Interest Rate rises - Discrimination at its finest? Why BoE interest rate rises don't make sense

Footymanu

When interest rates rise they burden a minority with massive unexpected and unbudgeted increases. The BoE have written that interest rate rises affect 14% of homeowners immediately, while 86% are either unaffected or better off due to receiving extra interest on their savings.

Of huge concern is the extent to which the few are affected,  many have had to find an astonishing extra £10k a year. This is money posts "Millions are set to pay £10,200 more for their mortgages than 18 months ago as Bank of England raises interest rates to highest level in 15 years".

When someone takes a mortgage, the bank assess affordability. They ask questions like - "Do you have gym membership?" Perhaps this doesn't reconcile when the bank can make arbitrary increases of £10k on targeted individuals.

Further the BBC reports most homes are owned outright, with less than a third of the 28 million homeowners having mortgages. This equates to around 9 million Mortgages. When interest rates rise they negatively affect people with variable rate Mortgages. The BBC wrote this will affect 4 million households by the end of the year perhaps 2.5 million at present. This means the huge burden falls on a small minority, 1 in 7 households by the end of the year.

To me the BoE appear discredited because the interest rate burden falls solely on people who ticked the wrong box? It is the size of the penalty that is unpalatable? Meanwhile 36 million savings accounts receive more money in interest, so this enables those to spend more money? How does having more to spend reduce inflation?

Bank profits eg NatWest  actually suggest the banks are the main beneficiary of rate rises and choose to line their own pockets. The guardian reported NatWest first-quarter profits jump by 50% after interest rate rises. Maybe interest rate management should operate in the public interest and not that of the banks?

What the BoE appear to be doing by raising rates  is following other countries with the exception of Japan (inflation is 3% in Japan). The rises appear an unfair redistribution of wealth where the banks increase costs for some, give higher interest payments to more but fund themselves with the lions share; spoils grabbed from the minority?

In relation to landlords - around 1/3 of Landlords are affected. How can the government expect Landlords to suck up such big increases yet not pass this on?

It is already reported around 5% of tenants have missed a rental payment in April due to the energy and food price rises. This further attack on a minority of  Landlords will put them under great pressure who then have to pass the increases onto tenants who are already struggling? Landlords can only legally put rents up once a year but the BoE has put mortgages up 8 times in the last year. if Michael Gove prevents Landlords from raising rents to the point they can break even, then this policy will cull landlords; and is akin to the policy that prevented energy suppliers from charging their actual costs that drove half the suppliers bust during a short lived price spike. The government penalised those who had not hedged prices or did not have deep pockets.  Now the landlords need help and not further legislation, so they can continue to support people who rent? If these landlords don't receive help their tenants will also likely suffer. It's just bad policy?

The BoE strap line that interest rate hikes curb inflation appears flawed and disingenuous as it targets a minority and benefits others. You may feel we deserve a rational explanation?

Perhaps this could be put to Victoria Atkins and she could be asked to obtain evidenced explanations from the BoE on its strategy, rather than unquantified statements, the bank can explain how relentlessly targeting a minority of people reduces inflation and is a fair policy? If it fails to do so perhaps urgent changes are needed to the few in charge of the decisions and policy at the BoE?

prowla

Price increases hit people in their pockets.

Interest rate rises hit people in their pockets.

You are told not to ask for more money.

Your Govenment it working in your best interests.

HappyHarry

You might want to read the Bank of England meeting notes in order to understand why they are raising interest rates. 

Whilst they note the impact on mortgage holders and savers, the key objective is to bring inflation down, and the main tool at the BoE’s  disposal is to make borrowing more expensive. 

More expensive borrowing has an impact on business debt and investment which in turn has a far greater impact on inflation than the debt burden imposed on individuals does.

Whilst the newspaper headlines are all about personal debt and savings rates, these are not the major factors on BoE’s decision making.

More details here: https://www.bankofengland.co.uk/-/media/boe/files/monetary-policy-report/2023/may/monetary-policy-report-may-2023.pdf

CliveOfIndia

Of course any change in interest rate will affect savers and borrowers in opposite ways.  It's one reason why when taking out a mortgage, for instance, it's very unwise to push yourself to the absolute limit.  A prudent borrower would always ask themselves, "Could I still afford this if interest rates go up by 2% ?"

A few years ago I was chatting to my dad who was bemoaning the fact that "All my life when I had a mortgage, interest rates were high [I think something like 15% or so?].  Now I'm retired with plenty of savings, interest rates are the lowest they've ever been".

And yes, whilst changes in interest rate will of course affect individuals, it's big businesses that take a far bigger hit.

Ryan_Holden

Are you sure these facts are right? Twice the amount of homes owned outright than with mortgages?

Is this a copy and paste from an article?

Nebulous2

Interest rates are a blunt instrument. In some countries they will have a higher impact on mortgage holders than others, depending on how many people are on fixed rates. 

The intention is not to penalise people with mortgages, but to suck money out of the economy. The theory is that inflation occurs when demand outstrips supply and people are willing to pay more to get what they want. If you reduce the money they have the supply will eventually match the demand. 

The problem is that there appears to be more money in the economy than people thought, and inflation has become sticky. We had a lot of people with a lot of money for discretionary spending, who were banned from spending it during the pandemic, so they saved it, and it appears difficult to work out how much of it is left. 

I'm struggling to see that it is working, and find it difficult to reconcile a cost of living crisis with what I see. I was recently in the Scottish borders. The campsite was full, at £35 a night or so, for two people. The local pub had no tables available from 6pm on. A rack of ribs was £20, fish and chips was £15 and a pint of real ale was over £5. All of these prices would be a 50% rise on pre-pandemic prices. We are not talking about high season either. Mid-May, mid-week, probably the quietest period for the next 3-4 months and demand is still outstripping supply. 

I'm trying to do my bit by stopping buying, regardless of whether I can afford it, if prices appear unreasonable. 

So the answer is simple, stop buying, don't pay inflated prices, inflation will be tamed, and interest rates wont go up any further. 

HHarry

CliveOfIndia said:

Of course any change in interest rate will affect savers and borrowers in opposite ways.  It's one reason why when taking out a mortgage, for instance, it's very unwise to push yourself to the absolute limit.  A prudent borrower would always ask themselves, "Could I still afford this if interest rates go up by 2% ?"

 Which is exactly what I did when I took out a mortgage last July.  Since when rates have risen 3.25%.
 So even a 2% cushion wasn’t enough for a prudent borrower.

horsewithnoname

CliveOfIndia said:

Of course any change in interest rate will affect savers and borrowers in opposite ways.  It's one reason why when taking out a mortgage, for instance, it's very unwise to push yourself to the absolute limit.  A prudent borrower would always ask themselves, "Could I still afford this if interest rates go up by 2% ?"

A few years ago I was chatting to my dad who was bemoaning the fact that "All my life when I had a mortgage, interest rates were high [I think something like 15% or so?].  Now I'm retired with plenty of savings, interest rates are the lowest they've ever been".

And yes, whilst changes in interest rate will of course affect individuals, it's big businesses that take a far bigger hit.

One point to bear in mind -and I speak as someone who had a ‘high rate’ mortgage - is that my mortgage was a princely £35,000 whereas young people I know have to borrow massively more than that so a rate rise means lot more on a monthly payment, thanks to rampant house price inflation. But yeah, only time I ever had a decent sum of money, interest rates were 1% if you were lucky 😂 I’d not swap for being able to afford a home though 😉

Voyager2002

Most economists believe that the way to deal with inflation is to increase interest rates, and central banks around the world act on that belief.

The exception is Turkey, where the newly re-elected president believes that high interest rates cause inflation and so is ordering the central bank to reduce interest rates to combat inflation. We can all watch what happens in Turkey to see whether the approach there works better than that followed in most other countries.

And if you don't like what the Bank of England is doing, why don't you just move to Turkey? I understand that the weather there is delightful this time of year.

sevenhills

Voyager2002 said:

Most economists believe that the way to deal with inflation is to increase interest rates, and central banks around the world act on that belief.

If money is freely flowing and consumers are spending, inflation will be high. Consumer spending and the M2 money supply is a problem.
We as a country have a massive debt, that money has gone into the economy and fed inflation.
If taxes were to rise, to lower our debt, that would help to lessen money supply.

MattMattMattUK

CliveOfIndia said:

Of course any change in interest rate will affect savers and borrowers in opposite ways.  It's one reason why when taking out a mortgage, for instance, it's very unwise to push yourself to the absolute limit.  A prudent borrower would always ask themselves, "Could I still afford this if interest rates go up by 2% ?"

A few years ago I was chatting to my dad who was bemoaning the fact that "All my life when I had a mortgage, interest rates were high [I think something like 15% or so?].  Now I'm retired with plenty of savings, interest rates are the lowest they've ever been".

And yes, whilst changes in interest rate will of course affect individuals, it's big businesses that take a far bigger hit.

Due to the size of mortgages these days, vs what they were in the 70s, 80s, 90s a mortgage rate of 3% is nominally equivalent to 15% in 1985 in terms of the overall cost. In 1989 the average house price was £24,300, the average income was £14,014 per man, £19,214 per working age couple. If I could have bought a house for 165% of the national average wage then I would have not needed a mortgage, but just for a two bed flat it cost me 1,040% of the national average wage. Old people who bang on about interest rates being 15% in the past do not understand the differences in borrowing between the past and current levels.