I can’t get the logic

a-friend_2

Hi, not sure where to post this I’m just hoping someone can help me get my head around this.  

So mortgage rates have gone up before my renewal but where I am lost is:

cost of living is increasing as the price of goods fuel gas etc goes up and most really the vast majority is energy related

so the Bank of England to combat inflation put up the cost of borrowing to “lower demand”

but no one is taking our loans (maybe exceptions) to fund gas, electricity etc and the interest rates don’t impact the demand for the things pushing the prices up? 

So how does putting up the interest rates bring down inflation at all when general people can’t impact the price of energy???

housebuyer143

a-friend_2 said:

Hi, not sure where to post this I’m just hoping someone can help me get my head around this.  

So mortgage rates have gone up before my renewal but where I am lost is:

cost of living is increasing as the price of goods fuel gas etc goes up and most really the vast majority is energy related

so the Bank of England to combat inflation put up the cost of borrowing to “lower demand”

but no one is taking our loans (maybe exceptions) to fund gas, electricity etc and the interest rates don’t impact the demand for the things pushing the prices up? 

So how does putting up the interest rates bring down inflation at all when general people can’t impact the price of energy???

It's the only tool they have to combat inflation, so that's all they can do.

Linton

1) Putting up interest rates gives you less money to spend on other things. So manufacturers are discouraged from putting up their prices as they would lose even more business.

2) Increasing interest rates encourages people to lend money for investment.

rc28

It's theoretical and doesn't always have the desired effect. As housebuyer said, its the only tool they have to combat inflation, and in theory should stifle demand and so reduce inflation. Since QE started the BofE now have QT as another tool to reduce money supply and inflation.

Also increasing interest rates should make the currency stronger and reduce inflation via imports (not so when the FED goes hard on rate rises)

Edi81

There is a really good podcast series on BBC Sounds about understanding the economy. 

I’d really recommend it. 

https://www.bbc.co.uk/sounds/play/p0df7j3k?partner=uk.co.bbc&origin=share-mobile

simon_or

It's a blunt tool to suppress demand, that's all they can do.

The price of energy is indeed a significant contributor to the inflation numbers but only makes up about 10-15% by weight of the CPI so by suppressing demand across the other components you can still impact inflation.

At least in theory!

sevenhills

housebuyer143 said:

a-friend_2 said:

Hi, not sure where to post this I’m just hoping someone can help me get my head around this.  

So mortgage rates have gone up before my renewal but where I am lost is:

cost of living is increasing as the price of goods fuel gas etc goes up and most really the vast majority is energy related

so the Bank of England to combat inflation put up the cost of borrowing to “lower demand”

but no one is taking our loans (maybe exceptions) to fund gas, electricity etc and the interest rates don’t impact the demand for the things pushing the prices up? 

So how does putting up the interest rates bring down inflation at all when general people can’t impact the price of energy???

It's the only tool they have to combat inflation, so that's all they can do.

If wages kept pace with wages, that would keep inflation higher, but the government have managed to subdue them. Even as far as causing a NHS strike.

a-friend_2

sevenhills said:

housebuyer143 said:

a-friend_2 said:

Hi, not sure where to post this I’m just hoping someone can help me get my head around this.  

So mortgage rates have gone up before my renewal but where I am lost is:

cost of living is increasing as the price of goods fuel gas etc goes up and most really the vast majority is energy related

so the Bank of England to combat inflation put up the cost of borrowing to “lower demand”

but no one is taking our loans (maybe exceptions) to fund gas, electricity etc and the interest rates don’t impact the demand for the things pushing the prices up? 

So how does putting up the interest rates bring down inflation at all when general people can’t impact the price of energy???

It's the only tool they have to combat inflation, so that's all they can do.

If wages kept pace with wages, that would keep inflation higher, but the government have managed to subdue them. Even as far as causing a NHS strike.

Thanks all, so it’s a leaver that’s the only one they have but generally at a time where cost of living is higher out of the control of most people to change but you need people to spend to keep out of recession surely keeping rates down to give people more money in their pockets would make sense? You can’t control external factors driving prices up but you could leave people more money to support.

if you have costs go up AND they put rates up it’s a government/BoE controlled recession isn’t it??? Seems bad logic 

also everyone requesting inflation matching rises of let’s say 10% that will be in those salaries as long as they have the job so it sets a more costly benchmark for the future doesn’t it?

in the private sector this usually leads to job losses once to balance the higher salaries of against staff numbers

feels odd to me

Sistergold

The truth is the government and Bank of England don’t really have an answer to all this. All theories but life keeps throwing curve balls at us all, covid then the war then who knows what? 

ACG

a-friend_2 said:

sevenhills said:

housebuyer143 said:

a-friend_2 said:

Hi, not sure where to post this I’m just hoping someone can help me get my head around this.  

So mortgage rates have gone up before my renewal but where I am lost is:

cost of living is increasing as the price of goods fuel gas etc goes up and most really the vast majority is energy related

so the Bank of England to combat inflation put up the cost of borrowing to “lower demand”

but no one is taking our loans (maybe exceptions) to fund gas, electricity etc and the interest rates don’t impact the demand for the things pushing the prices up? 

So how does putting up the interest rates bring down inflation at all when general people can’t impact the price of energy???

It's the only tool they have to combat inflation, so that's all they can do.

If wages kept pace with wages, that would keep inflation higher, but the government have managed to subdue them. Even as far as causing a NHS strike.

Thanks all, so it’s a leaver that’s the only one they have but generally at a time where cost of living is higher out of the control of most people to change but you need people to spend to keep out of recession surely keeping rates down to give people more money in their pockets would make sense? You can’t control external factors driving prices up but you could leave people more money to support.

if you have costs go up AND they put rates up it’s a government/BoE controlled recession isn’t it??? Seems bad logic 

also everyone requesting inflation matching rises of let’s say 10% that will be in those salaries as long as they have the job so it sets a more costly benchmark for the future doesn’t it?

in the private sector this usually leads to job losses once to balance the higher salaries of against staff numbers

feels odd to me

You cant prevent recessions, they are part and parcel of life. 

You cant control external factors, but you can do things to limit them. If the EU and the FED increase their interest rates, it makes their currency more valuable, that then means anything we as a country buy in USD (the big one being oil) or euros costs more pounds. Because it costs more for companies to buy, they then need to increase the price which they sell it for. That then increases inflation as we have to pay more for it. 

As the FED is increasing their interest rates, we have to keep on par with that otherwise everything goes up in price due to the value of the pound going down compared to the dollar. 

Increasing interest rates helps to keep the pound in line with the dollar and stops things costing more (normally), it also puts pressure on peoples finances which then means they buy less both of which help to reduce inflation. However, because of the war in Ukraine, the EU is paying more for energy which then puts the price of everything up due to the cost of manufacturing, shipping, travel etc going up. 

If interest rates were not going up, everything would cost a whole lot more.