AIBU?
to believe interest rates should be at least 4% already, and rising fast?
LargeDeviation · 05/09/2022 19:34
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!
Am I being unreasonable?
AIBUYou have one vote. All votes are anonymous.
SwanBuster · 06/09/2022 22:32
Boreded · 05/09/2022 22:48
You are making the same point that I am.
the OPs logic is still horrifically flawed and made on baseless assumptions.
fwiw, I got my degree in economics from Durham uni…it’s not really relevant other than that it means I am aware that macro economics is theoretical
ILoveAllRainbowsx · 05/09/2022 22:01
@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.
Boreded · 05/09/2022 21:06
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
wow - an economics degree - from Durham!
OP - give up - we are in the presence of genius.
meanwhile, at the BOE, see image attached.
Even a 5 year old could look at that and see their prediction records are complete nonsense.
AdamRyan · 07/09/2022 09:21
To be fair, I don't think anyone predicted the Ukraine war in February 2021
Also the BoE (as well as the BBC) seem to have been forced into presenting the rosy uplands/unicorn version of reality which ignores Brexit.
For some reason lots of conservatives hate the BoE at the moment, probably "had enough of experts". I'd still rather an independent professional organisation make those predictions than the treasury.
ThistleSifter · 07/09/2022 22:08
1dayatatime · 06/09/2022 14:39
@antelopevalley
"1dayatatime is super naive. It is not as simple as throwing Ukraine under a bus. We have already done that with Crimea. Russia will not stop. Putin thinks the West is decadent and will quickly give up support for Ukraine. His plan is to invade Ukraine and then start invading NATO countries.
If everyone thought Putin would stop at Ukraine, the UK and EU would not have supported Ukraine. They largely understand that Ukraine is the front line. "
++++
The idea that Putin will not stop after Ukraine and start invading NATO countries is scare mongering and not correct. Firstly after the military mauling Russian forces have received against a supposed "weak" opponent of Ukraine means that Russia is in no position militarily or politically to take on a much larger opponent. Secondly to attack a NATO country would invoke a war against all NATO countries which has a real potential to go nuclear. Putin is not stupid and doesn't want this nor does the West.
So I simply don't accept that Russian troops will next move on to Warsaw, Berlin and Basingstoke next. Many cite the example of Hitler from their GCSE History but perhaps a better comparison would be the rush to war on the First World War.
++++
@1dayatatime is wanting simple solutions to complex problems i.e let Putin successfully invade Ukraine so we can get back to normal. That is not realistic.
+++
I hope my previous posts have demonstrated that the solution to high inflation and its causes are incredibly complex with no easy answers and is anything but simple.
The question is how the war in Ukraine and the destruction, loss of life and economic damage can be best ended. Supplying weapons to war zones has historically been shown to not exactly be the best solution to shorten wars. An all out victory over all of Ukraine by Russia is not something the West will now accept. And all out victory expelling Russia from all of Ukraine including Crimea and humiliating Russia is not something Russia will accept without going nuclear.
So that leaves a negotiated peace deal which the Russians are desperate for. Maybe something along the lines of Russia keeping Crimea (which is ethnically 65% Russian anyway) and a referendum for Donetsk and Luhansk would allow a quicker and less costly end to this war. But so long as the West keeps giving a carte Blanche support and supplying weapons to Ukraine the war will grind on, more lives will be lost, more destruction caused and more economic damage inflicted.
Once a peace deal has been reached , gas supplies will resume prices will go down and this will buy time for Europe to go full out on reducing its dependency on "cheap" Russian gas. Something to be fair the US has been warning about for decades.
So I really don't think I am being naive and I really do not see any simple solutions. But I do a very complex and shit fest looming which will require realpolitik and unfortunately some very hard decisions which I recognise will be extremely difficult and unpalatable to many.
I agree.
LargeDeviation · 08/09/2022 16:51
@oiltrader Yes I think the ECB move will drag Bailey kicking and screaming into a 75bps rise next week.
Catherine Mann has made a speech which you can read at https://www.bankofengland.co.uk/speech/2022/september/catherine-l-mann-53rd-annual-conference-of-the-money-macro-and-finance-society where she advocates for sharp, fast rises in rates to cause less pain overall. She says it much better than me:
In this more complex and arguably more realistic and relevant version of the inflation model, a fast and forceful monetary tightening, potentially followed by a hold or reversal, is superior to the gradualist approach because doing so is more likely to promote the role that inflation expectations can play in bringing inflation back sustainably to 2% over the medium term. This policy strategy would reduce the risks of a more extended and costly tightening cycle later that depends primarily on shrinking aggregate demand.
Cailleachian · 09/09/2022 17:30
BoE committee postponed for a week because Lizzie popped her clogs.
This is not going to be a pleasant ride. There seems to be a denial of reality about the economic pain that the UK is going to go through in the next 5 years.
We are risking hyperinflation and a collapse of the pound.
1dayatatime · 09/09/2022 22:53
@Cailleachian
"We are risking hyperinflation and a collapse of the pound."
+++
Sadly you are spot on. In economics you don't get something for nothing and like whack a mole if you fix one problem then it will cause another problem to pop up somewhere else.
So in the case of the cost of living crisis the Government solution to the energy crisis caused by a reduction in Russian supply is to create £100 billion of debt and subsidise prices rather than seek to reduce demand and increase supply or to at least finance the cost through a windfall tax on energy producers or even out of that enormous £100 billion to set aside £10 million (which is 0.01%) for an information campaign to encourage people to reduce consumption.
The trouble is that creating £100 billion of extra cash will then cause inflation to rise further, requiring higher interest rates and a subsequent much bigger cost of living crisis.
We are heading down a very shitty creek being governed by what (after Cameron, May, Johnson) is now the D Team of the Conservative Party.
Notlosinganyweight · 09/09/2022 23:34
Fififelix · 05/09/2022 20:38
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.
Agreed. They do have to go up at some point, and the earlier you do it the more the benefit in reducing inflation. Propping up house prices in this country has caused so much pain and suffering,yet we are determined to prop them up just so the electorate feels wealthy even though everything else is going to shit. Its crazy.
1dayatatime · 10/09/2022 09:50
edwinbear · 09/09/2022 23:44
The reality is that the market is now pricing in a 50bps rise. The likelihood of 75bps fell off a cliff once the energy cap was announced as it will curb inflation.
Borrowing £100 billion will in fact push up future interest rates not stop them going up.
www.bloomberg.com/news/articles/2022-09-08/uk-economists-say-energy-plan-will-push-up-boe-interest-rates
This is basic economics and I am genuinely worried for the future the country that some people (voters) are unaware of the serious downsides of the government borrowing loads
LargeDeviation · 10/09/2022 14:14
@edwinbear The markets are frequently wrong, but here, sadly, I suspect they are right. Feartie Bailey will bottle it again and go for 50.
He has already kicked the can down the road a little, using the Queen's death as an excuse.
Bailey should be sacked and Catherine Mann made the first female Governor. Oh, and while we're at it, bring back Andrew Sentance.
LargeDeviation · 22/09/2022 12:09
@MarshaBradyo Yes - inflation will hit us far harder than the US as we have more exposure to energy. Addtionally a significant part of our inflation exposure is via our currency as oil and gas are priced in dollars, and so a strong pound versus the dollar will reduce inflation here.
So if anything the Bank of England should be raising rates much faster than the Fed.
MarshaBradyo · 22/09/2022 12:13
The hard part is dealing with those external factors with interest rates
I picked up on an economist talking about using interest rates in US as a more effective tool as the inflation issues are more domestically led.
It’s interesting but it was noisy at the time with dc so I need more on it
edwinbear · 22/09/2022 12:14
As I said, up by 50bps - which is absolutely the right decision. They have to wait to see what's announced tomorrow, before readjusting the forecasts at the November meeting to take them into account.
@1dayatatime I'm fully aware of basic economics thanks, my undergrad degree is in economics and I've spent the last 25 years in investment banking - selling interest rate derivatives to FTSE 250 clients. I do nothing but watch, analyse and discuss interest rates 12 hrs a day.
LargeDeviation · 22/09/2022 12:21
From www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/september-2022 we can see who made the fateful votes
Five members (Andrew Bailey, Ben Broadbent, Jon Cunliffe, Huw Pill, and Silvana Tenreyro) voted in favour of the first proposition. Three members (Jonathan Haskel, Catherine L Mann and Dave Ramsden) voted against the first proposition, preferring to increase Bank Rate by 0.75 percentage points, to 2.5%. One member (Swati Dhingra) voted against the first proposition, preferring to increase Bank Rate by 0.25 percentage points, to 2%.
LargeDeviation · 22/09/2022 12:29
@edwinbear One basic problem with the MPC's reasoning is that they don't take into account the expected market reaction to their decisions.
They are welcome to deviate from market expectations if they have good reasons to do so but if they do this then they should expect and try to quantify a market impact. They have not even mentioned currency market impact in their justifications for 0.5%, when it is clear this will cause a drop in the pound and an increase in inflation as the market was largely pricing in 0.75%.
Chevyimpala67 · 22/09/2022 12:34
edwinbear · 22/09/2022 12:14
As I said, up by 50bps - which is absolutely the right decision. They have to wait to see what's announced tomorrow, before readjusting the forecasts at the November meeting to take them into account.
@1dayatatime I'm fully aware of basic economics thanks, my undergrad degree is in economics and I've spent the last 25 years in investment banking - selling interest rate derivatives to FTSE 250 clients. I do nothing but watch, analyse and discuss interest rates 12 hrs a day.
What do you think should happen?
I think they need to increase further. I strongly feel that thos is the BofE MPC kicking the can down the road - which seems to all that successive governments have done since 2010...
happyfishcoco · 22/09/2022 14:02
Love to see this topic here. I personally know nothing about economic.
I was told, increase the interest rates can reduce the inflation.
This year, the inflation were crazy, most of the things are 15-20% higher.
If, increase the interest rates, will the prices go down? or just ensure the price won't go up again?
And why NOT increase the interest rates will make the Pound weak??
Hope someone if good at economic can explain it? thanks
GasPanic · 22/09/2022 15:19
@happyfishcoco
I'll have a go for you.
Imagine you have £10000 in a UK bank. The interest rate is 2%. However, you know that the interest rate in a US bank is 3%. What do you do ?
Answer is, sell your pounds, buy dollars and put them in a US bank. This makes the pound worth less (because less people want it) and dollars worth more (because everyone wants them to get the high interest rate).
The bigger the difference in interest rates between the UK and the US, the more likely you are to do it and the more money you will make by doing so.
This is why the UK interest rate has to follow what the Fed does, because if it doesn't then the value of the pound will drop.
Why is the value of the pound dropping a bad thing ? The reason is that not many things that you would want to buy outside the UK (for example energy) are priced in pounds. They are priced in dollars. So if the pound drops against the dollars, these things cost more in pounds than they did before and so pushes up inflation.
There are lots of other more complex factors that decide the currency values ,for example people generally view dollars as a safer currency to hold than pounds. so because of this people generally want a better rate of return for holding them.
There also some other ways interest rates act on the economy. They effectively set the price of money. So putting up the interest rates makes it more expensive to borrow money. This means there is less money in the economy to purchase the same amount of goods, so prices should (in theory) go down. However, it is less straightforward than this because as I mentioned earlier, a lot of our goods these days are imported.
To comment on this thread you need to create a Mumsnet account.