Reply With QuoteFill yer boots.
https://forum.tz-uk.com/showthread.php?506822
Perhaps some of the more economically minded people on the forum could explain how raising interest rates can stem inflation?
Listened to the announcement today, no explanation.
My simple understanding is that interest rates going up can do a couple of things:
1. Reduce ‘heat’ in the economy, ie demand driven inflation. Too many people chasing too few goods, expensive credit can put the brakes on, or encourage saving.
2. Increase the attractiveness of the pound, thereby reducing inflation as input costs for things priced in the dollar, or indeed anything coming in from overseas is reduced.
Given inflation is being driven pretty exclusively from external factors, I assume only point 2 can have an influence.
Can anyone shed any light on this. B of E gaffer not really filling in the gaps.
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Fill yer boots.
https://forum.tz-uk.com/showthread.php?506822
Lolz. I did search for interest rates, obviously not very well!
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It won't be that successful cause inflation isn't being caused by excess consumpotion but by the last 3yrs of money printing. To be fair, BofE doesn't have too much choice, with the Fed increasing rates, they need to keep competitive else face trouble selling bonds.
We're heading for a nasty recession.
It's a very blunt instrument to be honest. The aged-old theory is that it encourages saving and discourages debt-based spending. However, as inflation is at the moment being driven by rising energy, fuel and food prices, I don't really see it beimg that effective. Higher interest rates should encourage investment in UK assets and therefore strengthen stirling - so should help bring the prices of imported goods down a bit, but the Euro and USD doesn't seem to have moved much.
Most people are already being very frugal with their spending and those with mortgages are being screwed by these interest rate rises and the market's anticipation of more on the horizon.
All very bleak, I'm afraid.
The other inflation stimulus has been the huge breaks in supply chains around the world caused by the pandemic.
Higher interest rates will tend to reduce inflation because high borrowing rates will discourage both industrial and consumer spending through lower demand.
Inflation is simply too much money chasing too few goods. Therefore the best and quickest way to reduce inflation is to reduce our spending money. Increasing interest rates pushes up the cost of mortgages and bank loans and that leaves less money to chase the goods and then inflation reduces.
It’s a god awful mess, people are already in a terrible financial difficulties with energy and food costs I can only see this tipping a lot more household’s over the edge. Mortgages and also private rents will be impossible for some.
Spending I am sure would have slowed as the higher energy prices kicked in because up to now we have not touched the surface. Bleak times ahead
Mortgage interest rates are still nowhere near as high as they have been over the years - believe me I was in the tick of it.
I guess lots of folks run their lives closer to the wire than 20-30 years ago.
For sure, the supply chain and 'overseas issues' are less than helpful.
When you look long into an abyss, the abyss looks long into you.........
I'm no economist but I'm pretty confident that the impact of energy price rises would have curtailed spending, reducing prices and bringing down inflation. I don't think these interest rate rises are necessary. It's simply making financial pressure intolerable for millions of households. People had enough to worry about without adding losing their homes into the mix.
But I don't think you can compare like for like interest rates...we live in a separate financial era. Real world example...using Zoopla and having a public sector job means I can directly compare figures for 1997 against today for my job and house.Originally Posted by Chris_in_the_UK
My house was bought by the previous occupants for £129,000 in 1997. If I was doing the same job I am now back then, my base salary would have been £41,000. In 2020 when I purchased, it was £650,000 and my base level salary £63,000. The house price has gone up 500% whilst the salary 50%. If paying the market rate for a standard place to live is "living closer to the wire" then most people are forced into it. We have no choice.
Last edited by Christian; 3rd November 2022 at 23:03.
I also was in the thick of it, one day the rate went to 15% then settled back to 12% what a day they was. Today is very different to back then as we only knew basics items so we did not miss what we never had. You went to work to pay the mortgage and put a crust on the table, perhaps went out for a pint at the weekend. People will miss lots of the luxury items we now take for granted like holidays abroad expensive cars to name a few.
Inflation caused by the energy crisis has brought a real problem. Suppliers don't have much leeway to compete and cut costs because of the cost of fuel and energy. Proper stagflation territory.
Not enough supply of goods and services...prices increase. Too much supply of goods and services...prices decrease. We're living in a time of limited energy and housing supply in this country, therefore the cost of living is increasing. To cap it off we're at the start of a period in history where the need for lower skilled, poorly paid work will be decreasing. In 10 years time will it be possible to earn a living as an Uber driver? No, because cars will drive themselves. This is just one industry, there are many more that will go the same way.
We'll end up with an ever increasing pool of unemployed people living in poverty, which in turn will destabilise society for everyone. The only solution will be to provide universal basic income (UBI) and 'busy work'. Encouraging people to find fulfillment through the arts and leisure pursuits. With the robotic revolution, ideally the cost of goods and services will start to come down and we'll be able to provide for everyone. Once we have nuclear fusion sorted, energy will be cheap and plentiful. That leaves land and housing. Mars anyone?
Last edited by A440; 3rd November 2022 at 23:17.
I am not - when I bought my first house in 1984 I paid £16450. My salary was £17500 and my wife's was £10000.
When I sold it went for £132500 - 12 years later, the house I bought was £164500. My salary had gone up around 20%. What people are forgetting is the game has not changed, the capacity for risk is different and has changed over the years. My point was that in and amongst the time period I mentioned we had a massive interest rate rise and the world was going to end etc.
When you look long into an abyss, the abyss looks long into you.........
Combined with the energy crisis, it’s going to kill the hospitality and retail industries, that are already on their knees due to Lockdowns.
Agree. Double whammy...their energy costs go up massively and customers decrease.
I csnnot see this thread. Is it in the bear pit? Can someone invite me in please?
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Bank of England - 'UK to fall into longest ever recession'.
Also Bank of England - 'Interest rates up 0.75%'
Of course it's completely coincidental that banks and financial institutions don't like inflation because it reduces the value of loans they've made.
Nobody likes inflation because it screws up the economy. I don't like it and neither should you.
Even without the energy prices, I think we would have had a spike in inflation in the UK due to a shortage of workers. Partly due to brexit, partly due to the pandemic, the workforce is smaller than it was in 2019 so wages in many industries are increasing significantly. Unfortunately we need a recession to reduce GDP to a level that the current workforce can support.
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Indeed, assuming incomes increase somewhere inline with inflation.
I can remember when I secured a couple of interest only mortgages back in 2007/8 being rather concerned about paying them back. Now my income has increased and perhaps inflation has gnawed away at the principal, plus house prices have increased a lot, as too rents, the repayment isn’t as daunting as it was.
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I know one thing, I like about this situation of being cash rich, I can scour the best saving accounts and see rates of 4% and 5% with no risk.
Having no debt it’s a wonderful feeling, BUT I can see the kids come calling telling me they cannot manage, who else fears this
Hopefully it will teach some to start living within their means. As for me, happy for rates to keep on climbing.
While I see your point- a lot were living within their means?
I feel like there is a lot of "I'm alright jack" and stereotyping people going on. If you got on the property ladder when house price to earning ratio was 3x or 4x then paid off your final mortgage when interest rates were low just consider yourself lucky and don't judge those future generations where house prices are 10x the wage. I'd consider myself somewhere in between and I'm quite willing to say the generation on from me has it tough financially...coming out of education with huge student debts into a world where housing costs are enormous. The same generation of people in their 20s and 30s that locked themselves down recently to protect those over 50.
Last edited by Christian; 5th November 2022 at 02:38.
Well said
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This extensive student debt, compulsory? choices were made on the way in about cost and consequences. Just like phone contracts,PCP payments,parenthood. There are many more options now to drain your resources,standards and pressures are high to keep up with the jones. I made choices way back and it was to save,hard,every penny,for years. Old vans, secondhand stuff. Old house,went room to room refurbing it as funds in pocket allowed,contraception. There is now a definite trend to empty your pocket as fast as you can, Hard to pay any regard to the we are suffering moaners with the box fresh,white audi, cost a fortune coffee machine people i know. Nice people and good company just hand to mouth.
I am alright Jack, i made it happen.
And?
I think between FOMO, exacerbated by social media pressure and brands telling them they're worth it, and the mainstreaming of the ethos, Fake it till you make it, there are a lot of financially illiterate people heading for a fall.
I made it happen too, but and I'm not saying it was deliberate, but the generations after us were almost set up to fail.
Also the B word is steadily making the place less attractive to investors, a big factor in a country whose economy is very dependent on 'the kindness of strangers' as former BOE head Mark Carney put it, and less liveable' reducing opportunities for the average joe, I'll say no more.
Last edited by Passenger; 5th November 2022 at 12:09.
Less than 40% of young people start a full-time undergraduate course so it's not as if the majority of young people will end up with massive student loans.
Those that have, their choice.
Spot on MCFasty, nowadays it's a lot of buying on tik, must have this and that, latest gadget, phone, and when the crunch comes,......!!
Dead right. My aim in life was to work hard so as to retire with no money worries, I have achieved that. My motto always was if I can’t afford it I did not have it. Low interest rates have created this shit storm with lots of people living way beyond their means.
Sorry this is a huge over simplification. There are many living beyond their means taking a casual approach to borrowing and not thinking about the future. That said. education is vastly more expensive than ever, getting on the property ladder is significantly more expensive than ever (even for older houses that require work), having children is extraordinarily expensive but should not be viewed a luxury. I made sensible financial life choices and compromises and have been extraordinarily fortunate, but I would be seriously squeezed if "then" was "now". There is a minimum size the cloth can be cut.
Interest rises are not all bad I suppose as it does help to increase your savings.
This sounds just like generalisations such as "everyone on benefits is a scrounger and just spends their benefits on Sky TV and the pub". The vast majority of people out there are hard working supporting their families and the biggest problem people in their late-20s/early-30s face is the house price to earnings ratio which has forced people to borrow huge amounts just to get on the ladder and secure a place to live. These people will suffer during this horrible stagflation mess. The consequences reach very high up the income brackets.
I can recognise that when I went to university in the late-90s I was way better off...LEA grants, no tuition fees etc. University wasn't optional unless I wanted to risk working in a low paid job and I certainly wont refuse my son the opportunity. That will be the generation still paying off our covid debt, the spiralling healthcare costs and pension burden.
If you are of an age where you benefited from low house prices, MIRAS, final salary pensions, a SPA of 65 etc etc then you shouldn't look down your nose at people in the next generation and generalise like that. Sure iPhones and package holidays exist that weren't there in the 1970s but that is fringe stuff, life is hard work for everyone.
Last edited by Christian; 5th November 2022 at 14:32.
Or glass half empty view....decreases the rate at which your savings are eroding.
Like any generalisation there is some truth in it.
I consider myself lucky to have had opportunities, but it’s not luck that I took them.
I have mates who are mortgaged up to the eyeballs, always have a new car and nice holidays, kids, dogs etc etc and I know they are strapped.
I’ve always been conservative, I’ve never owned a new car and we make frugal choices. But we do spend money when we want to and enjoy a good lifestyle.
I guess the point is it feels all too often there is a lack of personal responsibility for the position people find themselves in. Then it’s a blame game.
It’s is incredibly tough for young adults right now but when we try and recruit them it’s nigh impossible.
When we do they often give up after a short time in roles that were easy to fill 20 years ago. There is definitely a change in the mindset.
I don’t know the answers but I do know that blaming others isn’t it.
Lots of comments on this thread that resonate with me, but this is the one that sums it up. I spent my 20s living beyond my means but learned from it; by 30 I got out of debt and had the self- discipline to start being financially sensible, if I couldn't afford it I did without. However, the lure of cheap finance wasn’t dangled like a carrot, in the late 80s / early 90s interest rates were high and borrowing was expensive so it was easier to resist the temptation to spend. Also there was less peer group pressure to have the latest stuff and get a new car every 3 years, my generation didn’t have the sense of entitlement that now seems to prevail.
The tragedies of the last 30 years are many; the two that stand out for me are the ludicrous rise in house prices and the loss of career opportunities that don’t require full- time study. In the 70s you could get on the starting line of a career at 18 or 16 , nowadays it’s 21/22 after 3 years of full- time study that has to be funded from student loans or bank of mum & dad. Can’t turn the clock back, a lot of the industries providing apprenticeships or part- time study career options have disappeared, house prices are sky- high and even a 10-15% correction won’t be much help to those trying to get on the property ladder.
I find the ageist comments distasteful; trying to somehow ‘blame,’ the older generation for the difficulties faced by the 20 and 30- somethings is annoying. You can only play the cards you are dealt, the baby boomer generation were fortunate in many respects to be born at a good time but I hardly feel they should be resented for it. Referring to the Covid lockdowns as a sacrifice by the youngsters to save the oldies is particularly crass, it’s another symptom of the generational divisions that are prevalent thesedays.
The good old days weren’t always that good, unemployment in the early 80s and high interest rates at the end of that decade stick in my mind. Throw in the 3 day weeks (ca1974) plus the winter of discontent (1978/9) and its clear to see that it wasn’t all plain sailing!
Agree…you live to the system that you live in. Nothing against any age….I’m trying to balance the notion on here that millennials have it easy and the economic pain they are probably about to feel is entirely their own fault. I come at it from the middle ground being late gen x. I completely live within my means and live very, very frugally. Never had a loan other than mortgage since my late 20s, drive a very bog standard car worth about £5000 and have about 85% equity in my home. I still recognise, though, that I’ve watched house prices spiral beyond wages, SPA continually rising, pension schemes getting worse, no more student grants and a huge increase in tuition fees.
I think it’s bloody tough leaving uni right now….my job the competition has increased dramatically, I’m not sure I’d be recruited to my same career facing the current competition. Even entering uni, I heard of straight-A students being unlucky purely because of the timing of the covid backlog. Timing is everything.
For the next few years, I’d benefit from an increased interest rate, but I still acknowledge the pain others will face, potentially through no real fault of their own.
It is a generalisation, one put better by others both here and elsewhere, i did not mention economic status as this issue can affect anyone who is foolish with there money big earners included. The text in bold is a generalisation, unless your definition of low paid is different to mine.
I’m talking about me in that sentence. You’ve got to work with what you’ve got. I was academic at school and not very practical. For me, the expense of University mitigated earning risk and I purely got my career based on my degree result and I acknowledge I was extremely lucky not paying tuition fees and getting an LEA grant.
Last edited by Christian; 5th November 2022 at 16:12.
Got to also remember that life is about the journey too! Why not have some fun along the way!
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This is true. I definitely have to fight my natural instinct to scrimp on everything and only think about the future.
Lots of comments about 'in ny day we did without' etc as if there is an element of schadenfreude about the travails some people find themselves in having overleveraged themselves.
Thing is economies need people to do this and take on debt. So they'll quickly come out of the high interest rate environment to allow this to continue- else everyone is screwed. Also note if you have debt it is someone else's money that's at risk and if you can't pay it back that's their problem so I'm pretty certain a bit of pain and then back on the bandwagon again.
Personal debt is a relatively new phenomenon. Most people used to just have mortgages, and people never remortgaged and withdrew a bit of equity for a new car or holiday.
I think the student loan scheme is a scandal loading young people with debt and normalising debt. If it was not for grants I doubt I’d have been able to go to university and life would be very different now.
I’d sooner earn 0.5% with 2% inflation than 5% interest with 10% inflation.
Interestingly electricity costs which are a big factor in inflation are based on gas prices. I August gas was at 550p a therm. Since then prices have plummeted to 38p a therm. So once this filters through to wholesale prices we surely have to expect electricity prices to fall through the floor and that to have an impact on inflation, and consequently interest rates.
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