Interest rates increased

Dirk Diggler said:
BBC News - UK interest rates rise to the highest since 2009

Could one of the forum's bucked teeth university educated know-it-alls explain why making things more expensive is the answer to the problems created by things being too expensive?

TIA
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www.economicshelp.org

Effect of raising interest rates - Economics Help

Explaining the effect of increased interest rates on households, firms and the wider economy - Higher rates tend to reduce demand, economic growth and inflation. Good news for savers, bad news for borrowers.
www.economicshelp.org www.economicshelp.org

Essentially the idea is to reduce people spending, and thus demand, which theoretically reduces prices that are demand/supply based.

Problem is with things that have constant demand, like standard cost of living items like food, electricity, etc.
 
Dirk Diggler said:
BBC News - UK interest rates rise to the highest since 2009

Could one of the forum's bucked teeth university educated know-it-alls explain why making things more expensive is the answer to the problems created by things being too expensive?

TIA
Click to expand...
It slows down borrowing which slows down investment. Plus there is an inverse relationship with bonds, but not going to get into that.

It is a way to play with the velocity of money slowing it down or speeding it up. This is how fast money is past on in the economy.

Now from here onwards it gets very complicated as you get into the mechanics of interest rises.
 
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Basically it makes the poorer even poorer and even the middle class tighten their belt, so reducing spending, so lowering demand on items and lowering prices/inflation. It will hurt the people must vulnerable hardest. Though to be fair interest rates have been ridiculously low for a very long time. Its just that they only raise them at times that people are suffering. So if you are poor, expect to be poorer.
 
Dirk Diggler said:
Could one of the forum's bucked teeth university educated know-it-alls explain why making things more expensive is the answer to the problems created by things being too expensive?
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I thought I had sufficient understanding of economics but I too see this as misplaced, so what do I know?

I wouldnt want to own (or work) in a business where the choice to buy or not is discretionary. The middle and below are not going to have any discretion to spend. The demand will be to eat dinner *and* heat your home.
 
As said it's used to increase cost of borrowing hence reducing spending thus bringing inflation down.

But as others have said with it being mainly energy and essential food prices its just going to run many into the ground

Rather than just screwing the poor it will be screwing the middle, especially those with hefty mortgages. Which are kind of unavoidable for most.
 
RockLobster said:
That’s understood although inflation is increasing because of energy, fuel and food price rises. How are people supposed to reduce their spending on essentials?
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I have added more to that.
There is push and pull inflation these are the types of ways which influence inflation.

I am all for rates being higher, I hope they get to 7 % base rate.
 
RockLobster said:
That’s understood although inflation is increasing because of energy, fuel and food price rises. How are people supposed to reduce their spending on essentials?
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Elasticity comes into play, see even more topics. This is about the demand and the changed to demand. But it gets deeper.
 
Interest rates are a pathetic way of controlling the economy but the boe can't do anything else.
 
Dirk Diggler said:
I hope your username checks out.
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It won't get to that. Would bring the country to its knees.

Just done a remortgage and took the early repay charge hit.

I have a typical newish mortgage on a typical house on a slightly above typical wage. Every 1 percent adds 100 pounds a month. That's significant for a lot of people. With all the house buying during covid there will be a swathe of people on 2 year fixes that will end right in the peak of this. They may well be jumping in rate by 2-3 percent. Which could easily mean 2-300 a month.


Getting to 5percent or more base rate is a game changer. Can't see it happening
 
Anyone, regardless of "social position" who is running things to the edge and has floating rate borrowing and no floating rate savings is squeezed. The bigger the principle the bigger the issue in general.

On a macro level, if you are a government it can make your fixed debt easier to sell but of course more expensive to service (if it's floating rate that is not always more expensive i.e. LIBOR+0.05BPS where LIBOR is currently 1% it may of course drop later).

In the real world though, I do feel for those who have only ever known low interest rates, not for any other reason than unless you dilligently do your sums (which let's face it, is normally second to can I afford it now?) you are going to get cash shock as your borrowings get more expensive to service, and at this time, as the Tories (IIRC) said a while back is a "double whammy".

Banks etc. project interest rate risk with something called a BP01, which shows the impact of single basis point rises (that's 0.01%) in interest rate rises. They are able to hedge that (or alternatively) gamble on it with Interest Rate Swaps. As a punter though you can't do that.
 
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Dirk Diggler said:
I hope your username checks out.
:(
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I hope I am right, the rates have been artificially low for a very long time. Damaging the balance of the economy and making having a job not worth the effort to work among other areas of impact.
Work does not pay anymore, then we have fiscal drag which has made things even worse, but nobody complains about it which is very important for the worker.

This is another mechanism they used for inflation control which is not obvious to people.

Workers are being shafted at both ends without even knowing it.




In
 
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