Why is BoE raising interest rates. I understand the normal reasons, but we are not in normal

boingy

The main reason is that it's the only tool in their inflation toolbox.
They have been asked to keep inflation down and been given an interest rate hammer to do it. If they use the hammer and it doesn't work they can claim to have done their best. If they don't use the hammer and it doesn't work they will be accused of incompetence.

Exodi

spudboater said:

We have a cost of living "crisis" people are not spending, so how does raising interest control the spending we are not doing. In fact, making borrowing cost more means we borrow more and forces us to campaign for higher pay, which in turn drives the cost of goods/services we work on to go up, which in turn drives up inflation. Vicious cycle.

Sorry, while I see the constant media diatribe about the 'cost of living crisis', like others, I don't really see this play out in real life.

It was only last month LVMH (the luxury company that owns louis vuitton and dior) became the first European company worth over $500bn. In my personal adventures outside of MSE, restaurants are still as busy as they've always been, clothes shops are still packed, nothing has changed. Even in my own situation, I have made no notable changes to my spending habits. No-one I know has. Sure my shop has increased maybe £30 a week, but that's about. Like a lot of people, my mortgage is not up for renewal for a while. That's not to say some people aren't struggling at the moment, I've no doubt they are, but 'some people' isn't enough to dampen inflation.

Rising interest rates should eventually discourage spending. It is immaterial whether we got in this situation because we were gluttons to luxury and overindulged, or because a distant country invaded another distant country which led to our energy bills soaring. We are in a position of soaring inflation and it is not an option for the Bank of England to sit on their hands and do nothing.

"making borrowing cost more means we borrow more" - makes no sense, generally economists would argue the opposite would occur.

Altior

As others have said, it's the Fed that is leading the BoE. We couldn't hold interest rates down even if we wanted to.

We are living through an historic experiment, the global developed population that is. The only real precedent is Japan.

In layman's terms, fiat currency is a representation of value. It enables the easy exchange of value. If you double the thing that represents the value, but there is no more actual value, that thing is worth half of what it used to be worth, in real terms.

The theory is that higher interest rates suck money out of circulation, ie reduces the velocity. 

The challenge that most of the developed nations' central banks face is that the amount of fiat currency in circulation has been ridiculously increased without the value of it increasing at anything like the same extent. Inflation is essentially the correction. The additional fiat currency in circulation has been 'made up'. There is so much of it in individual citizens hands, that it isn't really having much impact. And political pressure in 2023, the 'world' we live in now means that the answer of least resistance for the authorities is to carry on creating new money and handing it out to individuals, further reducing the value each unit represents. Including in the UK, for example making up money to reduce the impact of the increased cost of domestic fuel bills. 

Malthusian

spudboater said:

We have a cost of living "crisis" people are not spending

As others have said they most certainly are. 2020 and 2021 was when people weren't spending.
The cost of living crisis is largely a meme and an excuse for brands to hoick their prices up. 

It strikes me that interest rates are high, and deliberately being kept high, to adjust for all the money we printed during COVID.

The money spent on lockdown was borrowed, not printed. If we were struggling to pay it back, it would make sense to let inflation run riot as it would devalue the pound and make Sterling debt easier to pay.

Altior

It wasn't existing money that was borrowed to cover the lockdown billions, it was mostly electronically created. 

Altior

However, inflation is quite rightly labelled as the greatest stealth tax of them all. Certainly easier for the authorities than pushing interest rates higher than the true inflation rate, and potentially triggering a depression. 

Prism

Altior said:

It wasn't existing money that was borrowed to cover the lockdown billions, it was mostly electronically created. 

That's how almost all money is created, via loans. The money doesn't exist before the loan or bond is generated. Then eventually it gets paid back and that money disappears 

Altior

Posting this for the OP (and anyone else interested!). A very decent, consumable mini series in my view.

https://www.youtube.com/watch?v=DVJYEbTdB04

fletcher1985

i dont get it too, i dont understand how everything is costing so much more which we have to pay for each week and have no choice and on top of it they raise interest rates making people pay out even more on mortgages/loans credit cards etc which they also have no choice. 

so how is raising the interest really going to stop people spending when we are all having to pay out hundreds of pounds more each month because of it? 

Altior

As it theoretically takes money out of circulation. At the same time it reduces demand. 

What you are referencing, making people pay out even more on mortgages/loans credit cards is simply collateral damage. The BoE should at least be thinking of the bigger picture, and not the impact on individual mortgage liabilities.