To wonder how increasing interest rates will possibly help people?

[WeBuiltThisBuffetOnSausageRoll]

I might be really dim in my comprehension of this, but my understanding of interest rates is that they are increased and reduced to help control inflation - and to temper people's over-optimism in luxury/optional spending.

How on earth does this work when a huge cause of inflation is gas, electricity (more huge rises still pending), petrol, diesel and food prices (not to mention the increase in NI contributions, although that's most probably not included in the calculations)?

How is this not just rubbing salt into the wound and deliberately kicking most of us to the ground - when the absolute basics on which most of us have very little leeway or choice but to pay for are rocketing and about to plunge many previously-managing households into poverty and the already-struggling deeper into it?

I get that it's rough for savers, but it's been like that for a very long time now - and even when interest rates are higher, most banks are extremely reluctant to pass them on to savers anyway.

Am I missing something here? How is increasing the cost of mortgages meant to encourage us to stop using gas and electricity or give up food? Either way, it's another way for those ruling over us to demonstrate their complete lack of knowledge or care about what life is like for the ordinary majority.

It's only going to impact those on variable rates really. Or anyone who's fixed rate ends this year. But yes it's not going to help anyone out really. Anyone who is buying a house now or contract ends soon is going to see a rise in their mortgage deal.

We have extraordinary low interest-rate‘s you’re affected by arise of that are minimal amount you will probably already in trouble I’ve been stress tested on the mortgage that I’m buying right up to rates of 10% and I can still afford it as has just about everybody else I would imagine whose ball since 2008

We have extraordinary low interest-rate‘s you’re affected by arise of that are minimal amount you will probably already in trouble I’ve been stress tested on the mortgage that I’m buying right up to rates of 10% and I can still afford it as has just about everybody else I would imagine whose ball since 2008

We will be OK ourselves, but that kind of assumes that mortgage/debt payments exist in a vacuum. With everything going up significantly, all at the same time, the cumulative effect will be very significant for a lot of people.

True, you can stress-test the mortgage repayments, but would anybody have done that reckoning on being £100 or whatever worse-off each month to buy the same amount of (or less) gas and electricity? What if it hits an additional £100 on gas and electricity come October? Plus all of the food costs? Who would have stress-tested home energy costs up to 300% or whatever they end up being?

Wherever money is just instantly lost from the household budget surely doesn't make such a big difference: if it's gone, it's gone. Each 0.25% increase on its own might not represent that much money, but added to everything else that's risen right now, it gives out the clear message of either not understanding or not caring about ordinary folk.

And regardless of whether or not it's affordable or not, I still don't get what different spending behaviours the BoE is hoping to encourage, when the vast majority of the inflation is driven by non-discretionary spending anyway?

You are not focusing on the real reason they are raising interest rates.

They are fixated on avoiding a wage price spiral due to inflation.

They want to keep wage growth down.

Essentially, if you depend on income (wages) and don't have assets (capital), you are going to be made poorer.

Because they want to be seen to be doing something maybe? Agree it won’t help 99.9% of people! The small increase for savers (even assuming it’s passed on which it likely won’t be) is many times outweighed by their increased costs for everything else

It isn’t supposed to help people. The point is to curb demand

@User76745333

It isn’t supposed to help people. The point is to curb demand

Curb demand for what though? Food, electricity?

The markets think that there will be another few rate rises this year alone to around 2.5%

Curb demand for spending or rather suppress borrowing.

You're not being dim. In (very) basic economic theory, increased interest rates do dampen down inflation. However that assumes inflation is caused by an increase in demand for goods, whereas the current issue is supply side, the cost of raw materials has rocketed.

Also important to remember that increased interest rates also increase the cost of businesses borrowing, and that in turn is often passed on to the consumer (or the next person in the supply chain). Increased interest rates can actually be inflationary.

Interest rates rise when the BoE wants to encourage less spending and more saving, which will cause prices to drop and help curb inflation. At the moment, inflation is on the rise, which is why the interest rates have been (very) slightly increased.

Conversely, interest rates are dropped when they want to encourage spending and discourage saving. The decimated interest rate was part of the attempt to kick-start the economy following the 2008 recession.

It's a tricky line to tread and trends will see-saw back and forth over time.

The record-low interest rates we have seen during the last decade+ have played no small part in overheating the housing market and sending prices through the roof. Borrowing is cheap so more people can afford to buy, demand goes up, etc. It was never going to last forever.

@User76745333

It isn’t supposed to help people. The point is to curb demand

That doesn't work beyond textbooks.

The interest rates rises are nothing to do with "helping savers"

www.economicshelp.org/blog/glossary/stagflation/

There is a lot of murmuring about stagflation..

Monetary policy during inflationary periods are designed to promote price stability (ie lower prices). It’s not about wage growth at all - in fact the cost of commercial borrowing will increase just enough by this rate change that it may increase unemployment in some (if not all) sectors.

This afternoon alone I have received online offers for thincs i was going to buy anyway and I’m now being offered a 20% discount on those products I’m not quite sure how that’s gonna curb spending if the two incidents are related

Interest rates rise when the BoE wants to encourage less spending and more saving, which will cause prices to drop and help curb inflation.

I get that that's the basic idea, but if they'd like to advise me where I can spend less on standing charges and keeping the fridge, cooker and heater working, I'd love to hear them and obey - as every single energy company doesn't quite seem to have received the message that we all need to now be spending less!

Even if they somehow don't include the cost of energy and food in their figures, the 'top experts' at the BoE must be very poor indeed at their job if they don't realise that the majority of people are going to be forced to spend far less on consumer goods very soon, whether they like it or not.

Then again, I suppose, if you're on £500K+ a year, it probably just doesn't enter your radar that ordinary people don't have anything like the same consumer choices as you do. You probably see it that the energy companies will take all of the trouble of calculating and adjusting the amount your direct debit for you, so what possible bother could it cause you?

Yes I agree OP. Interest rates have always been a very blunt instrument but in the current circumstances they are likely to be a fairly ineffective one too. They also fail to take account of the fact we don't live in a closed economy (wealthy individuals and businesses find it very easy to move). A lot of pain for very little gain.

@WeBuiltThisBuffetOnSausageRoll

Even if they somehow don't include the cost of energy and food in their figures, the 'top experts' at the BoE must be very poor indeed at their job if they don't realise that the majority of people are going to be forced to spend far less on consumer goods very soon, whether they like it or not.

Then again, I suppose, if you're on £500K+ a year, it probably just doesn't enter your radar that ordinary people don't have anything like the same consumer choices as you do. You probably see it that the energy companies will take all of the trouble of calculating and adjusting the amount your direct debit for you, so what possible bother could it cause you?

Well not quite, it's more that they're operating on the level of managing the economy of an entire country and not just a single household. They have to think that way because they're dealing with billions of national debt and expenditure, and not my Tesco shopping list.

And it's not about encouraging people to spend less on heat and food, it's about encouraging less big borrowing, again, on the national scale.

Money isn't just been spent on food and heating. Some people are buying other things and if interest rates rise they might save the money instead which in theory may reduce inflation.

Agree OP! OH convinced me to go for the variable mortgage offer late last year after years of fixed. I stupidly gave into his argument re the interest rates being low for so long and now I'm worried that they're going to keep rising and we'll have yet another big increase in our monthly outgoings.

@User76745333

It isn’t supposed to help people. The point is to curb demand

But what we have is not demand-pull inflation, but cost-push inflation.

Increasing interest rates will have negligible effect on that.

@Belladonna12

Money isn't just been spent on food and heating. Some people are buying other things and if interest rates rise they might save the money instead which in theory may reduce inflation.

Are you suggesting that a rise in interest rates will encourage pepole to save?! Do you really think that after 2 years of a crap relatively joyless life during the pandemic that people are going to think "oh well, I think I'll keep that £10k in savings after all now as I'll get 200 quid a year from it at these rates!"??? I very much doubt it. Nearly everybody I know who is lucky enough to have a cushion of savings is thinking life is too short to be keeping that 10k locked away for the sake of 200 quid and are thinking about using it to have a bit of enjoyment in their life like going on the holiday of a lifetime.

Others with savings are saving it not because they will make more money because of the higher interest rates but because they are worried about affordability of the basics of life, either for themselves or for their adult children for whom life is considerably worse than their own in terms of affordability and they want to be able to pay for university costs, or childcare costs for grandchildren etc, or give them money towards their first house because they are shocked that 2 people on fulltime professional salaries have to live in the same kind of house that when their own generation was buying, was bought by warehouse foreman and his wife who worked pt in Sayers.

What does need to happen is some kind of PROPER restriction on house prices based on income. At the moment, stress tests seem to be "how much can we get away with lending people so that they aren't going to default on the payments?" It shouldn't be the case that they take every last earned penny into account of both members of a couple, for example, and offer them a mortgage at the very top of what the lender thinks they can afford.

Years ago when we got our first mortgage in 1999 and looking at the maximum you could get everyone was guided by the formula of "3 times a single person's salary" or "2.5 times a couple's salary". What the fuck happened to that? Just why have lenders been allowed to get away with offering more and more money? Buyers have been forced to spend beyond their means on housing for far too long, and THIS is what has made housing costs spiral out of control. Together with buy to let mortgages which has had people buying second/third homes or whole porfolios as investments and not to live in.

But I guess the people in charge of the country have absolutely no interest in reducing the amount they can rake in in property price increases. There is no incentive to put any restrictions on mortgages, both for owner occupiers or landlords, no incentive to have a massive country-wide post-war style house-building scheme, as they know this would bring house prices down. Less profit for themselves.

@CurlyhairedAssassin part of the reason mortgages are so large now is because borrowing has never been cheaper, because interest rates are so low. People can now afford to borrow 5x their salary.

When interest rates are higher, banks will be wary of lending as much as they do now because people are less likely to be able to borrow e.g. 5x their salary and still afford the repayments. So higher interest rates could well reduce the amount buyers can borrow and we could potentially see a return to 2.5x or 3x mortgages.

The problem with that of course is that if buyers can't borrow, house prices will have to fall significantly from the over-inflated prices they currently are...