Traditionally, as I understand it, interest rates were increased when wage inflation was high, to make people feel a little poorer/make their loan payments increase and in turn product and services prices moderate to maintain competitiveness in the market.

With me so far?

Currently wage inflation is negative in real terms, personal debt is around it’s highest levels ever and internet selling of goods and services makes everything as competitive as it’s ever likely to be. Inflation is due entirely to the crap exchange rates after the Brexit vote.

So how is the traditional tool of inflation limitation going to make any difference?

Cause a house price collapse?

Theoretically to increase saving and also reduce ‘disposable’ income, easing expenditure pressure on inflation.

Cause a house price collapse?

and thence a total economic collapse

I can’t work out what he’s up to either – maybe wants an excuse to give more free cash to the banking sector, or else he’s bringing down the government ? (I know he’s Canadian, but is he a remainer?)

It’s to reduce the supply of money and strengthens the pound. Investers put more money in to currencies with higher intrest rates

So it would help with import inflation

Theoretically to increase saving

I thought that, but inflation is close to 3% and savings accounts offer around 1%, so banked cash is losing value and adding 0.25% isn’t going to change that?

IMO inflation at the moment is currency driven and using (talk of) interest rate rises to strengthen the £ to dampen inflation is daft. The US and EU are in a (slightly) better economic position to rise interest rates and if/when they do their rate rises will simply cancel out any effect UK interest rate rises will have on our currency driven inflation.

Cause a house price collapse?

A correction is about due.

But who knows.

reduce ‘disposable’ income, easing expenditure pressure on inflation.

You put it more succinctly, but that’s the point of my original post. After a decade of wage stagnation, a significant proportion of people don’t have disposable income, they have debt, which will become more expensive as interest rates rise.

It’s to reduce the supply of money and strengthens the pound. Investors put more money in to currencies with higher interest rates

So there’s an industrial aspect to it as well, but surely the pound is so weak and the impact of brexit such a great unknown, that will have little impact.

edit – posted while I was typing, but this…

IMO inflation at the moment is currency driven and using (talk of) interest rate rises to strengthen the £ to dampen inflation is daft.

ampthill – Member
It’s to reduce the supply of money and strengthens the pound. Investers put more money in to currencies with higher intrest rates
So it would help with import inflation

This.

And it makes borrowing more expensive soooooo people borrow less…

That’s not really a hard concept to grasp.

And in defence of Carney, he’s about the only one with his head screwed on tight.

The value of the £ immediately went up when this was announced the other day.

People will spend less as money gets diverted to higher loan repayments, are less likely to borrow to spend and/or savings rates go up. Interests rates have been hiatorically low now for 10 years it would be rational to assume they ill return to more normal levels

OP please take care of the the Remoaners “contributions”

And in defence of Carney, he’s about the only one with his head screwed on tight.

Agreed. Personally I’m surprised he has stuck around so long esp with the personal attacks from the Cabinet Brexiteers….

The value of the £ immediately went up when this was announced the other day.

Ooh yeah. It was such a huge recovery. 1.11 to 1.13 wasn’t it? Going to make a massive difference to my week in Torremolinos next year!

I think you’ll find it SOARED!

And it makes borrowing more expensive soooooo people borrow less…

That’s not really a hard concept to grasp

consumers or businesses? You really think a small rate rise is suddenly going to make consumer credit unaffordable (or even just deter people from borrowing)?

Interests rates have been hiatorically low now for 10 years it would be rational to assume they ill return to more normal levels

but there’s a LONG way to go to get back to where they were 10 or so years ago, I assume the great unknown is where does the rate have to get to before people worry and stop taking out loans, buying cars on finance and hammering the credit card?

Very much against interest rate increase. Runaway inflation caused by Brexit, so why should the morons who voted for it get more from their savings while the worst off pay more for mortgages? Can’t see how it can help control inflation either.

You really think a small rate rise is suddenly going to make consumer credit unaffordable (or even just deter people from borrowing)?

As soon as rates start rising or in anticipation of them rising, the banks will increase their loan rates by more than the base rate rise. Our credit card went up 2% last week, not that we ever pay interest on it.

You have captured the conundrum facing this BOE perfectly.

Inflation above target v lack of real wage growth. What do you do?

Signalling 25bp in Nov IMO

Thanks THM.

What do you do?

Not a bloody clue, so it’s a good job I’m not an economist. I think a new ‘tool’ is needed that better reflects the national and global economic reality, but I’m not imaginative enough to know what that might be.

trouble I can see is that as others have said above, majority of the ‘inflation’ is not actually inflation driven by demand – the interest rates have been this low for ages and inflation didn’t increase substantially all that time. It’s the drop in the £ since that-which-shall-not-be-named making imported goods more expensive that has created inflation.

That’s now factored in; the FX rewrite is a year old and prices due to FX on a year to year basis won’t be a further 3% higher, it’ll go back to the underlying level just as the BoE increases rates to curb inflation, which’ll make the £ ‘soar’, imports get cheaper, etc. Doesn’t mean a rate rise isn’t needed, I question if it should have been done sooner actually even if the data didn’t show it. But as said – who’d be Mark Carney right now.

It’ll be interesting to see -companies that didn’t pass on the cost increases, such as John Lewis, have just announced the loss in profits and I assume would be raising prices soon, or if the FX readjusts will increase profits again accordingly. Will companies that put the prices up on the back of brexit reduce them again if there is an adjustment?

That’s now factored in; the FX rewrite is a year old and prices due to FX on a year to year basis won’t be a further 3% higher, it’ll go back to the underlying level just as the BoE increases rates to curb inflation,

Yes, another point I’d thought of, which will make the interest rate increases look like they were effective.

It’s all explained on the Bank of England web site:

http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

There is no need/reason for rates to be at 0.25 with inflation at current levels. But they have genuine problem with real wages and the ,mon policy ctte is split on the issue. However, they are now giving clear signals that rates are going up slowly. My guess is two moves of ,25bp with the first in Nov

They need to end strealing offf savers at some point.

Out of interest THM, as one closer to this than most what do you think is the underlying rate, and how much is the impact of the FX rate change last year.

I know in the end it’s all ‘inflation’ and needs managing, but YKWIM.

What do you do?

Cancel Brexit.

4-5%

Weakness in £ resulted in higher inflation and lower real wages. Hence what do you do? It made the Banks job more complicated hence the split among MPC members

Recent £ strength creates uncertainty over by how much. Hence the first step will be a little one followed by wait and see. Rates are still going to be low for some time. Just less so.

teamhurtmore – Member
There is no need/reason for rates to be at 0.25 with inflation at current levels. But they have genuine problem with real wages and the ,mon policy ctte is split on the issue. However, they are now giving clear signals that rates are going up slowly. My guess is two moves of ,25bp with the first in Nov

They need to end strealing offf savers at some point.
Problem is the amount of debt in the country. The number of people who are on the edge of being able to just keep up with the repayments. Not saying people should get off free from this but it’s a risky game isn’t it.

I assume the great unknown is where does the rate have to get to before people worry and stop taking out loans, buying cars on finance and hammering the credit card?

People are so used to debt and credit cards now it is part of everyday life. You can raise the rate as much as you want but all you will get is more people bankrupt. There seems to be a disconnect for many between the idea of taking out a loan and paying it back. I speak to so many people who I otherwise believe to be intelligent who have to fight every payday to not spend all of their money the first day and then get evicted… or many who take loans to cover credit cards … a rate rise will not stop these people just push them down the wonga route…
I must be old because I still remember withdrawing £5 from a cash point and having a credit card with a £100 limit. Not sure the issue them with limits that low any more..

Mind you setting the BoE rates based on people who don’t understand what a loan is may not be the best economic policy…