MegaSack DRAW - This year's winner is user - rgwb
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My mate lucky wants to know why the bank of England HAVE to put up interest rates because, in there words, everything else is getting more expensive. Surely this will just make everything more expensive! Can you help with his dilemma?
ok ill bite...
Inflation is a sign that demand is higher than supply in an economy, this means more people are competing to buy fewer goods therefore prices rise. This can be refered to as an economy 'overheating'
By putting interest rates up you reduce the amount of money people have in their pockets and therefore reduce demand which in turn helps prices come down again.
Unfortunalty the current bout of inflation is not really being caused by a traditional overheating economy. (how many people to you know splashing money about atm) therefore raising bank rates would actually make little difference. the current causality is more along the lines of rising world food prices (population growth, drought etc) and the increased competition for goods from the newly developed world.
This state where inflation is High but growth is low is sometimes known as stagflation and its what Japan had through the 90's and is pretty bad.
hope that makes sense, its the first use ive found for my economics degree so far...
Or... given the amount of debt people are in, banks drive inflation (interest rates) and the BoE has to keep up? That's a half baked theory anyway.
Thanks for that titusrider. You made it a lot clearer to me if not to him. At least now you know it was worth going to all those lectures