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.

not dim at all, OP. Interest rates do affect inflation because of the reason you said. It reduces demand and therefore puts a downward pressure on prices (in general) Higher interest rates do prompt some people to save rather than spend, and also makes borrowing more expensive so that people don't put a holiday on a credit card, or get a new sofa on tick, and reduces demand that way.

Like you say, though, the very products that are really driving inflation at the moment are inelastic - demand won't respond dramatically to price rises. We might take a few steps to reduce our energy consumption, but we can't avoid eating/heating our homes and there are no easy alternatives.

On the one hand, there are plenty of people who can afford the increased prices of energy, fuel, food and it might mean their demand for other goods has to reduce to compensate. So demand (in general, on average, over the whole spectrum of goods in the CPI basket) has fallen. On the other hand, some people wont be able to afford the increases and they'll really struggle and go without one thing or another - food or heat. People do that already, and the number is about to grow. As a PP mentioned, this isn't to help people. It's just a blunt tool to put downward pressure on prices.

It will have an effect on house prices. It will be more expensive to borrow an amount of money.

Some landlords might out money into savings if bank interest rates were worthwhile.

Figures quoted are approx.
Of the 23m households in the country, 8.6m are rented, 8m are owned outright, leaving 6.4m with mortgages. The vast majority of these mortgages are fixed rate, leaving just the 1.1m on SVR and 0.8m on trackers as the only ones who will be affected by increased mortgage rates. This is not "most of us".

@mumda

Some landlords might out money into savings if bank interest rates were worthwhile.

They are hardly going to sell in a downturn are they 🤦‍♀️ Due to inflation as a first time buyer every single person I’ve been competing against to buy my House has been a landlord. And the turnaround has been spectacularly quick properties have been sold to completion within six weeks weeks seven it’s on the market for £400 more than I know the mortgage would’ve been if I put down 25% deposit they probably bought it for cash let’s be honest. And rented out by week eight £900 per calendar month for a two bed terrace.

Raising interest right now is nothing short of desperation for central banks as they have run out of ideas. Traditionally, interest rates are used to dampen demand and reduce borrowing. That would be all well and good if that money that people are spending had come from increased productivity. It didn’t. It came from printing money like it was going out of fashion and it made it way into assets while production actually ceased because of pointless lockdowns. Production still hasn’t caught up, commodity prices have risen enormously and interest rates will cause people to spend less. That’s a recipe for the dreaded combo - stagflation.
Central bankers are officially out of ideas after 15 years of printing money like brain dead zombies.

It's not about individuals.

It's about the whole economy which includes corporates.

There is some doubt though that interest rate rises even work to limit supply inflation.

I don’t think the government or the Bank of England give a flying fuck about whether ordinary people can afford their gas bills. This is to keep down wage bills for employers.

The vast majority of these mortgages are fixed rate, leaving just the 1.1m on SVR and 0.8m on trackers as the only ones who will be affected by increased mortgage rates. This is not "most of us".

OK, then - 'only' about 3-4m adults. Will those fixed rates that most of the lucky others have last forever, then, and never be affected by increases that get going apace now?

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.

I said that is the theory, not that it will definitely happen. No I don't think being able to make £200 will make those with 10k less likely to spend it. Interest rates are still very low though. I think this is just the beginning of interest rate rises and there may come a point where savings make a lot of money as in the late 80s/early90s

More interest on your savings, thats if the bank pass the increase on to their customers that is....

agree with @sst1234, the economy is fucked & I don't know how they fix it. Far too much reliance on QE which has inflated assets & devalued wages. No investment in economy so low productivity & with the backdrop of an ageing population.

@DrManhattan

More interest on your savings, thats if the bank pass the increase on to their customers that is....

Some banks will.

Interest rates should actually be far higher considering real inflation is probably something like 15%. Keeping interest rates low only helps those in debt (including companies) whilst punishing savers who have been frugal. The whole thing is a disincentive to "do the right thing" and has totally distorted the housing market amongst other things. Hopefully they will be at least 2% by the end of the year.

@lonelyapple

Interest rates should actually be far higher considering real inflation is probably something like 15%. Keeping interest rates low only helps those in debt (including companies) whilst punishing savers who have been frugal. The whole thing is a disincentive to "do the right thing" and has totally distorted the housing market amongst other things. Hopefully they will be at least 2% by the end of the year.

Well given the number of companies who are actually only still in business due to the government bounce back loans last year, there will be an absolutely enormous amount of small to medium size business is that go bust in the event of a raise it interest rates who will then default on the loans hence I really do not see any major raises being in the governments best interests .

@LakieLady hit it on the head

But what we have is not demand-pull inflation, but cost-push inflation.
Increasing interest rates will have negligible effect on that.

In addition, raising interest rates mostly affects one type of spending...the spending on credit or borrowing of money.

Increased interest rates only affect day to day disposable income spending as a knock on effect in that people are more encouraged by higher interest rates to save money instead of spend money. But we won’t see this we have a cost of living crisis so disposable incomes are dropping and banks are not passing on the interest % rises to the usual high street savings accounts.

Increased interest rates only affect day to day disposable income spending as a knock on effect in that people are more encouraged by higher interest rates to save money instead of spend money. But we won’t see this we have a cost of living crisis so disposable incomes are dropping and banks are not passing on the interest % rises to the usual high street savings accounts.

Disposable incomes are dropping but that doesn't mean nobody can save. Some people can and some will save the money to buy stuff rather than borrowing money. It's not true that no banks are passing on the interest rate rises. If people shop around they will often get good rates and these are increasing.