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

coyrls

fletcher1985 said:

making people pay out even more on mortgages/loans credit cards etc

Reduces disposable income and therefore reduces demand, which in turn will reduce inflation, assuming that current inflation is demand driven (which may be a questionable assumption).

Altior

Prism said:

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 

For sure, but for a couple of years, policy makers malformed the government bond markets. Governments were only able to sell so much debt as they were also buying it (electronically created). We've seen subsequently what happens when the market is left to do what it should be able to do. In 'normal' times, existing money is used. 

TiVo_Lad

Altior said:

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. 

Remember thought that lots of people are on fixed-rate mortgages, which delays the impact of rising interest rates. The hope is that by rising rates quickly and getting on top of inflation quickly, you can start to bring interest rates back down before those that are on a fix need to renew their deal. It's not perfect, however, because there will always be some who have to renew at a much higher rate.

I don't think it's been mentioned, but whilst the overall inflation rate has come down (a bit), core inflation which strips out volatile items like food and energy is still rising. That surprised the markets and explains why there are renewed expectations that rates still need to rise further.

Altior

The mortgage liabilities are practically irrelevant to the BoEs central mandate. People seem to think that their judgements are based on the retail mortgage market. It's just one cog of the many cogs in a complex economy. I don't believe that the BoE have been competent, however higher interest rates should reduce the demand for new retail mortgages. That's more important to them than potential defaults. The difficulties are vastly exaggerated as many people will be able to tolerate the increases so far. They might not like them, but in general they can tolerate them. Many will have been stress tested to current levels anyhow. 

Beddie

I think there should be a pause on interest rate rises. (Boos from all the savers on here!)

This is because many mortgage holders have not yet had an increase, as they've been on a fixed rate. The current inflation hasn't curtailed spending much, as others have noted on this thread, but a £500 a month mortgage increase will.

I think there will be a sharp downturn in spending later this year into next, but rate rises will keep going until then and overshoot the level needed for correction. 

It's also evident that fuel and energy prices are coming down, meaning the inflation rate will fall regardless of interest rates.

However, as others have said, interest rates are used to support the Pound as much as anything and it's the only tool they have, so will continue to apply it.

I'm both a saver and mortgage holder, so am not hugely affected either way.

Altior

Many peoples' salaries are increasing too. If the monthly cost of the mortgage goes up as they needed to get a new fixed rate deal a) it was inevitable over the life of a typical mortgage, b) it will be somewhat proportionate to increases in income (typically). 

I've covered this topic a few times on other threads, mortgage liabilities in real terms decrease over the years due to the time value of money. Which is on somewhat of a tear, currently. 

Nebulous2

Exodi said:

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.

I've been posting occasionally, since last summer, my own anecdotes about seeing people spending and how that doesn't match with the cost of living crisis. Restaurants full, prices of menu items up. Tourist attractions with full car parks and big crowds and my own totem for inflation, the massive increase in the cost of campsites. I'm looking at you Caravan and Motorhome Club. 

Unlike you however, I am cutting back. Not because I'm being forced to as I've run out of money, but because I'm not seeing value in the prices being charged. 

We've reduced the amount of red meat we are buying / eating. A typical lunch for me would have been salad with oily fish and cheese. I usually had access to 5-6 varieties of cheese. I'm now down to about 3 types and am eating less of it. During the cold weather I often had a tin of supermarket soup,  rather than my usual pick and mix of salad ingredients, cheese, chutney, olives etc. 

I'm trying to be frugal with heating, even though I'm on a fix and was actually better off than usual over the winter, with the support received. 

I've had 3 Spanish / Canarian holidays in less than 18 months, the first being really cheap, the next being okay and the third being painful. I'd be happy to go on a short-haul holiday every 6-8 months for years if the prices hadn't escalated so much. I've been pricing for October / November, but the prices are putting me off. 

Yet I recognise my reality and cutting back because I want to doesn't match everyone's. I work with people who appear to be frugal, have few examples of conspicuous spending, who cannot afford holidays and say they are really struggling. There is a divide, where a lot of the poverty is hidden. 

Meantime restaurants are 'going like a fair' as the saying goes, and its very difficult to get a seat. 

Nebulous2

Altior said:

The mortgage liabilities are practically irrelevant to the BoEs central mandate. People seem to think that their judgements are based on the retail mortgage market. It's just one cog of the many cogs in a complex economy. I don't believe that the BoE have been competent, however higher interest rates should reduce the demand for new retail mortgages. That's more important to them than potential defaults. The difficulties are vastly exaggerated as many people will be able to tolerate the increases so far. They might not like them, but in general they can tolerate them. Many will have been stress tested to current levels anyhow. 

I'm sure I've seen it reported that only 15% of mortgage holders have been impacted so far. There are also huge numbers of homes held outright, so many people wont be affected by rising rates at all. 

coastline

Nebulous2 said:

Altior said:

The mortgage liabilities are practically irrelevant to the BoEs central mandate. People seem to think that their judgements are based on the retail mortgage market. It's just one cog of the many cogs in a complex economy. I don't believe that the BoE have been competent, however higher interest rates should reduce the demand for new retail mortgages. That's more important to them than potential defaults. The difficulties are vastly exaggerated as many people will be able to tolerate the increases so far. They might not like them, but in general they can tolerate them. Many will have been stress tested to current levels anyhow. 

I'm sure I've seen it reported that only 15% of mortgage holders have been impacted so far. There are also huge numbers of homes held outright, so many people wont be affected by rising rates at all. 

32% owned outright. 28% with a mortgage. Renting in BTL (  many on mortgage ? ) plus social housing 37%.

More people in England now own homes outright than have a mortgage or rent them, figures reveal | This is Money

Around 250,000 needing a mortgage every quarter . Millions by 2024.

How increases in housing costs impact households - Office for National Statistics (ons.gov.uk)

It's very split out there and I don't kid myself there isn't millions struggling. Food , gas and electric are the same price for everyone. Those on lower pay are getting hammered. Since covid many items in the supermarket are up 50%. How much for fish and chips.  Pubs and restaurants have closed in big numbers and I've read 20% have gone since covid. Pubs close early never heard of. Holidays are up , air travel, car hire up, second hand cars, list is endless. How many wished they'd bought a second hand car two years ago. Anybody had a home extension priced recently or even a quote from a tradesman. ? No the wonder workers are asking more than the 5% on offer. In the meantime....

Sainsbury's chief executive total pay rises to £5m - BBC News

There's another 10 years to add onto this one.

CEO-pay-compared-to-workers-pay-in-the-United-Kingdom-2000-2014-Source-UK.ppm (668×354) (researchgate.net)

Aliliva

fletcher1985 said:

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? 

It will decrease the amount of disposable income people have to spend after their basic needs are met.

Take this example: Person A takes home £1000/month, and they spend £250 on mortgage, £250 on food, £200 on bills. At the end of the month, they have £300 left to spend on restaurants, holidays, however they like. If their mortgage increases by £200, at the end of the month they will have only £100 left to spend on non-necessary items, in all effects forcing them not to spend.

End result: there are £200/month taken away from the economy, demand reduces, restaurants (and other business) have to compete more for their customers, they lower their prices to be more competitive, inflation reduces.


That being said, lots of people are in the same situation as myself and partner. We saved loads during covid, took decent payrises in the past 3 years, work in jobs that seem as stable as they can be, and, mostly, have mortgages fixed for other 3 to 4 years. Obviously, we are not cutting down, not really, if anything, we are about to spend the most money we've ever spent on a house extension project - and this is due to another perverse effect of inflation being higher than rates: we calculated that we are better off borrowing some £10k at 6% now than paying maybe 20% more if we wait the two years it'll take us to save the money.