To think that raising interest rates in the current economic climate is the wrong thing to do.

[Mumski45]

Now I know that historically interest rate rises are used to curb inflation. However this is usually because an economy is overheating and growing too fast. The idea is that by making borrowing more expensive we force consumers to spend less on other things thus bringing inflation under control.

However in the current situation the inflation is being caused mainly by an increase in expenses which are not that easy to cut eg energy and petrol which are being driven by external factors and not consumer demands.

An increase in interest rates will lead to misery and poverty for many and will cause many businesses to go under and have little effect on the causes of our current inflation.

The outcome is that the Bank of England could be causing the recession which they are now predicting.

Or are my economic musings too simplistic?

Or are my economic musings too simplistic?

Your question, answered

Can you elaborate please @SavoirFlair as I would like to understand this better.

When people have less money, there is less demand for products and services, it takes the heat out of the labour market, it stops the arms race for wages and creates unemployment - both of which generate cheaper employees, the cost of products and services begin to stabilise.

Inequality and poverty is built in to the health of our economic model. And yet we continue to demonise the poor for their poverty. It's fucked up.

A lot of economists agree with you OP.
www.cnbc.com/2022/07/05/hiking-interest-rates-the-wrong-solution-to-inflation-problem-analyst.html

I think raising interest rates given inflation is largely largely supply driven is pretty ineffective but I don't think there are any other short term options other than producing more/fixing supply.

By raising the cost of borrowing it can deter people getting cheap debt to maintain current standards of living and thus maintaining spending (albeit at a higher cost).

You make an excellent point, OP. Increasing interest rates in an economy which is stagnating, not growing, and struggling due an external energy price shock is not ideal and risks making the inevitable recession longer and deeper.

But not raising interest rates in response to clear evidence of an emerging wage/price spiral driven partially by external energy prices and partly by domestic labour shortages risks that spiral escalating further, requiring even stronger measures later. In the US, the Fed is raising interest rates further & faster than the BOE for exactly this reason.

Sometimes in Macroeconomics there are no good options, only degrees of bad ones. This is one of those times.

@Thisismynamenow thank you that does make sense.

@PlanetNormal I can see the logic but I was thinking that most people would naturally be curbing discretionary spending anyway as high energy costs will be doing the job of high interest rates.

I really worry that many people with existing debt will be stuck in a situation in which they can't reduce borrowing or energy costs and fall deeper into debt just to survive.

They probably will. Unfortunately our current government is busy infighting and alongside this wants to keep the votes of people who are mortgage free, want to pay less tax, are still more concerned about "migrants" and give no shits about families in poverty because they just need to "work harder".

I've been asking this question for a while. Inflation is rising due to increases in the prices of utilities, fuel and food and I'm not sure increased interest rates will actually cause prices to stop rising due to the war in Ukraine and higher wholesale prices.

People will naturally reduce spending on non essentials, eating out, building work etc due to significantly reduced disposable income because of the massive price rises in utilities etc, which are largely unavoidable. But inflation will stay high because there's still upward pressures on prices of food and utilities.

Meanwhile poorer people are sitting hungry in the dark and cold and even middle income people are getting into increasingly expensive debt just to pay for the basics.

Interest rate rises are a blunt tool. Fundamentally, if the cost of money is higher, people will spend less because they have less. Less demand = lower prices. The BoE can’t do anything about the Ukraine war and global energy prices but they can dampen spending in the rest of the economy in this way. But to be properly effective the government should take other measures as well.
All that said, interest rates shouldn’t have been that low to start with and if they’d started raising rates years ago the pain would be less acute when they inevitably revert to the mean.

I agree and thats largely because our inflation is both external i.e. energy crisis and contextual i.e. Brexit and lack EEuropean workers to do a lot of the low paid jobs.

Increasing interest rates wont impact on inflation - inflation is happening because energy on global commodities market is very expensive at the moment. It is also happening because our supply routes/low skilled jobs e.g. fruit pickers have been messed up by Brexit and not because people have too much cash. Therefore, food and energy are not expensive because we consume too much of it but because they are too expensive to produce it due to external reasons.

A rise in interest rates wont impact on either of these two things but it will throw us into a recession. House prices will become less affordable and middle classes who are less hit by rising energy/food will still spend less on extras and save instead. Therefore, we end up in two things happening at the same time which is disastrous.

However, the Bank of England can only do one thing - cut or rise interest rates. And they have to follow the Fed because if not - people wont buy the pound i.e. currency devaluation which is already happening but will be even worse. We have to follow the Americans when it comes to interest rates - we dont have a choice.

However, the government could be more creative when it comes to managing inflation in relation to energy prices or the labour market. They are currently doing neither and we are in for a bumpy ride.