Economics for dummies

[Clueless2023]

Please can someone explain to me in simple terms why the Bank of England keeps raising interest rates. I understand that it's to curb inflation, but I'm really not sure what that means, what inflation is and why it's bad?

The interest rises mean people pay more on their mortgages so have less to spend on things like holidays, new clothes, eating out, socialising, etc. But surely this means that these industries then suffer, some go under, people lose their jobs, more people reliant on benefits? I just don't get it?

Also, I've read in the news today that the government are being asked to step in to help people who are struggling with their mortgages... but why would they do that when they are the ones who made the decision to raise interest rates? Or do the government not control the Bank of England?

That mistake with forecasts is going to cost people dearly

Agree with your order of causes too

@SunnyEgg yes it is going to cost people dearly these BOE policy makers are not exactly doing a good job. Out of interest why did Gordon brown give them autonomy

Listening to politicians from both parties this morning maybe as a way to say it’s their issue we don’t comment ;

But other than that no idea, would be good to know

Wonder why BoE got the forecasts so wrong, which variables were out

@SunnyEgg Bailey is out of his depth complete imbecile

Carney did nothing because he didn't have to do anything.

I can see how anyone who wants low interest rates forever would like Carney.

Unfortunately the world says no and central bankers (at least the central bankers of smaller economies like the Uk) need to do what the markets tell them to do.

Carney should be congratulated for getting out before tshtf.

But I'm not sure he demonstrated any particularly impressive skill set that made him worth his wages.

@GasPanic you maybe right but Bailey is out of his depth

I’ve seen a few posts on Bailey like that. Trouble is we’re at the mercy of such mistakes but no direct public kick back

@Parsley1234 and @GasPanic what would you do to get through all this? You may have said already

I’m guessing you have good insight into economics

@SunnyEgg i have no idea however if I were in charge of the BOE I would imagine my economic ability would be such that I would know and I’m very sure it would not include chasing a recession or hoping that raising interest rates when the
outside influences on inflation are not determined by people over spending. All this clown is doing now is making life bloody tough for people even more than it was and while he moans on about getting inflation under control it’s out of his hands it’s not a question of putting the brakes on there are no brakes 🤯🤯🤯. He is using a hammer to crack a nut and the nut isn’t cracking

Where to start.... the UK's problems are so vast at this moment that it will take massive and sustained cross party effort to turn the economy from sunk to thriving. And it's not just sensible long term economic policy, its everything, from education to infrastructure.

Inflation happens when there is too much money sloshing around and not enough goods. This is exactly what happened during Covid when govts locked down healthy working adults shutting down production of goods. If this is not bad enough, our govt then printed borrowed and printed almost a trillion £ to pay for healthy people to sit at home. So not only was the supply of goods choked, made up phoney money was handed out like skittles to an unproductive population. What happened after lockdowns lifted, people with free money chasing goods that hadn’t been produced.

High interest rates are a tool for taking money out of the economy. It means people have to pay more to service debt so either they borrow less to spend or they have less disposable income to spend on other things after servicing their mortgage.

Essentially, the govt now wants to cause a recession to control the inflation, that they caused. Yes that’s right folks! This govt wants to shrink the economy, make you lose your job, make you poorer, lose your home, in order to pay for their corruption during Covid where they handed out billions in contracts to their friends. Those billions came from the printed and borrowed money.

So the taxpayer in this country is spending £20billion a month in servicing that debt, paying more interest on their mortgages, paying more for food and energy, AND will face a recession that the Bank of England and the govt is openly saying they want.

Hope the lockdown was worth it for you. Since so many wanted to it so badly.

No the major issue is that we printed half a trillion pounds to pay for Covid. When we couldn’t afford it. The US can afford it, they have a high productivity economy. And we don’t produce enough of our own energy. The US does. Fracking anyone?

No the major issue is that we printed half a trillion pounds to pay for Covid. When we couldn’t afford it. The US can afford it, they have a high productivity economy. And we don’t produce enough of our own energy. The US does. Fracking anyone?

I mentioned QE in my post? Productivity is an issue, as you say, and one which many European countries, including the U.K., face.

But I still think the sharp spike in energy and food costs was prompted by the invasion of Ukraine, which is a major agricultural exporter (and the knock on impact of countries reducing dependence on Russian energy).

Both points are correct. The biggest driver was as you say printing £500 billion of money during Covid and injecting it into the economy. This was always going to end in tears, for example if anyone thought at the time that the £600 million Sunak spent on eat out to help out was something for nothing then now we are paying the price.

The energy price rises were caused by the reduction in supply of Russian gas because of the Ukrainian crisis. UK inflation is a touch higher than the EU average especially on food prices (but less so on energy prices) so Brexit did have a small impact on making inflation higher than the EU average.

Given that the majority of the population supported the lockdowns, that the majority support standing up to Russian aggression against Ukraine (including myself) and 17 million supported Brexit. Then sadly we are all to blame for the higher inflation and subsequent interest rate rises and becoming poorer.

The main lesson in economics is that you don't get something for nothing, there is always a price to pay.

This BBC podcast series is worth a listen if you have the BBC sounds app: www.bbc.co.uk/sounds/brand/m001dwr7?partner=uk.co.bbc&origin=share-mobile

Inflation is covered in episode 1 (each episode is only 14 mins but us a good summary if you're a novice like me!).

I agree, both Covid and Ukraine war have had big impact on inflation. Out of those three mentioned I supported one, our approach to Ukraine.

But no party is talking about changing Brexit much and it was a vote and lockdowns people demanded them over all else, so the public largely wanted it.

Explain to me what Carney would have done differently to Bailey and I might agree with you.

Bottom line is that Bailey doesn't have any choice in following the Fed and his remit is to curb inflation (keep it at 2% IIRC). What other tools does he have to do that other than interest rate rises ?

I think two issues. One as someone else said, he began raising rates too late and was not aggressive enough at the beginning of the cycle. But if he had done then we would have had all the usual property VIs screaming about how the rate rises were unnecessary. If he had started raising earlier I think the endpoint would have been the same, we would have just got here sooner.

The second is the modelling. Which is woeful. I have been going on about how bad the BOE is at forecasting inflation for ages. But surprise surprise no one takes any interest. Then as soon as people get hit in the pockets its outrage. Can you hold Bailey responsible for the crap modelling ? Well probably not personally. But as responsible for the performance of an organisation as a whole then yes IMO.

For years rates have been set too low. This has caused malinvestment in property. The government had the chance to do something about this by varying fiscal policy. But the kind of fiscal policies they came up with to curb the effect of low rates was help to buy which just goosed the market further and stamp duty holidays. We're at the end of the line now. No more goosing to be done. So everyone needs to get ready for some pain.

@GasPanic I have no idea but surely to god someone drawing a fantastic salary with perks shd be doing a better job ? Yes there willl be pain for some but definitely not all and re Carnie he came across as intelligent and educated sadly not Bailey

Well how ?

I mean there is one thing he can do on managing the economy. Move the lever up and down.

There isn't much more to it than that.

Carney got away with it because the lever didn't need moving on his watch. But he has as much control over US rates and UK furlough schemes as Bailey does (zero).

If Carney and Baileys terms had been switched I'm confident we'd be ranting about Carney now in the same way people are ranting about Bailey, because there is no magic way out of where we are now - the only way was not to get to where we are now in the first place. And where we are now was dictated by stuff people did over the past 13 years, not by Bailey.

TBH I would fire the whole of the MPC (and their no doubt inflation linked benefits) because the entire thing is a waste of public money.

GasPanic I totally agree with you. The Bank has to take some responsibility for inflation forecasts being utterly wrong. As you say, their main job is to control inflation via interest rates and if they're predicting 3-4% and the reality is 9-11%, that's a big error.

I speak to fund managers regularly and their criticism of the Bank verges on vitriolic. Given they have an army of analysts at their disposal, I think they may have a point.

But you're right, it becomes political. We needed to raise rates higher and earlier, however unpalatable that might have seemed at the time. We face more pain now as inflation is still so high. And while interest rates were low for a long time, it's somewhat of a historical anomaly and they were going to rise at some point.

I do wonder whether all the posters on here who wanted longer lockdowns and more state support are also complaining about inflation and interest rates? The day of reckoning of the pandemic support couldn't be put off for ever.

I thought Carney was better than Bailey but he wasn't apolitical enough, in my view.