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!

[bellac11]

Yes totally agree with you OP, we have a variable rate mortgage and no savings but Im still in agreement with you on that.

[Thatusernamewastaken]

Why do you believe raising interest rates would reduce inflation not caused by consumer spending? What would you hope it would achieve?

[OddsandSods]

This isn’t a normal inflation.raising interest rates too much will tip us into a worse recession. I’m sure the BoE have considered this and more reliable than a random on mumsnet.

[Cailleachian]

It feels like the UK economy is simply spiralling out of control.

Businesses cant absorb their energy bills going up 3x, 5x, 10x, they will close and unemployment will rise with them. Care homes are in a very precarious situation, massive energy bills, staff shortages and still covid concerns. Companies will be looking to outsource costs by shutting offices and pushing energy costs to WfH, that all leads to difficulties in commercial real estate, which local authorities are heavily invested in.

The residential market is way overheated prompted by a stamp duty cut fuelled boom, with loads of people in homes with poor energy efficiency because either they cannot afford the necessary upgrades or they paying a fortune to landlord that dont care about energy costs.

The NHS is already at breaking point, as are schools, courts, railways, refuse collection....and all the necessary public services to make a society function.

This winter is going to be bad.

[LargeDeviation]

@Thatusernamewastaken As I said above, large interest rate rises would strengthen the pound. That would make oil and gas cheaper because they are priced in dollars.

The root cause of most of the inflation today in the UK is the spike in energy prices. Strengthening the pound would directly help with the cost of energy - only a bit, but a meaningful bit.

[Fififelix]

They will have to raise rates again sooner rather than later. Sterling is tanking which will be much worse for everyone , commodities oil gas are traded in dollars. We are reliant on imports for a lot of things. Everyone will suffer if sterling tanks, not everyone will if mortgage rates rise.

[LargeDeviation]

@OddsandSods A recession is bad but not catastrophic in the medium term. Persistent inflation is catastrophic in the medium term.

[LargeDeviation]

@Fififelix Exactly - and I think large 'unexpected' rate rises are going to happen whatever happens.

Either they will be forced upon us because of a market crisis, or they can be done in a controlled and preemptive way.

[maddening]

The inflation is not being driven by consumer demand and spending.

[LargeDeviation]

Although I think the Bank of England has slightly lost control already; hence the big drop in sterling. They have another chance to raise rates by more than the pitiful 0.5% next week. I hope they take it but don't have high hopes that they will.

[tttigress]

The pound is getting killed, something vary rarely mentioned in the media in relation to inflation.

So I totally agree with the OP, however action should have been taken much earlier, if we had not have printed/borrowed all that money for Covid, and had started increasing interest rates about a year ago, we would be over the worse of it by now.

[Fififelix]

@maddening

The inflation is not being driven by consumer demand and spending.

Our currency is tanking, we import lots of things. The fed and Australia have raised their rates again if we want to be competitive we will have to do the same. A worthless currency is shit for everyone.

[LargeDeviation]

@maddening No it is being driven by energy prices. Most of the increase is due to supply, but a bit chunk is because of currency weakness.

Raising rates will help address currency weakness.

[LargeDeviation]

@tttigress Yes the media has been very slow to report on the slide in the pound and what it means for all of us. They need to do a better job of covering it.

[LargeDeviation]

@Fififelix I find it strange that the ECB rate is still at 0 (OK, this is better than -0.5%).

They are expected to raise rates to 0.75% tomorrow which is a big rise but still a very low rate compared to inflation.

They have the additional problem that if they raise rates too much then the market will start to question the solvency of countries with high debt like Italy.

[1dayatatime]

@LargeDeviation

"The root cause of most of the inflation today in the UK is the spike in energy prices."

+++

This is indeed correct, however inflation was rising before the Russia / Ukraine war caused by the massive £450 billion increase in Government debt from Covid spending increasing money supply.

Liz Truss plan of freezing energy prices at an annual cost of £90 billion ( by way of reference the entire education budget is £100 billion) will further increase Gov debt and further increase inflation in turn requiring higher interest rates.

In short you don't fix inflation by creating more money. But the public votes for easy solutions today without considering the greater problem it creates tomorrow.

[Fififelix]

@1dayatatime

@LargeDeviation

"The root cause of most of the inflation today in the UK is the spike in energy prices."

+++

This is indeed correct, however inflation was rising before the Russia / Ukraine war caused by the massive £450 billion increase in Government debt from Covid spending increasing money supply.

Liz Truss plan of freezing energy prices at an annual cost of £90 billion ( by way of reference the entire education budget is £100 billion) will further increase Gov debt and further increase inflation in turn requiring higher interest rates.

In short you don't fix inflation by creating more money. But the public votes for easy solutions today without considering the greater problem it creates tomorrow.

Someone should be making horrible unpopular decisions to get out of this mess. They won't because all they care about is votes and the next GE. This is not going to go away there's no kicking the can down the road. We never properly recovered from the last recession they just kept rates at a really low level and used QE.

[LargeDeviation]

@1dayatatime You're right, it's a simplification to say that all inflation is because of energy prices - the post vaccine boom and supply shortages and COVID QE and low rates generally were also factors.

On fiscal policy - I think it depends what taxes Truss is targeting for cuts. Some tax cuts could reduce inflation, such as cutting VAT on energy. That would directly cut energy prices for consumers (though unfortunately not most businesses). A cut in fuel duty would help a bit too though most of the problem actually seems to be with gas rather than petrol and Sunak already cut it 5p for a year.

[LargeDeviation]

@Fififelix Yes and the Bank of England is meant to be independent of government so it can take these difficult decisions.

However we somehow ended up with Carney who seemed to want to become a celebrity so didn't want the stigma even during years of record low unemployment, and Bailey who looks too scared to act decisively.

[Boreded]

Ah OP…another one who thinks they know more about economics that those who’ve trained their entire lives to work in the field.

your logic is flawed, and could cause a crash in the housing market.

stupid post

[Fififelix]

@Boreded

Ah OP…another one who thinks they know more about economics that those who’ve trained their entire lives to work in the field.

your logic is flawed, and could cause a crash in the housing market.

stupid post

House prices crashing for a few years would be bad but not as bad as our currency becoming worthless I say that as a homeowner. The pound tanks and we face paying much more for goods and energy. The economy will be completely fucked over.

[LargeDeviation]

@Boreded Why do you think the professional economists at the Bank of England have been so consistently (and predictably) wrong in their estimates of inflation over the last few months?

[1dayatatime]

@LargeDeviation

"Some tax cuts could reduce inflation, such as cutting VAT on energy."

+++

It depends on how she finances the tax cuts. If they are financed through increasing debt then this will increase the money supply further fuelling inflation and requiring even higher interest rates down the road.

Only if she finances the tax cuts by proportionally cutting Gov spending would inflation not be impacted. But I don't exactly see such a policy as a vote winner.

[LargeDeviation]

Actually, one thing I hate is that the Bank of England isn't really held accountable.

Yes they are independent, but all the Governor has to do if he misses the inflation target is write a letter to the Chancellor explaining why.

MPC members get over £150K per year. I daydream of cutting the salary down to £30K and then they only get the rest of the money if inflation stays within a small range of the target for a whole year after each meeting. I think that would focus their minds on their actual remit a lot more.

[Deguster]

I am a homeowner - large mortgage but healthy LTV. I agree with your OP in strictly economic terms, but I doubt it is realistic to try to control double digit inflation with incremental increases in interest rates. The only realistic means to shore up sterling is to increase them so radically that many people lose their homes. The "optics" of that is so unconscionable that I suspect yet another can will be kicked down the road. The government knows that the indebted public will not give up decades of cheap borrowing without a fight.