rates might need to rise further.
Personally, I doubt she'll have the scope to cut taxes. Expect u-turns aplenty from her campaign waffle. She also (at least for now) has no say over interest rates - that's down to the nominally independent BoE

sevenhills

Mumum said:

Hello,
If Liz Truss lowers tax, this reduces interest rates? 

The main tax change promised was not to increase corporation tax to 24%
That tax change is less likely to affect interest rates, but her main thrust was to increase growth by pumping money into the economy, will will have an upwards pressure on interest rates.
Her attitude seemed to be to increase borrowing.
If interest rates go up, rates will also increase for  government debt, so they generally don't want to allow rates to increase too much.

Expotter

From The Mail on Sunday a couple of days ago:

"With inflation set to soar well into double-digits, rates are now expected to hit 4 per cent next February, according to SONIA, a key commercial benchmark used to set mortgage rates. 
Worse still, borrowing costs will continue to rise, reaching a peak of 4.4 per cent in June 2023, and not fall below 4 per cent until April 2024. "

I'd also agree with the idea that any tax cuts or releasing extra money into the economy would if anything stoke further inflation and therefore increase the likelihood of higher rates. Although a freeze on energy prices would cause a drop in the predicted inflation figure.
I, personally, don't see them cutting rates anytime soon; but my guess is as good as yours, so we'll just have to wait and see.

mlc2009

sorry to derail this thread, but couldn't find anything similar

inflation is forecast to reach 20 percent later next year. Let's say the russia/ukraine war ended tomorrow, somehow. Would that reduce inflation dramatically? 

US inflation is at 8.5 and expected to fall slightly, and they don't seem to have the same energy costs as us, is energy the main factor in high inflation?

Also, if energy is the main cause of high inflation then what good is raising interest rates?

sevenhills

mlc2009 said:

US inflation is at 8.5 and expected to fall slightly, and they don't seem to have the same energy costs as us, is energy the main factor in high inflation?

Also, if energy is the main cause of high inflation then what good is raising interest rates?

8.5%% inflation is still way above what the governments would like it to be, so interest rates are rightly higher.
People that have experienced higher interest rates of previous decades may consider 5% interest rates as normal and optimal.

Martico

mlc2009 said:

Also, if energy is the main cause of high inflation then what good is raising interest rates?

In normal times it makes little sense, to me too, as the pressure is on the supply side, not demand. But I think raising them to a more "normal" level is probably the right thing to do, as that will give the monetary authorities scope in the future to either raise or reduce rates. Having them at exceptionally low levels for such a long time has reduced their capacity to respond. 

Albermarle

mlc2009 said:

sorry to derail this thread, but couldn't find anything similar

inflation is forecast to reach 20 percent later next year. Hopefully will not quite reach those levels.Let's say the russia/ukraine war ended tomorrow, somehow. Would that reduce inflation dramatically? Certainly would help.

US inflation is at 8.5 and expected to fall slightly, and they don't seem to have the same energy costs as us, is energy the main factor in high inflation? The biggest factor for sure

Also, if energy is the main cause of high inflation then what good is raising interest rates?

Inflation was rising before Russia invaded Ukraine. Post Covid demand for goods and services was high, but supply chain issues were causing shortages. Price of things like timber, concrete, plastics, microchips etc had already doubled in some cases. Also shortages of labour was pushing up wages. So there was plenty of inflationary pressure before energy prices went through the roof. So higher interest rates can have little effect on energy inflation but can have an effect on other inflation.

RG2015

mlc2009 said:

sorry to derail this thread, but couldn't find anything similar

inflation is forecast to reach 20 percent later next year. Let's say the russia/ukraine war ended tomorrow, somehow. Would that reduce inflation dramatically? 

US inflation is at 8.5 and expected to fall slightly, and they don't seem to have the same energy costs as us, is energy the main factor in high inflation?

Also, if energy is the main cause of high inflation then what good is raising interest rates?

You could always have started a new thread.