Why are Interest rates rising

[Parsley1234]

Why are interest rates rising to so say curb inflation when inflation markers are things such as fuel which are out of our control. It seems that we cannot curb inflation by stopping spending as everything is going up. Inflation then pushes up interest rates but we can’t just stop spending as everything is more expensive and out of our control. I may well be missing something completely here please enlighten me

In the old days it was to curb spending on luxurious goods etc but as it's fuel this is a bit of a new area.

But it's basically to curb spending.

to protect the pound

To stop inflation getting worse. It's simple fiscal economics.

At the simplest level - high interest rate encourages saving. This reducing spending. This is supposed to curb inflation.

It's way more complicated than that - inflation has many causes. But they tend to move hand in hand regardless of the underlying cause.

It does surprise me that most people didn't realise that quantitative easing in covid aka the government printing more money to pay for furlough etc was going to lead directly to massive inflation - with a year or twos time lag.

Add in war in Ukrainian pushing scare resource prices up, Brexit linked import price increases, and energy costs... and - bam!

Because the idiots in charge are completely out of ideas and options

It really isn't that. There are not many other options for reducing inflation. Unless you brought in price controls - and good luck going that.

Holding public pay rises low is he other thing that works. Sad but true.

It does surprise me that most people didn't realise that quantitative easing in covid aka the government printing more money to pay for furlough etc was going to lead directly to massive inflation - with a year or twos time lag.

Do you think if we didn't do the above we would be unaffected by the China lockdowns & impact of that on supply chains?

This is what happens when governments print money and hand it out like sweets. We all suffer.

Interest rates rising is good for savers.

It is also what happens when western governments place too much trust in countries like Russia and China, and become too reliant on them, thinking that they will be reluctant to shake the tree too much because they will damage their own economies as much as ours if they misbehave.

Interest rates rising is good for savers.

Only if the banks pass it on, are any saving rates beating inflation?

Higher interest rates depress economic activity by making borrowing more expensive and reducing demand for goods bought on credit. Housing prices have already started to level off and even drop in some places in the US due to higher mortgage rates. Lower demand means less upward pressure on prices.

It's not perfect, but as others have noted, central banks have a fairly limited number of tools to work with.

They would be, if the banks were passing the higher rates on to savers!

Even if some of the causes of inflation are external, by increasing interest rates ( increasing cost of borrowing and incentivising saving), people might still spend less on non essentials - which might reduce inflation (compared to what it could have been).

@downfield they had no choice but to do it. Knowing it would lead to steep inflation later. If we all survived.

Every government took the same call. Rightly.

They would be, if the banks were passing the higher rates on to savers!

They're not, at least in the US, because deposits are at an all time high thanks to the pandemic stimulus money. Banks raise rates to attract deposits, which they don't need to do now.

At the simplest level - high interest rate encourages saving. This reducing spending. This is supposed to curb inflation.
Yes but the banks are supposed to pass it on to savers and they aren’t! So rather than reducing spending, it’s actually going to increase spending as savers rush to spend their money before it falls in value!

The boe announced they were stopping qe in 2020 (and it had been going on since 2009). It wasn’t to pay for furlough.

It’s not really going to work though is it ? Not a very well thought out plan sadly

I’m not rushing to spend my money. I’m saving (what there is to save after these prices keep soaring). It may be the wrong thing to do mathematically speaking but I am spending much less.

It's honestly the best thing they can do now. There is no magic wand for this.

Shannith how does keeping pay low help curb inflation? Sounds cruel!

They are trying to avoid a wage-price spiral.

www.investopedia.com/terms/w/wage-price-spiral.asp

The Wage-Price Spiral and Inflation

The wage-price spiral is an economic term that describes the phenomenon of price increases as a result of higher wages. When workers receive a wage hike, they demand more goods and services and this, in turn, causes prices to rise. The wage increase effectively increases general business expenses that are passed on to the consumer as higher prices. It is essentially a perpetual loop or cycle of consistent price increases. The wage-price spiral reflects the causes and consequences of inflation, and it is, therefore, characteristic of Keynesian economic theory. It is also known as the cost-push origin of inflation. Another cause of inflation is known as demand-pull inflation, which monetary theorists believe originates with the money supply.

higher earners will be get pay rises though or have already

uk.finance.yahoo.com/news/city-bankers-bonus-uk-pay-inequality-123222777.html

What Shannith originally said was Holding public pay rises low is he other thing that works. Sad but true.

The public pay rises as in public sector/government workers. The government has no control over private pay rises.

To follow the increase in US rates. If the pound is devalued against the $ by not following US rates then imports become much more expensive.