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Re: Rising cost of living
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Originally Posted by Sephiroth
The BoE have completely lost the plot. How on earth does an interest rate hike bring down the energy price? It's objective is to stop people from buying stuff so that internal prices don't rise. But this will lead to unemployment and neither the people in work nor those laid off will be able to pay their mortgages. In time of recession, interest rates should fall.
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This is the Times explanation
https://www.thetimes.co.uk/money-men...nterest-rates/
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How does increasing interest rates reduce inflation?
Before December 2021, interest rates had been at a record low so people were encouraged to borrow money because it was cheap. Meanwhile the interest rates on savings accounts were pitiful so there was little incentive to save, meaning people tended to spend instead.
But rising interest rates have increased the cost of borrowing money. In this environment, consumers and businesses are put off from spending or borrowing.
There is now more incentive for people to save their money rather than spend it as they can earn some interest.
But as demand for goods and services fall, this should in theory have a knock-on effect on prices by preventing costs from rising. Shops might even reduce the cost of goods to try to encourage people to buy them.
This is why increasing the Bank rate is like a lever for slowing down inflation.
This is exactly what the Bank of England’s MPC decided to do on 16 December when they voted to raise the cost of borrowing from the record low of 0.1%, and again in February, March, May, June, August and September. The rate is currently 3%.
The rise will be felt by those with mortgages that track the base rate of interest, while those on fixed rate deals may find that rates have increased when it comes to remortgaging. The base rate also impacts other borrowing such as credit cards, personal loans and car loans.
With a weak economy, increasing prices, and static wages, there is a fear that the UK risks falling into “stagflation”.
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