Interest Rates
Posted: August 5th, 2022, 4:49 pm
by Leothebear
The reason the B of E gives for increasing rates is to dampen inflation. Surprise surprise, it is, after all the only tool in their box for that particular job.
To me however I cannot see that as a valid reason. The economy is already in danger of stagnating due to massive energy price increases. The only effect I can see of the rise is to push borrowers nearer the brink. Workers will be even more desperate for wage increases just to stay afloat.
Am I missing something here?
Re: Interest Rates
Posted: August 5th, 2022, 8:15 pm
by NotSure
I'm pretty thick when it comes to this stuff, but from the BoE's point of view, what does it matter whether it's "supply side" or "demand side". Either way, demand exceeds supply so prices rise.
The BoE cannot make stuff or mine stuff or sort out supply chains or stop wars, it can only try to control demand with IRs and also try to make the sure the pound does not plummet if others are rising rates which would add further price rises via imported inflation. Whether the supply demand imbalance is being called supply side or demand side seems neither here nor there to me. There would be no supply side issues if demand was lower.
Also, higher IRs incentivise saving and reduce the urge to spend on credit, though changing real IRs from -10% to -9.5% probably won't have much effect there.
QT is another option, but I guess has much the same effect. While headline IRs are unaffected, less demand for bonds means lower prices, higher yields hence less attractive borrowing and more attractive saving.
I appreciate some demand is considered inelastic, but is it really, in aggregate? When energy/food is cheap, there is no incentive to control one's use - buy an SUV or a Chelsea tractor and make loads of unnecessary trips at 75 mph, leave the heating at 23 C 24/7, eat the best ready made food Waitrose and M&S have to offer etc.
I just pity those that have already cut to the bone, but are also borrowed to the max on variable rates. But that is a situation anyone should try to avoid in the first place.
But as I say, I'm pretty thick when it comes to all this stuff.