Interest Rates and Inflation

[Stive Pesley]

45 minutes ago, sage said:

Interest rates going up really do highlight another massive issue, the horrific house prices.

We simply haven't built enough houses because it suits housebuilders not to build enough and no one in govt has the balls to deal with them.

The other thing about rising interest rates is that it will impact renters too - even though they don't (can't afford to ) have a mortgage

The historic low interest rates laid the groundwork for a huge amount of property investors to pump money into Buy To Let. Understandable, given that savings accounts had pointlessly low rates, but now - they're all faced with mortgage rate hikes across their "portfolio" and they don't want to take the pain, so they will just pass it onto the tenants in the form of rent rises

But to answer @G STAR RAM's initial question - I'm in agreement, it doesn't feel like interest rates are an effective tool in the current economic crisis, and my fear is that it will actually make things worse by widening the gap between those who can afford to ride it out (and actually benefit from higher rates) and those who are being crushed by it. 😔

[sage]

Interesting non-party political analysis

[G STAR RAM]

17 hours ago, Leeds Ram said:

There's nothing sinister behind it. We're just seeing the end of a 13-year-old administration out of ideas facing a structural economic crisis around 15 years in the making. Everything is breaking around us (Trains, NHS, Education, Housing, Roads etc. etc.) and the Truss disaster severely limited our ability to fix things. You add in the additional expenditure the government spent over covid and is still footing in plaster measures and we have a high tax high spend ineffective government. 

Even the Truss disaster for me seemed very manipulated.

How can someone cause so much damage, in so little time, merely based on projections?

[sage]

6 minutes ago, G STAR RAM said:

Even the Truss disaster for me seemed very manipulated.

How can someone cause so much damage, in so little time, merely based on projections?

Because to quote a local Tory i know, they had to vote between a Moron and a Backstabber and they choose the former, despite the latter and 99% of economists pointing out what would happen 

[G STAR RAM]

1 hour ago, sage said:

Because to quote a local Tory i know, they had to vote between a Moron and a Backstabber and they choose the former, despite the latter and 99% of economists pointing out what would happen 

But even still, nothing happened, and she was gone from her job within weeks.

How can words and projections for something, which was very quickly reversed, have such supposedly devastating consequences?

[Wolfie]

25 minutes ago, G STAR RAM said:

But even still, nothing happened, and she was gone from her job within weeks.

How can words and projections for something, which was very quickly reversed, have such supposedly devastating consequences?

She came in a and proceeded to go ahead with a mini-budget which was anything but mini....massive spending increases and tax cuts with no detail on how it would be paid for. Refusing to let the OBR go over it before the announcement was a huge mistake.

What markets hate more than anything is uncertainty. Not surprisngly the financial markets went into panic mode that the policy would be a disaster and Truss & Kwarteng were deliberately avoiding scrutiny - even the bank of england had to step in to prevent huge pension funds going bust - taking all of our savings with them.

"Nothing happened" because they then brought in Jeremy Hunt to undo all of the damage caused.

[sage]

26 minutes ago, G STAR RAM said:

But even still, nothing happened, and she was gone from her job within weeks.

How can words and projections for something, which was very quickly reversed, have such supposedly devastating consequences?

Things did happen, the pound slumped, the Bof E had to step in to buy Govt Bonds, she was planning to borrow to give tax cuts so the cost of that borrowing was soaring.

She ended up doing a massive U Turn on the tax breaks and she lost all credibility.

When you driving off Beachy Head you make a projection and apply the brakes. You don't wait until your car turns into hang glider.    

[PistoldPete]

4 hours ago, Wolfie said:

She came in a and proceeded to go ahead with a mini-budget which was anything but mini....massive spending increases and tax cuts with no detail on how it would be paid for. Refusing to let the OBR go over it before the announcement was a huge mistake.

What markets hate more than anything is uncertainty. Not surprisngly the financial markets went into panic mode that the policy would be a disaster and Truss & Kwarteng were deliberately avoiding scrutiny - even the bank of england had to step in to prevent huge pension funds going bust - taking all of our savings with them.

"Nothing happened" because they then brought in Jeremy Hunt to undo all of the damage caused.

The only massive spending was on the energy cap. And that wasn’t reversed. 
 

Tac cuts are not spending. They may or may not reduce Government revenue,,, tax receipts still go up even after cuts in the marginal rates. 

[sage]

20 minutes ago, PistoldPete said:

The only massive spending was on the energy cap. And that wasn’t reversed. 
 

Tac cuts are not spending. They may or may not reduce Government revenue,,, tax receipts still go up even after cuts in the marginal rates. 

They were massive tax cuts and they were unfunded, at a time of high debt, low growth, high inflation and high interest rates, She refused to engage with the OBR which meant the banks and markets had no trust in it.

 

[PistoldPete]

41 minutes ago, sage said:

They were massive tax cuts and they were unfunded, at a time of high debt, low growth, high inflation and high interest rates, She refused to engage with the OBR which meant the banks and markets had no trust in it.

 

What do you mean they were "unfunded". Ireland had growth of 12% in 2022 on the back of a low tax economy. That's how you fund them. .  As I say tax cuts is not spending. And they were not massive cuts either.  

[sage]

Just now, PistoldPete said:

What do you mean they were "unfunded". Ireland had growth of 12% in 2022 on the back of a low tax economy. That's how you fund them. .  As I say tax cuts is not spending. And they were not massive cuts either.  

I didn't say there were spending. You are arguing with the wrong person there.

Unfunded by the fact that there were no spending cuts and we are already have a deficit and high debt.  

Getting ridding of the top rate, cutting basic rate by 1p and corporation tax by 6p is massive.

Ireland are in the EU. 

What works for a small country like Ireland may not work for the UK

Our debt to GDP ratio is more than twice as high as theirs.

it was a gamble of a budget and the general feeling was odds weren't in our favour.

[PistoldPete]

1 minute ago, sage said:

I didn't say there were spending. You are arguing with the wrong person there.

Unfunded by the fact that there were no spending cuts and we are already have a deficit and high debt.  

Getting ridding of the top rate, cutting basic rate by 1p and corporation tax by 6p is massive.

Ireland are in the EU. 

What works for a small country like Ireland may not work for the UK

Our debt to GDP ratio is more than twice as high as theirs.

it was a gamble of a budget and the general feeling was odds weren't in our favour.

The Corporation tax was not cut by 6%. Its the other way around.. Hunt put the tax up by 6%. What has Ireland being in the EU got to do with it? Germany is in the EU and their growth is now lower than ours.  We need to reduce the debt to GDP ratio I agree.. and the way to do that is growing GDP. 

[ariotofmyown]

On 17/07/2023 at 13:38, G STAR RAM said:

Although I understand the reasoning behind interest rate increases, basically to reduce spending power and to encourage people to save, I can't help but think that right now, increasing interest rates will achieve what is set out to do. 

The biggest impact is surely going to be to mortgage holders who are most likely already struggling from food price and inflation and the energy 'crisis'.

With these 2 things supposedly being the main driver of inflation I cant understand how we get it under control, after all both are necessities so people are not just going to stop buying them.

Does anyone agree with the BoE logic or, like me, believe there is something more sinister at play here?

There was jump in business insolvencies reported today. Hard to see anything but the interest rises leading to the economy crashing and loads of businesses failing.

House prices could well drop, which could be good in the long term unless, you've purchased a home in the last few years.

There doesn't seem many easy answers out of this mess. If the pain in the UK continues as other countries improve, especially Europe, can imagine there will be a groundswell of opinion to rejoin the EU, or at least the single market. 

Regardless of how anyone voted, the implementation has been appalling.

Perhaps empty homes owned by foreign investors that don't live in the uk could be forced to sell? Maybe not even empty homes, not sure why we've allow foreign landlords owning property in the uk as investments?

[sage]

7 minutes ago, PistoldPete said:

The Corporation tax was not cut by 6%. Its the other way around.. Hunt put the tax up by 6%. What has Ireland being in the EU got to do with it? Germany is in the EU and their growth is now lower than ours.  We need to reduce the debt to GDP ratio I agree.. and the way to do that is growing GDP. 

EU interest rates and inflation are lower so they can borrow at better rates. 

I would agree that interest rates won't have that much effect on inflation now, but trying to tax cut our way out of this situation would lead to even higher inflation which would definitely need higher interest rates, then the tax cut benefits are swallowed up by higher mortgage payments.

The banks and markets thought this mini budget a massive gamble. 

Meanwhile the govt has tried to increase GDP by allowing net 600,000 immigration whilst taking a metaphorical pitchfork to 40,000 different immigrants.     

[sage]

6 minutes ago, ariotofmyown said:

There was jump in business insolvencies reported today. Hard to see anything but the interest rises leading to the economy crashing and loads of businesses failing.

House prices could well drop, which could be good in the long term unless, you've purchased a home in the last few years.

There doesn't seem many easy answers out of this mess. If the pain in the UK continues as other countries improve, especially Europe, can imagine there will be a groundswell of opinion to rejoin the EU, or at least the single market. 

Regardless of how anyone voted, the implementation has been appalling.

Perhaps empty homes owned by foreign investors that don't live in the uk could be forced to sell? Maybe not even empty homes, not sure why we've allow foreign landlords owning property in the uk as investments?

A massive house building scheme is the only way out of this. Yesterday the govt confirmed that 4 separate specific building trades can offer temporary work visas to non UK nationals, so perhaps they agree.  

[Ramarena]

Gilt market say's no.

70% of all mortgages in the UK are fixed rate, their rates are determined by the gilt markets that take a broader look at things than just, interest rates, although interest rates are important. The state of the economy, government policy (eg: Truss' budget), PMI's, inflation, jobs reports, etc, can all have an impact.

Hence when that fool Truss decided to try do so much damage in one budget, gilts s*** the bed and fixed mortgage rates went up and they have been doing again as the economic situation worsens. 

If you're on a tracker mortgage, then only the BOE rate decisions can really affect your rate. 

If you look at the current inflation data, the UK has fallen way behind it's peers in the G7, which will feed into the gilt market issues. Canada leads the pack at 2.8%, USA Japan and France are below 4.5% and Italy and Germany in the 6%'s with the UK way back on 8.7%.

The UK does update its inflation rate on Thursday(???), but even if it drops 1% it's still way behind and has been for too long. 

As others have mentioned, as much as I dislike the BOE governor, he and his team only really have one blunt instrument to deal with inflation. The government has much more it can do, but current policy is for them to sit on their hands, hope it falls naturally, call that a success, then call an election saying they've fixed the cost of living crisis. 

Other countries governments in tandem with their National Banks have done much better than the UK. Who've basically done nothing and tried to wish it all away!

[Eddie]

2 hours ago, sage said:

Ireland are in the EU. 

Nailed it.

[uttoxram75]

On 17/07/2023 at 14:32, i-Ram said:

To be honest GStar I don't have the first idea what to do, but as you suggest the policy of increasing interest rates is to suppress spending and demand. However, it has not been consumer demand that has been creating inflation, it has been war, disease, and other macro-economic factors like Brexit. Its all a bit of a s*** show. I look forward to learning from others how this might be addressed, particularly @Stive Pesleyand @uttoxram75

I wouldn't worry about it.

The overall wealth of the UK's billionaires has increased by more than 10% over the last year or so. 

You should be fine mate!

 

[cstand]

13 hours ago, Ramarena said:

Gilt market say's no.

70% of all mortgages in the UK are fixed rate, their rates are determined by the gilt markets that take a broader look at things than just, interest rates, although interest rates are important. The state of the economy, government policy (eg: Truss' budget), PMI's, inflation, jobs reports, etc, can all have an impact.

Hence when that fool Truss decided to try do so much damage in one budget, gilts s*** the bed and fixed mortgage rates went up and they have been doing again as the economic situation worsens. 

If you're on a tracker mortgage, then only the BOE rate decisions can really affect your rate. 

If you look at the current inflation data, the UK has fallen way behind it's peers in the G7, which will feed into the gilt market issues. Canada leads the pack at 2.8%, USA Japan and France are below 4.5% and Italy and Germany in the 6%'s with the UK way back on 8.7%.

The UK does update its inflation rate on Thursday(???), but even if it drops 1% it's still way behind and has been for too long. 

As others have mentioned, as much as I dislike the BOE governor, he and his team only really have one blunt instrument to deal with inflation. The government has much more it can do, but current policy is for them to sit on their hands, hope it falls naturally, call that a success, then call an election saying they've fixed the cost of living crisis. 

Other countries governments in tandem with their National Banks have done much better than the UK. Who've basically done nothing and tried to wish it all away!

Inflation down to a year low now 7.9%
https://www.bbc.co.uk/news/live/business-66231510

Edited July 19, 2023 by cstand

[PistoldPete]

13 hours ago, sage said:

EU interest rates and inflation are lower so they can borrow at better rates. 

I would agree that interest rates won't have that much effect on inflation now, but trying to tax cut our way out of this situation would lead to even higher inflation which would definitely need higher interest rates, then the tax cut benefits are swallowed up by higher mortgage payments.

The banks and markets thought this mini budget a massive gamble. 

Meanwhile the govt has tried to increase GDP by allowing net 600,000 immigration whilst taking a metaphorical pitchfork to 40,000 different immigrants.     

I agree the markets thought tax cuts would be inflationary. And that’s because they increase demand and productivity, ie they increase GDP which is what the intention was. As for any consequent inflation requiring interest rate rises leading to higher mortgage rates…. Well that is the issue that the original poster is querying… why? Why raise interest rates which undoes the efforts of trying to stimulate growth?