Interest Rate Rise - a good idea ?

[Snow1964]

I'd say in general interest rates ought to be higher than they have been since 2008 [1], but this doesn't appear to be the time to do it. My (admittedly rather limited) understanding of economics points to the inflationary pressures at the moment being entirely independent from any effects that raising interest rates will have.

Also, I think the Government should take back the power to set interest rates from the BoE. Or to be more precise, the power should never have been given away by Gordon Brown in the first place.


[1] though given I had a mortgage to pay, I'm not complaining too much from a selfish perspective And now I've effectively paid it off, I'm quite happy personally for savings rates to rise again too. But I acknowledge my timing here was rather fortunate.

Regarding mortgages, most people with them have benefited since 2009, or about half the length of a typical 25 year mortgage

Yes it is tougher for those taking them out now, but interest rates are still lower than for those who took them out in 1980s, 1990s (and upto 2008).

Let’s be honest, most Brits in 1950s & 1960s bought British built goods, and used British fuel to heat their homes. Importing was a way of getting goods from where labour is cheap, and people accepted risk of importing fuel with volatile prices.

My personal view (as someone with an Economics degree) is interest rates should have risen to nearer 2.5% and Bank of England has been too slow to put the brakes on inflation. Yes it squeezes the economy, but it is too far out of balance with Government offering fuel subsidies (and various benefits) rather than ensuring the low paid get paid better. The economy needs to grow to create jobs that people can live on, not subsidise people to take low paid jobs by paying top up benefits.

 

[Yew]

indeed. Yet according to some it appears that all the world‘s finest economists are wrong.

Are these the same fine individuals who piloted us into this mess?

 

[Bald Rick]

Well, the brightest minds in the market seemed to be under the impression that everything was "honkey-dorey" up until now, so who knows !

To be fair they’ve been signalling that rises were coming since last year. Hence why I fixed my mortgage last October. At a most favourable rate.

 

[Yew]

My personal view (as someone with an Economics degree) is interest rates should have risen to nearer 2.5% and Bank of England has been too slow to put the brakes on inflation. Yes it squeezes the economy, but it is too far out of balance with Government offering fuel subsidies (and various benefits) rather than ensuring the low paid get paid better. The economy needs to grow to create jobs that people can live on, not subsidise people to take low paid jobs by paying top up benefits.

And how exactly do you plan to grow the economy, when rising intrest rates increases the cost of borrowing, increases the amount people spend on servicing debt, and signals volatility. Those don't seem like ideal conditions to start a business, or for an existing business to make a large investment.

If the "Captains of Industry" are scared of the swirling maelstrom of random market forces - perhaps it is time for the government to take an organised approach that puts working people ahead of capitalist speculators.

 

[Bald Rick]

Are these the same fine individuals who piloted us into this mess?

No.

 

[Magdalia]

indeed. Yet according to some it appears that all the world‘s finest economists are wrong.

As Her Maj said after the 2008 banking crisis, why did nobody see it coming?

Actually in 2008 there were 3 people who saw it coming: Vince Cable, Gillian Tett and someone else I've forgotten. Most of the world's finest economists did not see it coming.

In the aftermath of the 2008 banking crisis, very few of the world's finest economists worked out that quantitative easing would create an asset price bubble without feeding through into the real economy. Neither did they foresee that, having created an asset price bubble, quantitative tightening would lead to an asset price crash, which is why they have never dared to do it.

A year ago the finest economists in the Bank of England had a 4% inflation forecast.

The world's finest economists are doing fine.

 

[yorksrob]

To be fair they’ve been signalling that rises were coming since last year. Hence why I fixed my mortgage last October. At a most favourable rate.

It doesn't seem to have had much impact on these markets though. Not until now anyway.

I've still got a few years to run on mine fortunately, however I'll be dissappointed if some of my favourite businesses go under due to a lack of disposable income amongst the general population.

 

[TheBigD]

To be fair they’ve been signalling that rises were coming since last year. Hence why I fixed my mortgage last October. At a most favourable rate.

Fixed mine for back in January at 1.64% with no fee) for 5 years. I doubt I'll get anywhere near that rate in May 2027 when the current deal expires.

 

[gingerheid]

There's no good answer, but I think raising interest rates was unavoidable for the reasons others have given.

Also, interest is not just an inducement to save as an alternative to spending money, a measurement of cost of borrowing, or a means of influencing the value of currency (and therefore cost of exports). It is also the basis of income for people including not particularly wealthy future pensioners (and also the ultra rich, but I doubt we care about them so much). They just can't be allowed to become too out of step with inflation (which they already are).

 

[Yew]

It is also the basis of income for people including not particularly wealthy future pensioners (and also the ultra rich, but I doubt we care about them so much).

And how many not particularly wealthy working people are we throwing under the bus for said pensioners?

 

[gingerheid]

And how many not particularly wealthy working people are we throwing under the bus for said pensioners?

a) The alternative is probably throwing everyone under a lorry.
b) *future* pensioners, who are currently not particularly wealthy working people.

 

[Dai Corner]

And how many not particularly wealthy working people are we throwing under the bus for said pensioners?

Aren't working people future pensioners?

And how many of them will lose out because their virtue signalling pension funds sold their shares in oil and gas producers?

 

[Yew]

Aren't working people future pensioners?

I suppose you'd have to as @gingerheid what timescales he was thinking of. But I imagine that if you were already relying on foodbanks and living paycheck-to-paycheck, a small amount extra on a pension that you might die before you collect is the last thing on your mind - especially if your landlord puts up the rent to cover the additional costs of their mortgage.

 

[Xavi]

Note that the author, Richard Murphy, is a tax and economic policy campaigner and adviser to the TUC (Trade Union Congress). Other blogs to confirm different biases are available.

Richard Murphy (tax campaigner) - Wikipedia

en.wikipedia.org

Does that make him wrong?

 

[Dai Corner]

Does that make him wrong?

Not necessarily. I was just pointing out that it's the opinion of one man with an agenda, not everyone will agree with him and that it's good practice to read a range of reports before reaching a conclusion.

== Doublepost prevention - post automatically merged: 4 Aug 2022 ==

I suppose you'd have to as @gingerheid what timescales he was thinking of. But I imagine that if you were already relying on foodbanks and living paycheck-to-paycheck, a small amount extra on a pension that you might die before you collect is the last thing on your mind - especially if your landlord puts up the rent to cover the additional costs of their mortgage.

Perhaps he was thinking of those who had thought about the future and managed to build up a pension fund when times were better but are now seeing it shrink in value due to high inflation?

 

[philosopher]

A 13-14 Winter would be an interesting one if repeated this winter: lots of flooding, but also relatively mild with ample wind power potential.

A cold winter, such as one similar to 09-10 or 10-11 on the other hand would be really bad news given the current energy situation. Such a winter I suspect would lead to very high inflation rates and turn what still looks like to be a mild recession quite a severe one.

 

[najaB]

It is if you have savings and are receiving a negative real rate of interest and/or have a non-index linked pension.

Indeed. I was speaking in the general case for the country, rather that specific cases.

 

[GB]

Yes it is tougher for those taking them out now, but interest rates are still lower than for those who took them out in 1980s, 1990s (and upto 2008).

While the average wage was lower back then, how much was the average house? The average property price is about 9 times that of the average salary.
How much was the cost of fuel, food, heating and general standard of living?

 

[yorksrob]

My personal view (as someone with an Economics degree) is interest rates should have risen to nearer 2.5% and Bank of England has been too slow to put the brakes on inflation. Yes it squeezes the economy, but it is too far out of balance with Government offering fuel subsidies (and various benefits) rather than ensuring the low paid get paid better. The economy needs to grow to create jobs that people can live on, not subsidise people to take low paid jobs by paying top up benefits.

The economy's not going to grow if you keep taking money out of household budgets. How are they intending to grow the economy. Exports ? They've just made exports more expensive.

A year long recession ? It doesn't feel as though we've been out of recession since 2008 frankly.

 

[deltic]

Interest rates should probably have risen some time ago as a tight labour market was seeing large wage increases in some sectors feeding through into higher prices and the start of a wage - price spiral. As mentioned upthread the Bank of England was already forecasting inflation of 4% a year ago. (No one forecast war so the fact inflation is now way ahead of that is not the Bank's fault - in reality no-one can forecast the future accurately and pretending we can leads us into lots of errors.)

There are plenty of economists who recognised that quantitative easing would lead to asset bubbles (eg staggering house price inflation). Many would also argue that low interest rates have led to the maintenance of a large number of zombie businesses which have held down productivity levels and that rising interest rates will at last kill them off.

While rising interest rates are unwelcome to many in reality borrowers have never had it so good. The real value of their debt is falling rapidly and real interest rates are negative.

How long any recession lasts is down to factors outside our control ie the war in Ukraine and possibly now a war over Taiwan.

 

[Yew]

How long any recession lasts is down to factors outside our control ie the war in Ukraine and possibly now a war over Taiwan.

So in the mean time, the Governor of the Bank of England uses it as cover to make choices that benefit investment companies, and then promptly follow his predecessor, Mark carney, into a cushy job at one?

 

[yorksrob]

Interest rates should probably have risen some time ago as a tight labour market was seeing large wage increases in some sectors feeding through into higher prices and the start of a wage - price spiral. As mentioned upthread the Bank of England was already forecasting inflation of 4% a year ago. (No one forecast war so the fact inflation is now way ahead of that is not the Bank's fault - in reality no-one can forecast the future accurately and pretending we can leads us into lots of errors.)

There are plenty of economists who recognised that quantitative easing would lead to asset bubbles (eg staggering house price inflation). Many would also argue that low interest rates have led to the maintenance of a large number of zombie businesses which have held down productivity levels and that rising interest rates will at last kill them off.

While rising interest rates are unwelcome to many in reality borrowers have never had it so good. The real value of their debt is falling rapidly and real interest rates are negative.

How long any recession lasts is down to factors outside our control ie the war in Ukraine and possibly now a war over Taiwan.

What exactly do you mean by "real" interest rates ?

 

[Broucek]

What exactly do you mean by "real" interest rates ?

Interest rate less inflation (it's a technical term, not a suggestion that there's anything shady about the rates)

 

[yorksrob]

Interest rate less inflation (it's a technical term, not a suggestion that there's anything shady about the rates)

Ah thanks.

I don't see what relevance such a metric has for household spending power - people will end up paying the one on top of the other.

 

[Magdalia]

What exactly do you mean by "real" interest rates ?

Real interest rates are positive if higher than inflation, negative if less than inflation.

A simple example may help. Say you had £1000 of savings in the bank, and inflation is 10%. After a year you need to have £1100 in the bank for your savings to be worth the same amount in "real terms", because prices are 10% higher. If your bank only pays you 2%, then at the end of the year you only have £1020 and are £80 worse off.

It works the same in reverse for borrowers, but only if their income rises in line with inflation.

Positive real interest rates transfer resources from borrowers to savers, negative real interest rates transfer resources from savers to borrowers.

 

[yorksrob]

Real interest rates are positive if higher than inflation, negative if less than inflation.

A simple example may help. Say you had £1000 of savings in the bank, and inflation is 10%. After a year you need to have £1100 in the bank for your savings to be worth the same amount in "real terms", because prices are 10% higher. If your bank only pays you 2%, then at the end of the year you only have £1020 and are £80 worse off.

It works the same in reverse for borrowers, but only if their income rises in line with inflation.

Positive real interest rates transfer resources from borrowers to savers, negative real interest rates transfer resources from savers to borrowers.

As you say, only if income keeps up in line with inflation.

 

[Dai Corner]

Ah thanks.

I don't see what relevance such a metric has for household spending power - people will end up paying the one on top of the other.

The significance is that at the moment real interest rates are less than zero. Borrowers are being paid to have banks' money and savers are paying to let the banks have theirs. Wealth is quietly being transferred from the latter to the former.

Magdalia explains it better than me.

From a personal point of view, my savings are shrinking in value by about half of my annual pension. I should really spend my savings before they lose even more value, but that would stoke inflation if everyone in my position did it.....

 

[yorksrob]

Except in the real world, borrowers aren't being paid to have banks money. Everyone pays over the base rate.

 

[Dai Corner]

Except in the real world, borrowers aren't being paid to have banks money. Everyone pays over the base rate.

They are if you take inflation into account. A loan of £10,000 will be easier to pay off in a year's time as the value of a pound falls by 10%.

 

[Magdalia]

The economy's not going to grow if you keep taking money out of household budgets. How are they intending to grow the economy. Exports ? They've just made exports more expensive.

Consumers' expenditure is a big part of GDP, but there is also business investment, government expenditure and net exports.

In the UK there are big disadvantages in trying to boost the economy by boosting consumers' expenditure. One is that a lot of it leaks out of the UK because the spending is on imported goods, the economy that benefits is China not ours. Another is that a lot of it leaks out into asset price inflation particularly houses. Even if the boost goes into domestic goods and services, there's no growth if the suppliers of those goods and services just raise prices, and that's what is likely to happen because they can't get the staff.

== Doublepost prevention - post automatically merged: 5 Aug 2022 ==

Except in the real world, borrowers aren't being paid to have banks money. Everyone pays over the base rate.

But most borrowers are paying interest rates that are a lot less than the rate of inflation. The base rate is just a benchmark of the interest rate that the Bank of England pays to commercial banks.