Rise in Interest Rates

[LindyLou2020]

May I begin by saying I'm neither a politician or an economist. I'm just an ordinary person who tries to stay up to date with what's going on in the world.
But I'm typing whilst quietly seething, after reading yet more news stories about people being terrified of energy bills, and also the consequences of rising interest rates, (i.e., people not being able to afford their increased mortgage payments). I'm not even going to touch on inflation, which of course will be partly driven by both of these issues. I'm not going to touch on Brexit either, or the costs of Covid.
I also know "bad news sells", so I have to be careful of being swayed by scaremongering as opposed to reality.
I know that the war in Ukraine has been the cause of much of the COLC.
But what is angering me so much is that it appears that Truss's and Kwarteng's so-called "mini-budget" spooked the world's financial markets, and has been the direct cause of the rise in interest rates which is going to have repercussions for everyone. And it's this that prompted me to post.
Have I got that right? If so, is Truss going to face any consequences, as she was PM at the time so carries the can for the decisions made? And if not, why not?
Can Mumsnetters more financially savvy than me tell me if I'm right.....or wrong?
I'm not after a digest of world economics please, just some clarity on what has been caused by the actions of those two.

Interest rates were going up before the truss/kwarteng mess as a response to inflation and in response to interest rates going up elsewhere (USA) to protect the value of the pound.

Yes truss/kwarteng spooked the markets but that's only part of the story

Truss was PM for 50 days and her little economic experiment cost the country £30bn.

That's a cost of £600,000,000 for every single day she was in office.

It's fucking criminal.

I would say right and wrong. Right in the respect that Truss caused a short term spike in rates (more correctly gilt yields) due to bad management.

Wrong in the respect that the underlying trend in rates/yields was and is up, and that is nothing to do with Truss.

A few weeks ago I would have probably argued that yields were going where Truss caused them to go anyway in the medium term. However, I am not so sure about this now. It looks like they spiked due to Truss much higher than where the underlying trend will take them. That would mean that people remortgaging at the point where the Truss budget spiked yields higher would be at a disadvantage.

OTOH, you could argue that without the Truss budget, yields would be higher than they are now (although not as high as Truss caused them to spike obviously). Sunak has obviously been frightened witless by the market response to the Truss budget and has been making aggressive noises on curbing spending and raising taxes, which has pleased the markets and lowered the yields significantly.

Would Sunak have done what he has done without having the market response to Truss's budget to scare him into action ? I very much doubt it. But then if Truss hadn't done what she did, Sunak would probably not be in power !

So quite a lot of co-dependency in there - tldr, Truss may have spiked yields in the short term, but will actually lower them in the medium term because Sunak has been forced to get his house in order as a consequence of what Truss did.

Well done OP, I am delighted that you have raised this point.
Personally I am amazed how little condemnation and repercussion has fallen on Truss and KK for their reckless, egotistical and stupid economic experiment which will have serious consequences for the entire country.
30 Billion pounds which we are going to have to recover by increased taxation, lower public spending and raised interest rates.
Personally I would like to see them both held responsible for their actions, and a custodial sentence would be perfectly reasonable considering the long term damage they have wrought.
And don't get me started on the Conservatives party internal election process which led to this dismal state of affairs.

Thank you - that's the kind of info I was seeking!

@GasPanic
THANK YOU! I'll need to read your reply several times, but a VERY comprehensive explanation.

Yes, to me it's unbelievable that they seem to have just been able to blithely carry on without even a slap on the wrist. I just don't understand it.
Britons should be up in arms 😡

I didn't know it was that much!
Glad it's not just me who's livid!

I'm beyond livid. I'm not sure I can ever forget what they've done or forgive the party that enabled them to do it, tbh.

And I'm guessing I'm going to be even more livid in 2 days' time when Sunak reveals exactly what this fiasco is going to cost each of us, personally.

The £30bn they cost the country is half of the £60bn gap Hunt is trying to fill.

I was shocked to see Truss with other past PMs at the Cenotaph on Sunday. I don't know how she dares to show her face.

Interest rates seem to have peaked and be dropping back a bit now. According to DH it's because the US had somewhat lower inflation figures than expected (I think). Truss and Kwarteng's bad misjudgment certainly didn't help (understatement!) but some of the pressures on interest rates are external.

I thought that too as soon as I started watching the Remembrance Sunday coverage on TV. I suppose because the former PMs are merely following tradition, she couldn't officially be excluded.
But she could have had the decency not to show up. Shame on her.
To me, she has the same smug, entitled , arrogant demeanour as Thatcher.

Quantitive easing was a massive experiment. Now we are at quantitative tightening. Interest rates are set by US. We have to keep the pound strong against the dollar as gas etc is sold in dollars. So a lot of what has happened would happen under a different government as well. I dont think much oil change if labour get in. But we will find out in a few years. Basically my understanding is they kept interest rates low since 9/11 to keep up morale. Interest rates were meant to return to normal but then 2008 crash happened. Then Covid happened. Now they are tightening up the money flow at last. That's my understanding. I dont think it's downto UK government, these were global decisions.

Sorry quantitive not quantitative

My understanding was that interest rates have to rise to keep inflation in check. The trouble is they were kept artificially low for so long that costs of things have gone up to a point where bringing interest rates back up to where they should be really hurts. And they should be higher - we've had interest rates advertising about 5% since records began over 300 years ago.

I think it's more like 60billion unfortunately. The reality won't be known for a while yet but it's likely that it's a very big number.

I think the gap to fill was around 30billion in the summer and now it's 90-100billion thanks to trusses stint in office.

I'm not sure they maintain interest rates to keep "morale up" !

Given the way people make out like bandits when rates are set low then they would probably set them low all the time !

Interest rates are mainly used to target inflation. In fact the BOE (the people who set interest rates who are NOT the government and supposedly independent) have a remit to keep inflation at 2% (in fact I think there is a greater remit to work in the general good of the economy, but not 100% sure on that).

It's kind of a myth that the BOE (central banks) actually set the interest rate though in my opinion. Really the market sets the cost of borrowing money (interest rate) and the central banks play catch up in response. You can kind of see this in how when the BOE raised the base rate recently by 0.75% it had practically no effect on the mortgage rates (some would argue that the mortgage rates has already priced in the 0.75% rise).

To me QE was the correct thing to do, but all it did was buy some time after the GFC of 2007-2008. It smoothed out the effect of the GFC, but at a future cost. The idea was that we could use it to get our house in order and spread the costs of the GFC over a longer timescale. Unfortunately we didn't restructure the economy, we didn't reduce the dependency on debt and now 15 years later we are going to end up in exactly the same place as we were before.

You'll notice that this morning the BOE have produced the latest inflation figures, 11.1% I believe - the highest inflation in 40 years. So they had one job. One job. To keep inflation at 2% via use of interest rates and they have failed dismally. I just hope that the nation feels that they are worth their salaries and inflation proof pensions.

Longer term interest rates are falling substantially though, I had a client fix via a swap for 12yrs a few days after the Truss budget at c.4.70%. If he did that same trade today, he'd be fixing at c.3.50%. No idea what tomorrow will bring mind!

Thanks to the PPs who have enabled me to understand all this a bit better.
And..........I know it's incredibly childish of me, a supposedly mature woman, to say this, but.........I still loathe Liz Truss 👿

Don't forget all of the bonds the Treasury had to issue to bail out pension funds directly afterwards, as a result of the mini budget. That was another £60bn, underwritten by the Treasury. I.e. all of us.

Yes interest rates were going to rise but nowhere near that fast.

And I know you said you aren't focusing on this OP but Brexit is costing the economy £40bn per year. If we have a £50bn deficit, and politicians are claiming to now be being "honest with the public" (🤣) is it not strange that they've not even set out to people the options:

a) endure £50bn of tax rises and spending cuts; or

b) rejoin the single market and endure only £10bn of tax rises and spending cuts.

This very lonely elephant in the room is screeching its head of and being completely ignored. 🐘

Yes precisely. OP watch what the FED does, we have to shadow the dollar as commodities are mostly priced in dollars so gas etc. It means that if we don’t keep pace with the dollar we import even more inflation than we are already experiencing. Unless the energy supply side issue is fixed there are basically few levers other than interest rates that the BOE can pull.

interest rates have been artificially extremely low for an extended period of time. We should have been slowly ratcheting up for a while already.