Does raising base rates really reduce inflation?

[Charlottesquare]

A fall in UK house prices of about 40% in real terms over the next few years will be needed to bring the multiple back to a more reasonable 4x or 5x average earnings.

Between, say, 1989 and 1992 prices dropped by something like 25% to 30% in money terms and didn't start moving again until New Labour after 1997. Personally I think the mandate for managing interest rates and inflation given to the Bankk of England missed a trick. Namely it should also have targeted inflation in the price of land and housing with a view to keeping the relationships between age, salary and house purchase affordability at a consistent level. But perhaps the perceived need to cut interest rates towards zero following the banking crises of 2007-2008 would have scuppered this.

That of course is maybe only true with UK averages, parts of the UK behaved very differently.

I bought my first Edinburgh flat for £50,000 in August 1989 and sold it for £74,500 in September 1997. Traditionally Edinburgh pricing never got as frothy as London/South East and effects generally took a while to reach us and diminished by distance, like ripples where a stone is dropped in a pond.

[servodude]

Between, say, 1989 and 1992 prices dropped by something like 25% to 30% in money terms and didn't start moving again until New Labour after 1997. Personally I think the mandate for managing interest rates and inflation given to the Bankk of England missed a trick. Namely it should also have targeted inflation in the price of land and housing with a view to keeping the relationships between age, salary and house purchase affordability at a consistent level. But perhaps the perceived need to cut interest rates towards zero following the banking crises of 2007-2008 would have scuppered this.

That of course is maybe only true with UK averages, parts of the UK behaved very differently.

I bought my first Edinburgh flat for £50,000 in August 1989 and sold it for £74,500 in September 1997. Traditionally Edinburgh pricing never got as frothy as London/South East and effects generally took a while to reach us and diminished by distance, like ripples where a stone is dropped in a pond.

I've just checked my first flat in Edinburgh:
Bought it in Sept 2002 (on a 102% graduate mortgage)
- sold in May 2005 for a gain (according to Rightmove) of 38%

Doesn't that seems quite frothy? It was in Abbeyhill.

I've mentioned earlier in this thread about the next place ("lower-villa" Carrick Knowe way). Again on RightMove we made 38% - this time in exactly 3 years. And the next chap loses 8% over 8 years.

I'm not sure if frothy is meant to just mean a bit bubble-y or insubstantial (without basis) or variable??
- but my experience of Embra at that time was "this is nuts, it can't last; we need to get out and move to Australia before we're trapped!! The schools here can't cope"
along with "I can't imagine them getting trams here!" (Our office was based off Shandwick Pl in Queensferry St Lane)

-sd

[Charlottesquare]

That of course is maybe only true with UK averages, parts of the UK behaved very differently.

I bought my first Edinburgh flat for £50,000 in August 1989 and sold it for £74,500 in September 1997. Traditionally Edinburgh pricing never got as frothy as London/South East and effects generally took a while to reach us and diminished by distance, like ripples where a stone is dropped in a pond.

I've just checked my first flat in Edinburgh:
Bought it in Sept 2002 (on a 102% graduate mortgage)
- sold in May 2005 for a gain (according to Rightmove) of 38%

Doesn't that seems quite frothy? It was in Abbeyhill.

I've mentioned earlier in this thread about the next place ("lower-villa" Carrick Knowe way). Again on RightMove we made 38% - this time in exactly 3 years. And the next chap loses 8% over 8 years.

I'm not sure if frothy is meant to just mean a bit bubble-y or insubstantial (without basis) or variable??
- but my experience of Embra at that time was "this is nuts, it can't last; we need to get out and move to Australia before we're trapped!! The schools here can't cope"
along with "I can't imagine them getting trams here!" (Our office was based off Shandwick Pl in Queensferry St Lane)

-sd

It was an "as frothy" rather than a "frothy" comment, a relative term rather than an absolute.

Certainly Edinburgh tends not to experience the bigger drops, New Town tends to be rock solid, as you move out less solid until say Dalkeith (where my nephew stayed in negative equity for years post 2007) where prices can and do yo yo.

I should mention the property we bought back in 1997 we still own, I suspect if we sold the gain today would be circa 375%( SP now nearly 5 times what we paid), but this is really not that uncommon, the Edinburgh property my father bought in 1967 for £6,750 he sold for £50,000 in 1981/82 (should have been £60k but found some dry rot) ,last time it was for sale circa 5 years back it was o/o £850,000 and I expect today it would easily be o/o £1m (Three storey end terrace house in Learmonth Place)

Significant price escalation has been with the Edinburgh market certainly since the late 1950s/mid 1960s, it is not new.

[Tedx]

Former MPC Committee Member David/Danny Blanchflower....

https://en.wikipedia.org/wiki/David_Blanchflower

...has his thoughts on inflation

https://sites.dartmouth.edu/blanchflowe ... inflation/

Despite 12 successive rate increases and asset sales by the MPC which appear to know not what they do. Sadly, these rate rises have hardly any impact at all on inflation which was caused by supply chain issues after the pandemic, the Ukraine war and Brexit. Brexit and its devastating impact on supply chains, especially for food, is what sets the UK apart from every other country. This can’t be fixed by rate rises.

[Mike4]

Former MPC Committee Member David/Danny Blanchflower....

https://en.wikipedia.org/wiki/David_Blanchflower

...has his thoughts on inflation

https://sites.dartmouth.edu/blanchflowe ... inflation/

Despite 12 successive rate increases and asset sales by the MPC which appear to know not what they do. Sadly, these rate rises have hardly any impact at all on inflation which was caused by supply chain issues after the pandemic, the Ukraine war and Brexit. Brexit and its devastating impact on supply chains, especially for food, is what sets the UK apart from every other country. This can’t be fixed by rate rises.

^^^This^^^ is pretty much what I was trying to express in my OP starting this thread, but far less articulately.

Thank you Mr Blanchflower. He seems to agree with my premise, that interest rate rises do not and will not fix it.

My own naïve opinion is if you pay the population £300bn in benefits to stay at home on the sofa for a pandemic, it will come out in the wash as inflation no matter what. And this is what we are seeing.

[servodude]

Former MPC Committee Member David/Danny Blanchflower....

https://en.wikipedia.org/wiki/David_Blanchflower

...has his thoughts on inflation

https://sites.dartmouth.edu/blanchflowe ... inflation/

Despite 12 successive rate increases and asset sales by the MPC which appear to know not what they do. Sadly, these rate rises have hardly any impact at all on inflation which was caused by supply chain issues after the pandemic, the Ukraine war and Brexit. Brexit and its devastating impact on supply chains, especially for food, is what sets the UK apart from every other country. This can’t be fixed by rate rises.

^^^This^^^ is pretty much what I was trying to express in my OP starting this thread, but far less articulately.

Thank you Mr Blanchflower. He seems to agree with my premise, that interest rate rises do not and will not fix it.

My own naïve opinion is if you pay the population £300bn in benefits to stay at home on the sofa for a pandemic, it will come out in the wash as inflation no matter what. And this is what we are seeing.

True...
But if you have a system where you tell some guys to meet once a month to control inflation but all that they are allowed to do is change one notional rate what do you think will happen?

"Is there anything to be said for having another Mass?"
- I think is how something similar went in Father Ted

[Tedx]

^^^This^^^ is pretty much what I was trying to express in my OP starting this thread, but far less articulately.

Thank you Mr Blanchflower. He seems to agree with my premise, that interest rate rises do not and will not fix it.

My own naïve opinion is if you pay the population £300bn in benefits to stay at home on the sofa for a pandemic, it will come out in the wash as inflation no matter what. And this is what we are seeing.

True...
But if you have a system where you tell some guys to meet once a month to control inflation but all that they are allowed to do is change one notional rate what do you think will happen?

"Is there anything to be said for having another Mass?"
- I think is how something similar went in Father Ted

Exactly. But why change the notional rate at all? Did they want to be seen to be doing something? Also, will they have the balls to admit they might be wrong?

[servodude]

True...
But if you have a system where you tell some guys to meet once a month to control inflation but all that they are allowed to do is change one notional rate what do you think will happen?

"Is there anything to be said for having another Mass?"
- I think is how something similar went in Father Ted

Exactly. But why change the notional rate at all? Did they want to be seen to be doing something? Also, will they have the balls to admit they might be wrong?

Yes
I think they do
I think they have to look "reactive", "capable", "confident", "strong"
But really it's like season 2 of Lost - they just keep pushing the button because they've been told to
To be fair though, it really got messed up when they stopped pushing that

[GoSeigen]

Former MPC Committee Member David/Danny Blanchflower....

https://en.wikipedia.org/wiki/David_Blanchflower

...has his thoughts on inflation

https://sites.dartmouth.edu/blanchflowe ... inflation/

Despite 12 successive rate increases and asset sales by the MPC which appear to know not what they do. Sadly, these rate rises have hardly any impact at all on inflation which was caused by supply chain issues after the pandemic, the Ukraine war and Brexit. Brexit and its devastating impact on supply chains, especially for food, is what sets the UK apart from every other country. This can’t be fixed by rate rises.

^^^This^^^ is pretty much what I was trying to express in my OP starting this thread, but far less articulately.

Thank you Mr Blanchflower. He seems to agree with my premise, that interest rate rises do not and will not fix it.

My own naïve opinion is if you pay the population £300bn in benefits to stay at home on the sofa for a pandemic, it will come out in the wash as inflation no matter what. And this is what we are seeing.

That's not what he said though. He said the rate rises so far have been ineffective, and hardly surprising as they have been tardy and cautious. Which is also not surprising because few have been planning for this eventuality. He also said rate rises could not fix Brexit. That is a different discussion. As is the one about the Treasury not being entirely unhelpful for 13 years

Blannchflower expects inflation to fall anyway, despite the "ineffective" rise in interest rates, but pointedly does not say whether they will return to the 2% target in any appreciable time. If he accuses the MPC of being in a state of confusion I think there are a few fingers pointing back at himself.

I do however agree that shutting down the economy and paying people to do SFA for best part of a couple of years was a key contributing factor to inflation. Lockdowns were supposed to be short-lived and purely to give breathing space to properly prepare health services. Unfortunately the mission drifted with rather predictable consequences.

There's also a severe lack of focus in what everyone is up to. Two major recent problems (IMO) have been resources consumption (world population size * per capita resource use integrated over that population) and CO2 output. The two are closely related. Positive actions to fix them are population reduction, demand (resource use) reduction and levelling out of demand (reducing excessive consumption of the wealthy and affording a better of standard of living to the poor). Yet we hear strong wining from certain quarters about 1. increasing energy prices, 2. how we need to encourage more babies 3. that we cannot allow the poor to take a share of our wealth (anti immigration etc) 4. blaming the poor for contributing to CO2 problem because they aspire to be like the wealthy (how dare they?).

When ordinary people are so confused and self-serving in their thinking it's not surprising that policy makers are too.

GS

[Tedx]

I suspect the middle ground now is where the Fed is at.

Ok, we've raised rates umpteen times in a row and we know that interest raises can take up to 18 months to work though, so lets pause a moment. Give the markets (particularly mortgage lenders) a bit of stability.

Basically, we've done all we can. For now.

[tjh290633]

I suspect the middle ground now is where the Fed is at.

Ok, we've raised rates umpteen times in a row and we know that interest raises can take up to 18 months to work though, so lets pause a moment. Give the markets (particularly mortgage lenders) a bit of stability.

Basically, we've done all we can. For now.

I think we need to catch up with the Fed before thinking of a pause. The MPC have been behind the curve for far too long.

TJH

[dealtn]

I suspect the middle ground now is where the Fed is at.

Ok, we've raised rates umpteen times in a row and we know that interest raises can take up to 18 months to work though, so lets pause a moment. Give the markets (particularly mortgage lenders) a bit of stability.

Basically, we've done all we can. For now.

I think we need to catch up with the Fed before thinking of a pause. The MPC have been behind the curve for far too long.

TJH

Which you keep saying but not acknowledging the UK moved first and has also tightened policy through QE reversal. Perhaps you can flesh out your argument here and provide some evidence to back it up?

[Tara]

I've just checked my first flat in Edinburgh:
Bought it in Sept 2002 (on a 102% graduate mortgage)
- sold in May 2005 for a gain (according to Rightmove) of 38%

Doesn't that seems quite frothy? It was in Abbeyhill.

I've mentioned earlier in this thread about the next place ("lower-villa" Carrick Knowe way). Again on RightMove we made 38% - this time in exactly 3 years. And the next chap loses 8% over 8 years.

I'm not sure if frothy is meant to just mean a bit bubble-y or insubstantial (without basis) or variable??
- but my experience of Embra at that time was "this is nuts, it can't last; we need to get out and move to Australia before we're trapped!! The schools here can't cope"
along with "I can't imagine them getting trams here!" (Our office was based off Shandwick Pl in Queensferry St Lane)

-sd

It was an "as frothy" rather than a "frothy" comment, a relative term rather than an absolute.

Certainly Edinburgh tends not to experience the bigger drops, New Town tends to be rock solid, as you move out less solid until say Dalkeith (where my nephew stayed in negative equity for years post 2007) where prices can and do yo yo.

I should mention the property we bought back in 1997 we still own, I suspect if we sold the gain today would be circa 375%( SP now nearly 5 times what we paid), but this is really not that uncommon, the Edinburgh property my father bought in 1967 for £6,750 he sold for £50,000 in 1981/82 (should have been £60k but found some dry rot) ,last time it was for sale circa 5 years back it was o/o £850,000 and I expect today it would easily be o/o £1m (Three storey end terrace house in Learmonth Place)

Significant price escalation has been with the Edinburgh market certainly since the late 1950s/mid 1960s, it is not new.

This is a good example of just how absurd UK house prices have become.

So in 1967 someone on average UK earnings of about £1,000 could have bought a nice Edinburgh property for about 6x the average UK salary.

And now in 2023 that same property will cost about 30x the average UK salary.

So long as people keep feeling “richer” every year through ever rising UK house prices, it will be very difficult to get UK inflation under control.

Inflation in the UK will not be properly controlled until UK house prices are strangled, negative equity is routine, and UK house prices have fallen by at least 30% or 40% in real terms.

[tjh290633]

I think we need to catch up with the Fed before thinking of a pause. The MPC have been behind the curve for far too long.

TJH

Which you keep saying but not acknowledging the UK moved first and has also tightened policy through QE reversal. Perhaps you can flesh out your argument here and provide some evidence to back it up?

I don't need to. Look at the respective rates.

TJH

[TheMotorcycleBoy]

Does raising base rates really reduce inflation?

Yes. It suppresses the desire of consumers to borrow money and hence reduces its creation by lending banks.

[Tedx]

So why didnt central banks put all their rates up to 5% straightaway?

Everyone says this should be the 'natural rate' (give or take a wee bit here and there).

[AsleepInYorkshire]

So why didnt central banks put all their rates up to 5% straightaway?

Everyone says this should be the 'natural rate' (give or take a wee bit here and there).

Sledgehammer to crack a nut ... the estimates of where interest rates are heading are just that, so they nudge up in small increments and watch, before they do it again or wait.

AiY(D)

[scotview]

So why didnt central banks put all their rates up to 5% straightaway?

Everyone says this should be the 'natural rate' (give or take a wee bit here and there).

Sledgehammer to crack a nut ... the estimates of where interest rates are heading are just that, so they nudge up in small increments and watch, before they do it again or wait.

AiY(D)

Well 8.5% by September......how do you like them apples ?

[Tedx]

But they didnt wait and see between increments did they?

Every month, chip, chip, chip chip.

Sergei Bubka used to get $10,000 everytime he broke the world pole vault record. So he broke it by the tiniest amount each meeting. I think the MPC just enjoyed the monthly glory (or bi-monthly I think)

Everyone knew he could jump 20cm higher just as everyone who was smart knew the 'natural' interest rate was 5%.

Like Bubka I think the MPC just enjoyed the monthly glory (or bi-monthly I think) and the feeling of being important....relevant, maybe.

[AsleepInYorkshire]

But they didnt wait and see between increments did they?

Every month, chip, chip, chip chip.

Sergei Bubka used to get $10,000 everytime he broke the world pole vault record. So he broke it by the tiniest amount each meeting. I think the MPC just enjoyed the monthly glory (or bi-monthly I think)

Everyone knew he could jump 20cm higher just as everyone who was smart knew the 'natural' interest rate was 5%.

Like Bubka I think the MPC just enjoyed the monthly glory (or bi-monthly I think) and the feeling of being important....relevant, maybe.

Bank of England - Interest rates and Bank Rate

Overall, we know that if we lower interest rates, this tends to increase spending and if we raise rates this tends to reduce spending. So, to meet our inflation target, we need to judge how much people intend to save and spend given the current interest rates. For example, if people start spending too little, that will reduce business and cause people to lose their jobs. In that case we may cut interest rates to help support spending.

AiY(D)