to believe interest rates should be at least 4% already, and rising fast?

[LargeDeviation]

1.75% base rate is pathetic in the face of double digit inflation.

The Bank of England has been much slower than the Fed in raising rates, and this is one of the main reasons why sterling is weakening - not the only one of course. Gas and oil are priced in dollars and energy prices are the dominant contributor to inflation, so we should strengthen the pound wherever we can.

The BoE has been far too timid to raise rates going back to Mark Carney. He had several opportunites to raise rates and even gave unemployment thresholds at which he would do it, but when unemployment went far lower he invariably lost his nerve.

Andrew Bailey is even worse. He should have cut QE and started raising rates as soon as it was clear that vaccines were working in early 2021 - or at least when it was clear that omicron was mild. It was clear far before the war in Ukraine that the post-vaccine boom would cause at least some significant inflation. Even after the war started, he has been so timid in acting! Tiny 0.25% and 0.5% raises.

Yes, raising rates will reduce cashflow, reduce house prices, and even possibly cause negative equity to those on high LTV variable mortgages, or those remortgaging soon. And yes it will reduce credit available to households and businesses, which would be difficult.

However with inflation you need to act fast and act big to get people to believe you are serious about taming it, otherwise expectations take hold and it becomes embedded. It is easy to cut rates again a bit afterwards.

If any of the MPC are reading: stop quivering, stop with the Lilliputian raises, and remember that your mandate isn't about the broader economy but to keep inflation under control!

[Cheapaschips1]

Got lots invested in cash savings accounts?

[Liebig]

The BoE is facing a currency crisis if they don't pull their fingers out. The rates increasing will harm people and companies, but I know it will be worse if sterling craters more than it already has.

[AdamRyan]

Do you think increasing everyones mortgage repayments at the same time as a huge increase in energy bills/food and unemployment? Seems a bit mad to me, but then I am not an economist

[LargeDeviation]

Haha. Yes, savers have been messed around by years of unnaturally low interest rates - but to cure that slow steady raises would have been fine.

The reason why rate rises need to be large and fast is to strengthen the pound.

[CornishGem1975]

I'd be okay with a rising mortgage rate if everything else wasn't so ridiculous. My current mortgage is 1.89% and ends next year when it will be who-knows-what. I could probably suck that up - but with the cost of petrol, food, clothes, nursery fees, and the astronomical cost of gas and electricity? That extra mortgage increase will tip us over.

[GertrudePerkinsPaperyThing]

YABU

Thats not going to help anyone who needs it. It’s just going to help those who have plenty of money saved up!

[LargeDeviation]

@Liebig Exactly; a currency crisis which will take hold and persist is far more damaging than a large increase in interest rates which can be temporary if the markets have confidence that the central bank have solved the problem.

[TheSmallestOneWasMadeline]

I'm guessing you aren't going to be one of those unlucky ones forced into neg equity or unable to afford the repayments?

[LargeDeviation]

@CornishGem1975 The point is that everything else wouldn't go up as much.

[Liebig]

@GertrudePerkinsPaperyThing

YABU

Thats not going to help anyone who needs it. It’s just going to help those who have plenty of money saved up!

Remind me, how does a pound that buys less than a dollar in a world where we have massive dollar based trade deficits help anyone?

If you think energy is expensive now, hoo boy...

[CornishGem1975]

@LargeDeviation

@CornishGem1975 The point is that everything else wouldn't go up as much.

I think you're wrong. Everything already HAS gone up. And it's not going back down anytime soon.

Mortgage rates going up are not going to stop energy costs from spiraling.

[LargeDeviation]

@TheSmallestOneWasMadeline People buying property are taking a chance on an asset. Its value can go up and down. Homeowners have enjoyed decades of strong growth apart from short stints during the credit crunch and early pandemic. House prices should not be a primary factor in deciding interest rate policy. Keeping inflation under control should be the main focus.

[Liebig]

@CornishGem1975

I think you're wrong. Everything already HAS gone up. And it's not going back down anytime soon.

Mortgage rates going up are not going to stop energy costs from spiraling.

That's not his point. His point is that there is a very real risk that the global markets lose faith in the pound sterling, as happened with Labour in the '60s and Tories in the '80s. If that happens, everything becomes much harder for everyone. And this time, there will be no North Sea oil and gas or selling off the national silver to pay for things.

[Liebig]

This is the sort of story that spooks investors. Hard to put money into a country that has decided to commit seppuku with its economy and currency.

[LargeDeviation]

@TheSmallestOneWasMadeline No but my parents were in such a position before, and I have seen the effects of the financial stress it caused close-up. I don't take this position lightly. Ultimately though, those with mortgages have taken the decision to take on market risk in order to buy a property. That is a choice they have made.

The MPC's remit is to control inflation. It is not to prop up house prices.

[LargeDeviation]

@Liebig I agree with you, apart from you calling me a man!

[Liebig]

@LargeDeviation

@Liebig I agree with you, apart from you calling me a man!

Whoops! My apologies, dear. Old habit. Certainly you have more balls than Bailey has, that's for sure.

[TheSmallestOneWasMadeline]

@LargeDeviation yeah but lets face it the homeowners that have enjoyed these decades of growth arent the same homeowners that will get completely fucked up the arse by their mortgage repayments doubling. It'll be the newer and younger homeowners suffering (yet again) because they've had less time to build up equity. And its not like we ever had any alternative than to pay the ridiculous house prices (well other than paying far more in rent to service someone else's mortgage).

[Unbridezilla]

Is your statement that you have to act "fast and big to tackle inflation" a fact or your opinion?

I'm interested in economics (but am a novice!) so would be interested in any sources you have

[Liebig]

If I was under 30, I'd probably be giving up on home ownership as an aspiration right now. It simply isn't viable. Better rent controls like in Germany would be better looked at for gov't as well as more housing, not that the latter hasn't been promised and never delivered.

[Liebig]

@Unbridezilla

Is your statement that you have to act "fast and big to tackle inflation" a fact or your opinion?

I'm interested in economics (but am a novice!) so would be interested in any sources you have

It's more or less a universal acknowledgement that with the inflation now, the currency has to be defended by raising returns on investments in pounds. Without that, there is no reason for anyone to put assets in UK, Plc. and see them depreciate, or buy gilts with terrible returns.

Having investment pulled and markets see us as radioactive at the same time as high inflation is a total disaster for the economy.

[LargeDeviation]

@CornishGem1975 If the war in Ukraine magically ended tomorrow and Russia resumed gas supplies via Nordstream 1, I would think there would be quite significant deflation.

Of course, that isn't going to happen, but I do think once the world permanently diverts requirements around Russian energy supplies totally (should be doable in a year or two) energy prices will retreat a lot.

The danger is that by then inflation will have become embedded into our economy and will take much bigger and longer rate rises to root out.

[LargeDeviation]

@Unbridezilla I am not an economist either, but I don't see that as a reason not to have a strong opinion on the subject.

Without being an economist, it is quite easy to see that many professional economists are stupid.

The Bank of England MPC is full of economists - supposedly competent ones - and yet they have persistently predicted lower inflation throughout despite the current high inflation being 'obvious' to anyone who was vaguely following the news.

[LargeDeviation]

@Unbridezilla In general market crises happen because of psychology more than underlying economics in any case.

From a psychology perspective, if the Bank of England gave the impression that they would do 'whatever it takes' to get inflation under control by making some eye-catching raises, they would actually have to raise rates by less and for less time overall.

[hop321]

I think you're right. Rates are forecast to double by summer 2023 but I think inflation has got to the level where the BofE needs to be decisive.

However, as independent as the Bank is meant to be, I wonder if political pressure is being brought to stagger the rises.