Interest Rate Rise - a good idea ?

[yorksrob]

The Bank of England has just announced a 0.2% interest rate rise.

Recession: Was the Bank of England right to raise interest rates?

The Bank of England warns the UK will fall into recession as it raises interest rates from 1.25% to 1.75%.

www.bbc.co.uk

It is the most piercing of warning sirens set off by the Bank of England.
It announced the largest interest rate rise in a quarter of a century, in an attempt to temper a peak in inflation of 13%.
But it is its prediction of a recession as long as the great financial crisis and as deep as that seen in the early 1990s that is the big shock here.

• UK will fall into recession this year, warns Bank
• How does an interest rate rise affect me?

The Bank thinks that energy bills hitting nearly £300 per month on average, treble their level of a year before, will plunge the economy in the final quarter of this year into a recession.
If global energy costs remain where they are, that recession will then last the whole of next year, with inflation barely below 10% even in a year's time.
This is a proper full fat recession now being predicted by the Bank, and at the same time a 42-year high in the rate of inflation.
It is a textbook example of the combination of stagnation of the economy and high inflation - stagflation.
It obviously will raise questions as to why rates are being hiked into a recession, at a time when consumers are already pulling back from spending.
Mortgage costs are now soaring. Markets expect further rises in the base rate - taking it up to 3% - even during this predicted recession.
That affects those on variable rates, and about half of those set to come off their fixed rate mortgages in the coming couple of years.
The Bank's answer will be that rates are still low by historic standards, and they just cannot provide further fuel for these extraordinary but hopefully temporary high inflation rates, to last for years.
But make no mistake, a forecast such as this, would mean a wrecking ball to the forecasts for government borrowing. Tax revenues would plummet, and spending would increase naturally.
Forget about the £30bn room for manoeuvre or "fiscal headroom" we heard so much about.
But with this level of energy shock, whoever is in power, would need to prepare further massive consumer support, and feasibly, rescue schemes for the energy sector too.
I cannot recall the Bank of England predicting a recession of this length in advance of the event.
And that certainly has not happened in the middle of the selection of a new prime minister. It is the sort of forecast that in other circumstances might have prompted an immediate emergency Budget.
It may just upend all the plans we have heard so much about.

Do we think this is a good idea ?

Personally I think it's lunacy. The BoE has admitted that we are about to enter a very large recession, due to a large chunk of spending capacity being taken out of householders and businesses budgets due to fuel rises.

Why is the country pursuing a policy that will take further money out of peoples budgets when we ned to be putting money into peoples budgets ? It's not as though such action will quell inflation, given that the inflation we are suffering is largely due to an over reliance on untrustworthy foreign powers for our resources.

It's as though our economists aren't able to analyse what is actually causing inflation, or don't actually seem to have any other policy tools.

 

[Busaholic]

Unfortunately it was inevitable, and probably should have been raised to 2%. The U.S. recently raised rates by three quarters of a cent, which was unprecedented in modern times, but the Bank of England top brass are much less independent than their counterparts since U.K. governments started playing a huge hand in the appointment of their Governors.

 

[Bletchleyite]

The natural level of interest rates is 3-5%, and they'll be back up there at some point.

But that aside, I do question it slightly as whacking peoples' mortgages up is going to do the opposite of help, and this isn't classic inflation that would be helped by a rise, so I think overall it was probably a bad idea. This is not a time to be encouraging saving instead of spending, which is the mechanism by which increasing interest rates reduces inflation by deliberately slowing the economy. If anything, they should be reduced so mortgages reduce, alongside a mandation to reduce rents accordingly.

 

[Xavi]

Read https://www.taxresearch.org.uk/Blog/
and you’ll understand BofE and government have lost control. Economic disaster looming.

 

[Wynd]

No. A recession is already upon us, and so the economy is going to contract due to falling spending by us, the public.

Secondly, inflation is primarily imported. We dont control the price of oil and gas, and so there is little we can do to fight it.

Thirdly, the UK economy was already incredibly fragile. To think that increasing the price of money is going to help anything is wrong headed.

This is easily one of the biggest policy failures we are likely to see from the BOE in our lifetimes.

Inflation will eventually burn itself out. Yes we will all be poorer as a result, but this is the result of significant expansions in the money supply over 15 years with little to no consummate growth in goods and services.

Inflation is so bad here because we already had price increases and falling trade due to brexit, then came the energy prices on top.

Make no mistake about this, a recession is being exacerbated by tightening monetary policy. The BOE have openly admitted unemployment is a price they are willing to pay to try and control something they cant control, inflation.

Its madness, utter madness.

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

Read https://www.taxresearch.org.uk/Blog/
and you’ll understand BofE and government have lost control. Economic disaster looming.

This is accurate.

 

[Dai Corner]

Read https://www.taxresearch.org.uk/Blog/
and you’ll understand BofE and government have lost control. Economic disaster looming.

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

Richard Murphy (born 21 March 1958) is a British chartered accountant and political economist who campaigns on issues of tax avoidance and tax evasion.[1] He advises the Trades Union Congress on economics and taxation, and founded the Tax Justice Network. He is a Professor of Accounting Practice at University of Sheffield Management School.

 

[brad465]

Interest rates should never have stayed so slow in the first place. The replacement to neoliberalism that nearly died a death in 2008 can't come soon enough.

 

[Mcr Warrior]

The Bank of England has just announced a 0.2% interest rate rise.

Recession: Was the Bank of England right to raise interest rates?

The Bank of England warns the UK will fall into recession as it raises interest rates from 1.25% to 1.75%.

www.bbc.co.uk

Is that not an increase of 0.50% per annum?

 

[Magdalia]

The natural level of interest rates is 3-5%, and they'll be back up there at some point.

There's no such thing as a natural level of interest rates. 3-5% interest rates are consistent with inflation near to 2% and a small real return for savers. Policy makers try to achieve that, but are easily thrown off course by economic shocks. The 2008 banking crisis, covid and war in Ukraine have all been big economic shocks.

 

[MikeWM]

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.

 

[najaB]

It's as though our economists aren't able to analyse what is actually causing inflation, or don't actually seem to have any other policy tools.

Well, the BoE is forbidden from mentioning the B-word...

 

[Bletchleyite]

Well, the BoE is forbidden from mentioning the B-word...

For all the B-word was a bad thing overall, I don't think it is the main cause of this issue.

 

[Broucek]

This inflation is primarily imported and exacerbated by labour shortages. It's the same around the developed world so it's not been caused by Brexit (although that may have slightly amplified things).

It's not obvious to me how higher interest rates will tackle those causes. They may put something of a brake on house prices but surely too little too late...

 

[najaB]

For all the B-word was a bad thing overall, I don't think it is the main cause of this issue.

The main cause of inflation, no. The main cause of our sluggish growth...

Well, I'm not going to say it's Brexit but the UK is forecast to have the lowest growth (0%) of any major economy in 2023, as compared to the Euro area (1.6%), United States (1.2%), Canada (2.6%), etc. The only major economy projected to do worse than ours is Russia (-4.1%).

Source: https://www.oecd.org/economic-outlook/

 

[Busaholic]

For all the B-word was a bad thing overall, I don't think it is the main cause of this issue.

Even on their own figures it is the underlying cause, as it represented an underlying 3% to 5% at a time when no other European country was experiencing such pressures, for the obvious reason that none of them were turning their backs on their neighbours economically speaking. Then when you factor in Russia's invasion of Ukraine, and the resultant energy shortfalls, you get most of the rest of it. Even there, we were lied to, government reassurances that our reliance on Russian gas was minimal, and therefore unconcerning, came thick and fast at the beginning of the year, whereas we had allowed our gas storage facilities to be mothballed (Sunak playing a large part in that) in an act of folly that had been signposted by many business and economic correspondents well in advance.

 

[Broucek]

I'm a remain voter but I'm perplexed at the determination to blame the current inflation on Brexit. The materials shortages, energy costs, shipping costs and labour shortages are the same EVERYWHERE. Brexit is probably not helping but if it's the main cause, why are things pretty much the same in Sweden?

 

[najaB]

I'm a remain voter but I'm perplexed at the determination to blame the current inflation on Brexit. The materials shortages, energy costs, shipping costs and labour shortages are the same EVERYWHERE. Brexit is probably not helping but if it's the main cause, why are things pretty much the same in Sweden?

As I noted above, there are inflationary pressures everywhere and inflation is above target pretty much everywhere.

However, inflation isn't a huge problem as long as there is GDP growth to support higher wages. The UK is pretty much alone among developed economies as having a 0% growth forecast for 2023. The only country with a lower growth forecast is Russia.

 

[johncrossley]

Make no mistake about this, a recession is being exacerbated by tightening monetary policy. The BOE have openly admitted unemployment is a price they are willing to pay to try and control something they cant control, inflation.

Is high unemployment actually a given? Under normal rules, a recession leads to high unemployment, but at the moment there are unprecedented staff shortages. So maybe unemployment will actually remain at quite low levels despite recession? The record low unemployment and acute staff shortages are as a result of a shrinking workforce, something that we haven't had in previous recessions.

 

[Bald Rick]

Yes, they were right to do it.

 

[jfollows]

Yes, it was the right thing to do, but too late, and when you consider that 12 months ago the Bank of England was forecasting inflation would peak at 4%, but is now saying it'll peak at 13%, what does this make me believe? I know I didn't believe the 4% figure a year ago.
In due course there will be repercussions, mainly by politicians trying to increase power by taking back what was given to the Bank of England by Gordon Brown.
But Boris Johnson was happy to latch on to the 4% figure last year, wasn't he?

 

[Dai Corner]

However, inflation isn't a huge problem as long as there is GDP growth to support higher wages. The UK is pretty much alone among developed economies as having a 0% growth forecast for 2023. The only country with a lower growth forecast is Russia.

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

 

[Yew]

I struggle to see how changing interest rates will effect the lockdowns in China restricting supply, or the Russian oil embargos pushing up prices.

Messing with domestic economic policy didn't relieve the Oil crisis in the 70's. But equally, if they want to ruin the supposed reputation of neoliberal economics, at least there would be an up side!

 

[yorksrob]

No. A recession is already upon us, and so the economy is going to contract due to falling spending by us, the public.

Secondly, inflation is primarily imported. We dont control the price of oil and gas, and so there is little we can do to fight it.

Thirdly, the UK economy was already incredibly fragile. To think that increasing the price of money is going to help anything is wrong headed.

This is easily one of the biggest policy failures we are likely to see from the BOE in our lifetimes.

Inflation will eventually burn itself out. Yes we will all be poorer as a result, but this is the result of significant expansions in the money supply over 15 years with little to no consummate growth in goods and services.

Inflation is so bad here because we already had price increases and falling trade due to brexit, then came the energy prices on top.

Make no mistake about this, a recession is being exacerbated by tightening monetary policy. The BOE have openly admitted unemployment is a price they are willing to pay to try and control something they cant control, inflation.

Its madness, utter madness.

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



This is accurate.

Yes, this is my reading of the situation.

Traditionally increasing interest rates works by cutting demand and "damping down" an overheating economy.

Our economy isn't overheating by any stretch of the imagination, so how damping it down is going to help anything is anyones guess (I'd be interested to know the mechanics of how they think it will work in an under-heated economy).

Is that not an increase of 0.50% per annum?

I thought it was in one go.

Well, the BoE is forbidden from mentioning the B-word...

Those Brexit labour and supply chain related shortages have undoubtedly had an inflationary effect. I don't think that's the primary reason for this immediate crisis though.

 

[Bald Rick]

There are two reasons for doing what has been done today.

Firstly the direct impact, which will take some months and years to feed through into the economy.

Secondly the signal it sends to the wider market. And that signal is that the economy is in trouble. That has helped push the oil price to a 6 month low today (Brent at $93, it was $124 in June) and the dollar is back to where it was in May. That will have a fairly swift (2-3 weeks) effect on fuel prices, which will help put a lid on inflation Very quickly. I’m willing to bet that inflation tops out at a figure lower than currently forecast, and then starts dropping rapidly.

The biggest factor hurting the economy (other than Brexit, obvs) is Gas prices. There is a very unusual distortion in the forward pricing of gas and electricity futures, which is causing all sorts of unusual behaviours in the market. Right now we are burning Qatari gas at a furious rate to generate electricity to send to France, Holland, Belgium, even Norway, at a huge profit.

A lot will depend on how cold the European winter is. Putin is praying for a big chill. Everyone else (except those related to ski resorts) is praying for a warm one.

 

[johncrossley]

Other major central banks have increased interest rates, for example the ECB, the Fed and central banks in Canada, Australia and Switzerland.

 

[Bald Rick]

Other major central banks have increased interest rates, for example the ECB, the Fed and central banks in Canada, Australia and Switzerland.

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

 

[yorksrob]

There are two reasons for doing what has been done today.

Firstly the direct impact, which will take some months and years to feed through into the economy.

Secondly the signal it sends to the wider market. And that signal is that the economy is in trouble. That has helped push the oil price to a 6 month low today (Brent at $93, it was $124 in June) and the dollar is back to where it was in May. That will have a fairly swift (2-3 weeks) effect on fuel prices, which will help put a lid on inflation Very quickly. I’m willing to bet that inflation tops out at a figure lower than currently forecast, and then starts dropping rapidly.

The biggest factor hurting the economy (other than Brexit, obvs) is Gas prices. There is a very unusual distortion in the forward pricing of gas and electricity futures, which is causing all sorts of unusual behaviours in the market. Right now we are burning Qatari gas at a furious rate to generate electricity to send to France, Holland, Belgium, even Norway, at a huge profit.

A lot will depend on how cold the European winter is. Putin is praying for a big chill. Everyone else (except those related to ski resorts) is praying for a warm one.

That's an interesting aspect of it. One wonders why these people in the wider market needed an interest rate to realise the economy has problems.

 

[brad465]

Raising interest rates increases the value of the £, which in turn makes imports in other currencies cheaper. Even if external factors are less affected by our interest rate rises, the impact is not zero.

 

[yorksrob]

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

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

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

Raising interest rates increases the value of the £, which in turn makes imports in other currencies cheaper. Even if external factors are less affected by our interest rate rises, the impact is not zero.

It will be interesting to see whether that's enough to offset the missing money from household/business budgets.

 

[brad465]

A lot will depend on how cold the European winter is. Putin is praying for a big chill. Everyone else (except those related to ski resorts) is praying for a warm one.

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.