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!

[LargeDeviation]

@1dayatatime It's complicated because a lot of UK debt is itself inflation-linked.

If policy measures cut inflation significantly (even if borrowed) there is a chance they can reduce the interest on debt even if the debt itself increases, as long as new debt is at fixed rates.

[Grumpybutfunny]

If this was a simple inflation situation caused by a boom post COVID fair enough but it's not, it's inflation linked to the fact we are at war with Russia. The USA isn't of course the dollar is going to rise when they are energy self sufficient. We knew this was coming we need to find a balance between inflation, cost of living and funding the war. I would suggest the marines or special forces to deal with the Russia government or getting china on side!

[MsPincher]

@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.

Emmm yeah. Or maybe you’re just not an economist so don’t understand economics?

interest rates were low globally. Inflation is now high globally. No one predicted the Ukraine war - economists or otherwise. It’s ridiculous to claim you somehow know the future and are better than the experts. You’re not.

[LargeDeviation]

@Grumpybutfunny Actually China is, to my surprise, helping out quite a lot with Europe's gas supply.

Their constant shutdowns for zero COVID policies, together with their property market slump, mean the Chinese economy is much weaker than they expected.

In turn they need much less gas than they expected, and so they are reselling the excess to Europe.

[1dayatatime]

@Grumpybutfunny

"I would suggest the marines or special forces to deal with the Russia government or getting china on side!"

+++

There are a number of classical ways of dealing with inflation such as raising interest rates or reducing money supply (tax more than Gov spends) but I must admit the idea of starting WW3 by dropping 42 Commando off into Moscow or being under the economic subjugation by China is certainly a new one to me.

[TheWhalrus]

I think much of this discussion is massively overlooking the human costs of high interest rates: Ok, I know inflation also has human costs because more people become unable to afford the basics, although that can be addressed to some extent by welfare (as imperfect a solution as this is).

The problem with high interest rates is that even small increases could drive (and are already driving) people towards insolvency, homelessness and, ultimately, bankruptcy which then has knock-on effects on the rest of the economy as unpaid debts then have to be written off. This is certainly why I'd be reluctant to raise interest rates any further.

Of course, we cannot be sure the MPC really cares about such things. From the way you're describing these things I can see that you clearly don't. A little more thought for people posting on here who could be badly wiped out by high interest rates would have been appreciated here.

[LargeDeviation]

@MsPincher Where did I say I predicted the war? The war started on February 24, over 6 months ago.

There have been 4 MPC policy dates since then - and at each one, the MPC releases their inflation expectations - and they have undershot each time. It was obvious to anyone with a functioning brain once the war started that Putin would try to use gas to reduce western support for Ukraine.

Even if you argue that a central estimate is always a single number and it is unfair thing to measure their performance against it in the short term, the MPC could easily have reasoned that higher than expected inflation ws much more likely than lower than expected inflation, and therefore to not raise rates fast was much riskier than sitting around.

[Jaxhog]

I agree Op. How is it fair that those of us who saved money for emergencies will lose all their savings as inflation hits 20%, while those who chose to spend, spend, spend are protected from inflation? Or are demanding big pay rises?

As a pensioner, my pensions are NOT protected from this level of inflation. I can't ask for a pay rise to cover inflation; my savings were supposed to do that.

[1dayatatime]

@Grumpybutfunny

"If this was a simple inflation situation caused by a boom post COVID fair enough but it's not, it's inflation linked to the fact we are at war with Russia. ".

+++

You are correct that the biggest factor in the increase in inflation is energy costs caused by the war in Ukraine. Although massive Gov borrowing has also played a part.

As such the quickest way to bring inflation down is for the war in Ukraine to end. Even if Putin were removed then he would simply be replaced by someone with similar views on Ukraine as no Russian President would stay in power if the abandoned Crimea which is ethnically 65% Russian.

So that basically gives a choice of NATO going full out to war with Russia or a negotiated peace which in turn involves throwing Ukraine under a bus to varying degrees depending on the deal.

[MsPincher]

@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?

they haven’t - they’ve been broadly correct. No one will ever be exactly right in predicting anything - they’re not mysticmeg.


But surely currency weakness will be really beneficial for exporters op? Seeing as you are such an expert.

[LargeDeviation]

@TheWhalrus I would argue that the human impact would be much worse with the plodding path the BoE is currently on - although it looks different if you only look at the next 6 months instead of the next 3 years.

I think ultimately rates will be higher for longer if they have to get raised in an emergency because of a crisis where sterling plummets.

If the BoE had responded to the war in Ukraine at their first meeting with a 1% hike - even if he waited to raise rates again afterwards, the markets would not be in any doubt as to Bailey's willingness to act, and the pound would probably be at least 5 percent higher against the dollar.

[WeBuiltThisBuffetOnSausageRoll]

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.

I can't speak for others, but we bought a house because our family needed somewhere to live. You make it sound like all ordinary folk gamble greedily on housing as a get-rich-quick scheme.

It doesn't even help renters, as if landlords mortgages go up, a lot of them will be unable and/or unwilling to take a lower margin or make up the difference themselves - doesn't take a genius to work out where they're going to look to get the extra money from.

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.

Maybe, but if everybody is going from a starting point of already having much less money to buy it with, because your mortgage has shot up, where's the actual benefit to them all? Increasing interest rates is supposed to discourage people from spending wildly and profligately on luxuries and treats - it's not meant to be a punishment for continuing to want to feed your kids hot food in a house where they don't sit and shiver.

[LargeDeviation]

@MsPincher Sad to say, we import more than we export.

[edwinbear]

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

They have 4 members (including Bailey) at the Treasury Select Committee on Wednesday.

[MsPincher]

@LargeDeviation

@MsPincher Where did I say I predicted the war? The war started on February 24, over 6 months ago.

There have been 4 MPC policy dates since then - and at each one, the MPC releases their inflation expectations - and they have undershot each time. It was obvious to anyone with a functioning brain once the war started that Putin would try to use gas to reduce western support for Ukraine.

Even if you argue that a central estimate is always a single number and it is unfair thing to measure their performance against it in the short term, the MPC could easily have reasoned that higher than expected inflation ws much more likely than lower than expected inflation, and therefore to not raise rates fast was much riskier than sitting around.

Don’t be ridiculous. The boe have been monitoring inflation and increasing rates since then. A large interest rate shock is the last thing the economy needs at this time. If you were an economist or had any idea about it you might know that.

[MsPincher]

@LargeDeviation

@MsPincher Sad to say, we import more than we export.

You don’t understand economics.

[Fififelix]

@WeBuiltThisBuffetOnSausageRoll

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.

I can't speak for others, but we bought a house because our family needed somewhere to live. You make it sound like all ordinary folk gamble greedily on housing as a get-rich-quick scheme.

It doesn't even help renters, as if landlords mortgages go up, a lot of them will be unable and/or unwilling to take a lower margin or make up the difference themselves - doesn't take a genius to work out where they're going to look to get the extra money from.

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.

Maybe, but if everybody is going from a starting point of already having much less money to buy it with, because your mortgage has shot up, where's the actual benefit to them all? Increasing interest rates is supposed to discourage people from spending wildly and profligately on luxuries and treats - it's not meant to be a punishment for continuing to want to feed your kids hot food in a house where they don't sit and shiver.

We import so many things including energy, food , clothing the pound tanks everyone will suffer from the very poorest to the richest. I have a mortgage but rates rising for a few years would be a lot better than our economy imploding. They will raise rates again because the pound is dropping in value.

[LargeDeviation]

@MsPincher They have been consistently wrong the wrong way - they have underpredicted inflation consistently and significantly since the war started.

I would expect them to miss a bit on the upside about half the time, a bit on the downside half the time. This isn't what is happening.

In fact, this has been a systemic problem throughout the Carney and Bailey years, even before the war. See this data analysis over the last 15 years where it shows, amongst other things:

1. there has been a consistent underprediction of inflation
   
2. there is almost no relationship between their prediction 1 year ahead and the actual inflation outcome.
   
   blogs.lse.ac.uk/businessreview/2021/10/20/the-bank-of-englands-response-to-rising-inflation/

[ILoveAllRainbowsx]

@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

This is why the US can increase rates more easily than we can. Most US mortgages are on long term fixed rates (20 years +), so increasing borrowing costs only affects a few new home buyers.

It is much more difficult in the UK.

[ILoveAllRainbowsx]

@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

@Boreded

Economics in not a science.

It is just theories. Most economists don't agree with each other.

I am not saying that the OP is correct, but just because she isn't a trained economist, it doesn't meant that she isn't.

[LargeDeviation]

@ILoveAllRainbowsx Yes this is true; it makes the decision easier in the US.

However I still think that controlling inflation as much as we can is the most important immediate economic priority. Keeping price increases as low as possible for everyone is more important than increases in a few peoples' variable mortgate rates. And if we don't raise rates significantly now, then we are at risk of a currency crisis where we will be forced to rauise rates anyway and probably by more and for longer.

[Liebig]

@MsPincher Those same expert economists have led to the biggest possible crash coming as consequence of, not only not seeing, but not properly dealing with 2008’s events.

The UK is simply going to be the first developed nation to go under because of a total lack of basic understanding about what QE and ZIRP lead to. It’s as if Japan wasn’t a good enough example of this folly for them. Instead, the West has sleepwalked into an even worse financial fate than if we’d just let things reset nearly two decades ago.

And quit with the appeals to authority. Plenty of other economists call bullshit on the BoE and Fed record. I might remind you that economics is all about the endless growth on a finite planet, something that most toddlers realise is dumb as hell.

[WeBuiltThisBuffetOnSausageRoll]

We import so many things including energy, food , clothing the pound tanks everyone will suffer from the very poorest to the richest. I have a mortgage but rates rising for a few years would be a lot better than our economy imploding. They will raise rates again because the pound is dropping in value.

Very fair point, but there are millions of households across the country who simply don't have the luxury of managing for a few years of pain before things (hopefully) settle back down again.

[antelopevalley]

People are disagreeing because they are thinking of the impact on them individually of rising costs of servicing debt. But I agree OP, without significant action there will be negative consequences on the economy.

[WeBuiltThisBuffetOnSausageRoll]

I'm not saying that we shouldn't all expect to tighten our belts for the good of the country and the economy; but unless Truss does something very significant and very soon about the energy prices, it will all be academic anyway and the whole country will crumble.