Surely the interest rate rise will achieve nothing?

[rlg43p]

I can understand that increasing interest rates will dampen down inflation if it is due to an economy overheating, but when inflation is being driven almost exclusively by the energy price increases, how does increasing interest rates achieve anything positive?

Surely it just further burdens both business with extra costs which they would then want to pass on to the consumer - thereby increasing inflation.

And for the consumer it just drives up living costs, so they will spend less, thereby making the situation for business even tougher.

What's the point?

[Al Gorithum]

Perhaps there's more to it but prima facia it seems to me that this inflation is Cost Push, so increasing interest rates (designed to calm Demand Pull inflation) won't work.

But the BoE has only one target and one tool to use.

Hopefully someone smarter than me will be along to explain...

[CzechItOut]

The BoE need to create some leeway to cut interest rates when we go into recession later this year.

[Ashfordian]

rlg43p said:

I can understand that increasing interest rates will dampen down inflation if it is due to an economy overheating, but when inflation is being driven almost exclusively by the energy price increases, how does increasing interest rates achieve anything positive?

Surely it just further burdens both business with extra costs which they would then want to pass on to the consumer - thereby increasing inflation.

And for the consumer it just drives up living costs, so they will spend less, thereby making the situation for business even tougher.

What's the point?

Energy (gas, oil, etc) is priced in dollars, as are most other commodities eg wheat, copper, etc, etc

Raising interest rates strengthens the pound(or reduces its weakness) against the dollar thus keeping the negative currency movements out of the inflation that we are currently experiencing.

[Dr Jekyll]

More specifically it's caused by supply shortages. So reducing the money supply to match what there is to buy does have a certain logic.

[Shnozz]

Protecting £ and cost of imports/oil.

[stuckmojo]

CzechItOut said:

The BoE need to create some leeway to cut interest rates when we go into recession later this year.

this.

[markymarkthree]

It may put a bit of money in savers pockets, which i will happily then spend.

[Boringvolvodriver]

markymarkthree said:

It may put a bit of money in savers pockets, which i will happily then spend.

On your higher energy bills……….

[Boringvolvodriver]

Read a piece in the i today with an economist who sat on the MPC a few years back saying that the BofEs arguement for raising interest rates and predicting a recession at the same time was “nil”

[Brave Fart]

The explanation I've heard is that the policy is designed to prevent inflation becoming persistent. High interest rates won't stop inflation in the next few months, but should stop it being high beyond, say, 2023. In other words, the BOE base rate rise will prevent inflation being worse in the medium term than it otherwise would have been.

I may have misunderstood though, no doubt the Economic Wise Owls of PH will be along soon.

[Tankrizzo]

markymarkthree said:

It may put a bit of money in savers pockets, which i will happily then spend.

Good luck with that when inflation is double digits.

[isaldiri]

Brave Fart said:

The explanation I've heard is that the policy is designed to prevent inflation becoming persistent. High interest rates won't stop inflation in the next few months, but should stop it being high beyond, say, 2023. In other words, the BOE base rate rise will prevent inflation being worse in the medium term than it otherwise would have been.

Well that's the theory anyway - to keep longer term inflation expectations in check

How much that actually applies though is slightly more debatable (and there is research from the US federal reserve that suggests current inflation expectations has a rather tenuous link to actual inflation being recorded later) but it's certainly the current mantra of the various central banks that rate rises now will help to ensure things don't get worse later with even higher rates (late 70s early 80s for example) being required even though most of the inflation now is mainly supply-side inflation that is not really going to be meaningfully affected by rate rises.....

[NRS]

The benefit is it makes the £ stronger (or at least keeps it equal against the $ when it is also being increased). Since much of our imports are priced in $ we need this or we'll face even higher costs due to a weak currency. This is particularly obvious for oil etc.

The downside is relatively limited. 70% of homes are mortgage free, most of those with a mortgage will be fixed too. So it's not got a huge impact there for now. For loans a lot of people will be flipping debt around 0% interest credit cards or messing up and hitting the nasty rates, so a small change here and there won't make much difference. Probably one of the bigger areas it will impact are companies who used cheap loans to expand very fast, and don't have the ability to pay back the increased loan repayments.

It also gives us somewhere to go in future to drop rates into the inevitable recession.

[aeropilot]

stuckmojo said:

CzechItOut said:

The BoE need to create some leeway to cut interest rates when we go into recession later this year.

this.

They are still historically silly low compared to what they've been in the UK for the previous 150 odd years prior to the 2008 crash. They'd pretty much never dropped below about 4.5-5.0% prior to 2008, and some of us remember 15% not so long ago.....

[ED209]

What actually happens to the money collected by the increased interest rates?

[Dr Jekyll]

aeropilot said:

They are still historically silly low compared to what they've been in the UK for the previous 150 odd years prior to the 2008 crash. They'd pretty much never dropped below about 4.5-5.0% prior to 2008, and some of us remember 15% not so long ago.....

Even sillier compared with inflation.

[fido]

ED209 said:

What actually happens to the money collected by the increased interest rates?

It is paid out to investors of UK debt.

[NRS]

aeropilot said:

stuckmojo said:

CzechItOut said:

The BoE need to create some leeway to cut interest rates when we go into recession later this year.

this.

They are still historically silly low compared to what they've been in the UK for the previous 150 odd years prior to the 2008 crash. They'd pretty much never dropped below about 4.5-5.0% prior to 2008, and some of us remember 15% not so long ago.....

There was a few decades of 2% from the 30s to 50s. And 1850-1910 or so often had periods of 2%, it was probably an average of 3%. So when people assume normal rates are say 5-10+% that's actually high on a historic period, it's just they remember them from when they were young so it is "normal". 8%+ has pretty much only occurred for a few decades, so only a decade more than 0%.

Edited by NRS on Friday 5th August 14:28

Edited by NRS on Friday 5th August 14:29

[Rogue86]

NRS said:

The downside is relatively limited. 70% of homes are mortgage free

Do you have a source for that? Seems very high and a quick google shows it as being the other way round (with 36% mortgage free). Perhaps it's an age thing but I know very few people who own their house outright and fixed-rate mortgages have time-frames, they're not fixed indefinitely.