BoE thinking

jbrassy

Scorpio33 said:

1) In theory, the higher interest rates will mean higher savings rates, encouraging more people to save
2) Mortgages are not the only form of borrowing. This will mean less loans, credit cards etc so less spend overall in the economy.
3) Even if people are on a fixed rate, those fixed rates come to an end (2.4m in 2024 - https://www.theguardian.com/money/2023/jun/17/uk-homeowners-face-huge-rise-in-payments-when-fixed-rate-mortgages-expire) , which will mean higher rates for them, and less spend in the economy.
4) This also makes in harder for businesses to borrow money, meaning they will borrow less (and so spend less).

All the above points to lower spend, so lower inflation.

The other aspect is that lower spend could mean lower profits, and so a recession. It is a balancing act.

To add to this, in theory, higher interest rates should mean an appreciation in the value of the pound relative to other currencies. This is because foreign investors can find higher returns in UK bonds which drives demand for sterling. If the value of the pound appreciates, imports should become cheaper and reduce inflation. In practice, this hasn't happened today: https://www.ft.com/content/dcdded8c-6231-4a3e-bba8-fc9367f513e1

Sg28

kingstreet said:

Interest rate hikes to cure supply-side inflation. It's barmy.

Still, there's more chance of seeing Lord Lucan riding Shergar than there is them accepting the "B" word might be the issue...

The problem is that supply side inflation can easily become home grown inflation and once it does its hard to stop. 

bostonerimus

Mortgages have been stress tested for rate rises, but I wonder if that testing also included double digit core inflation and stagnating real wages. Many people are living on a financial cliff edge and if they have to renew their mortgage they will be looking at paying hundreds of pounds more each month. Living in the US I'm amazed that the UK does not have long term fixed rate mortgages so that the buyer can sensibly budget their housing costs. My first mortgage was a 30 year 6.5% fixed mortgage on a $150k loan and my final mortgage was a 15 year 3.5% fixed mortgage on a $300k loan. The killers in the UK are now the 6% mortgage rate combined with house price increases from maybe 2 to 3x salary to maybe 9x salary and people not being able to lock in rates they can afford for the long term.

sevenhills

Sg28 said:

The problem is that supply side inflation can easily become home grown inflation and once it does its hard to stop. 

Higher mortgage payments add to inflation, although housing costs are not included in CPI inflation.

If you want to know a better measure of inflation, look at RPI inflation. Which is now 11.3%

Sg28

sevenhills said:

Sg28 said:

The problem is that supply side inflation can easily become home grown inflation and once it does its hard to stop. 

Higher mortgage payments add to inflation, although housing costs are not included in CPI inflation.

If you want to know a better measure of inflation, look at RPI inflation. Which is now 11.3%

Yeah but the BOE doesnt target RPI it targets CPI, which doesnt include housing costs. So higher mortgage payments dont actually add the the headline figure. Theoretically higher mortgage payments will help to reduce cpi as people have less disposable income to spend. 

You could argue that higher mortgage rates could be used by workers to demand higher wage rises and this could feed back into cpi. 

weddingringman

RogerPensionGuy said:

If mortgage takers were not informed advised rates may go up to 6 or 7% in the future, maybe this will be another miss selling scandal?

Even my kids know interest rates can rise and fall, so I think people need to accept responsibility for the decisions they made - particularly those that bid 10-20% more for a house in 2021, and had the audacity to take a 2 year fix just because it was the cheapest deal. 

I can’t believe we have people calling for government intervention on this one. I’m truly tired of being a tax-payer that’s asked to constantly bail others out.

I too am desperate to buy my family a bigger home… but seeing house prices spiral out of control during the pandemic made me take a step back from the ticking time bomb - not join the bidding war and think “who cares - mortgage rates are only 1.5% anyway”.

If people bought houses they can no longer afford, then just downsize and let someone else have them. 

TheJP

Scorpio33 said:

1) In theory, the higher interest rates will mean higher savings rates, encouraging more people to save
2) Mortgages are not the only form of borrowing. This will mean less loans, credit cards etc so less spend overall in the economy.
3) Even if people are on a fixed rate, those fixed rates come to an end (2.4m in 2024 - https://www.theguardian.com/money/2023/jun/17/uk-homeowners-face-huge-rise-in-payments-when-fixed-rate-mortgages-expire) , which will mean higher rates for them, and less spend in the economy.
4) This also makes in harder for businesses to borrow money, meaning they will borrow less (and so spend less).

All the above points to lower spend, so lower inflation.

The other aspect is that lower spend could mean lower profits, and so a recession. It is a balancing act.

I wish i could save the £450 extra a month i now pay due to the BOE increase, the only winners here is the banks and the backers. The rate is not passed on to savers, highest rate i have seen is 4.10, that's 1.4 lower than the base rate.

Sarah1Mitty2

Geoffw27 said:

Can anyone explain to me how raising interest rates, which will increase mortgages will help inflation now, as 8 out of 10 mortgages are fixed rate?
surely the immediate effect will be negligible.. 

It reduces the amount new buyers can borrow and reduces house prices.

Sarah1Mitty2

Sg28 said:

kingstreet said:

Interest rate hikes to cure supply-side inflation. It's barmy.

Still, there's more chance of seeing Lord Lucan riding Shergar than there is them accepting the "B" word might be the issue...

The problem is that supply side inflation can easily become home grown inflation and once it does its hard to stop. 

Media outlets already saying that this is now the case, historically I don`t think inflation has ever been tamed without rates HIGHER than inflation? If that is the case we will need about 9% on the base rate.

Sarah1Mitty2

Sg28 said:

sevenhills said:

Sg28 said:

The problem is that supply side inflation can easily become home grown inflation and once it does its hard to stop. 

Higher mortgage payments add to inflation, although housing costs are not included in CPI inflation.

If you want to know a better measure of inflation, look at RPI inflation. Which is now 11.3%

Yeah but the BOE doesnt target RPI it targets CPI, which doesnt include housing costs. So higher mortgage payments dont actually add the the headline figure. Theoretically higher mortgage payments will help to reduce cpi as people have less disposable income to spend. 

You could argue that higher mortgage rates could be used by workers to demand higher wage rises and this could feed back into cpi. 

You can bet your last dollar than when people become angry and scared by their mortgage debt costs rising there will be MASSIVE strike action to demand the money to meet the rising costs, we are in a very dangerous mess now, rates should have been rising years ago and the brakes put on the ridiculous and socially damaging property bubble many years ago.