Interest rate rises to tackle inflation

Adyhall316

Can someone please explain the logic of interest rate rises to tackle inflation.  I get the idea of this supposedly reducing peoples spending capacity to force down inflation but why should banks (private institutions), benefit from this.  Would it not be better to raise taxes to reduce spending power, affecting all people in society and not just those with mortgages and rental expenditure.  Plus the extra money raised through taxes could be spent on our public services rather than share holder dividends. Interest rises have a benefit on the richest in society, that have no mortgages and large savings accounts, but have a devastating impact on the poorest.  It just doesn't make any sense to me why the banks are even involved in controlling inflation.

MattMattMattUK

Adyhall316 said:

Can someone please explain the logic of interest rate rises to tackle inflation.  I get the idea of this supposedly reducing peoples spending capacity to force down inflation but why should banks (private institutions), benefit from this.

What makes you think banks benefit from rising interest rates? Their borrowing costs are also rising. 

Adyhall316 said:

Would it not be better to raise taxes to reduce spending power, affecting all people in society and not just those with mortgages and rental expenditure. 

Raising taxes can work to an extent, but it does not reduce supply of money which is what interest rate rises can do. However the major factor behind raising interest rates to counter inflation is to protect the value of Sterling.

Adyhall316 said:

Plus the extra money raised through taxes could be spent on our public services rather than share holder dividends.

Taxes are going on debt and debt interest at the moment. Dividends are good, if there is any extra profit then the dividends are taxed which raises more tax as you desire, a lot of them are paid into pension funds, good in the long term, others are received by individuals as well, profit and dividend are not bad things when they do happen. 

Adyhall316 said:

Interest rises have a benefit on the richest in society, that have no mortgages and large savings accounts, but have a devastating impact on the poorest.

The richest in society might have no mortgages, but they also do not have large savings accounts, their wealth will be invested, not just sat in a savings account. Interest rate rises also have minimal impact on the poorest who do not have mortgages. Interest rate rises, as with most actions which have a negative side, impact the so called "squeezed middle".

Adyhall316 said:

It just doesn't make any sense to me why the banks are even involved in controlling inflation.

There is a distinction, "the banks" do not, The Bank of England does, it raises interest rates which filter over to multiple things, including lending by retail banks and financial institution. 

HillStreetBlues

Raise taxes Government gets blamed.
Raise interest rates banks get blamed.

If you're in Government which one would you pick?  

Albermarle

HillStreetBlues said:

Raise taxes Government gets blamed.
Raise interest rates banks get blamed.

If you're in Government which one would you pick?  

I was going to say something similar. 
Raising taxes is a logical answer to many of the UK's problems. NHS would benefit, social care would benefit, critical public sector workers could get a decent pay rise etc etc
However the public do not like paying tax, especially as they have been paying more recently anyway, so additional tax would be much more unpopular with the majority of voters than raising interest rates. So it won't happen.