Increasing the interest rate to 5%, is this really the fairest way to slow inflation?

Growstuff but the policy is still not making any sense - there are more job vacancies than workers to fill them. So wages can still rise?

ronib

Growstuff but the policy is still not making any sense - there are more job vacancies than workers to fill them. So wages can still rise?

Ah! But if businesses fail, there will be lots of people unemployed, so plenty of people to fill those vacancies. It doesn't seem to matter that those people might live in the wrong part of the country and/or have a different skillset.

From a personal point of view, I'm happy to finally get some sort of returns on savings and investments - they've been kept artificially low, to subsidise mortgages, for too long.

On the other hand, my family, who are younger, would like low interest rates.

But, we've been here before, in the 70's, 80's and 90's, and it's nothing new.

It'll pass.

M0nica

MaizieD what is the alternative to ^Increasing the interest rate to 5%,........ to slow inflation?^

How is that going to slow inflation, though, MOnica, when the inflation isn't being caused by excess demand (too much money in the economy)?

DiamondLily

From a personal point of view, I'm happy to finally get some sort of returns on savings and investments - they've been kept artificially low, to subsidise mortgages, for too long.

On the other hand, my family, who are younger, would like low interest rates.

But, we've been here before, in the 70's, 80's and 90's, and it's nothing new.

It'll pass.

Of course it'll pass, DL. Inflation always does. But it'll take longer to pass with the BoE deliberately stoking it...

But it won’t work, there is no need to punish the ordinary person because demand is not the issue

The government “built in” a structural level of inflation over the past few years and this remains all the time it doesn’t tackle this issue.

Whitewavemark2

But it won’t work, there is no need to punish the ordinary person because demand is not the issue

The government “built in” a structural level of inflation over the past few years and this remains all the time it doesn’t tackle this issue.

But it will work to make those with savings and no borrowing richer.

MaizieD I am not arguing the case for this measure, just asking what we should do in its place?

we have rented for a few years and we have recently bought but we bought on a fixed rate (quite high at the time) and we were used to paying 6% anyway. I know someone will be along to say I am a bit younger than some of you. But we have bought again on fixed, with a good deal because we just want to buy a house rather than paying someone else's mortgage and I hope people in other rented houses will be able to do the same. I know some people see housing as a financial transaction but for most people in rented and mortgaged housing, they se it as a HOME. Maybe this will reset the balance

M0nica

What is the alternative?

You sound like the government M0nica. They really don't seem to have anything to offer. Rachel Reeves doesn't give me much confidence either.

Apparently a senior advisor to the Treasury has said that the Bank of England must now drive Britain into recession. That they must create "the fragility and the uncertainty of a recession to stop firms putting up prices and to stop workers asking for more money " (Marr, New Statesman podcast)

Richard Murphy, whose opinions I usually find too extreme, made some good points on Politics Live today. He talked about the amount of pain today's rate rise would cause. He suggested it would be "massive". As well as the pain of increased mortgage interest we now have a rental market that relies so much on mortgages, as most landlords are now in the private sector as opposed to mainly council housing in earlier times.

He pointed out that the so-called "orthodoxy" of the methods being used was created in the 1970s. As well as rents having changed out of all recognition, the amount of money people borrowed on mortgages was much lower. In those days we didn't lease cars so our ownership of them wasn't attached to interest rates. He mentioned that a quarter of the costs we pay on water goes on interest. The increases for business will be passed straight on to us. He suggested those for water could go up probably threefold.

Both he and the Conservative on the panel agreed today's rise shouldn't have happened.

I worry about the increased repayments for people who are already in debt. The average personal debt in 2022 was over £34,000 excluding mortgages. It’s scary.

How is that figure calculated Casdon? I suspect it includes student loans and credit card debts many of which such as mine are paid off in full each month. If so it’s very misleading.

www.money.co.uk/press/uk-personal-debt-rose-a-third-in-2022
This is where the figure came from Germanshepherdsmum.
It doesn’t mention student debt as a factor.

www.statista.com/topics/10449/personal-debt-in-the-uk/
Comprehensive summary of the debt burden.
It’s the personal loan payments and credit card debt specifically that will impact people, as these are often taken out to meet living expenses according to the reports.

I can recall for a long time it being being usual to pay interest rates for mortgages of 5-6% (been on and off mortgages since the 1980's).

But it wasn't combined with rising prices for everything else.
Nor such acute housing shortages.

Currently negotiated a 2 year 4.5% deal last November but nearly paid off.

Germanshepherdsmum

How is that figure calculated Casdon? I suspect it includes student loans and credit card debts many of which such as mine are paid off in full each month. If so it’s very misleading.

In 2022 polling figures tell us that 35% said they paid their credit card off in full and 65% said they carried some, or all, forward.

I doubt it has improved since then.

It was ever thus. Our generation were targeted by raising interest rates and now younger people are facing the same problem. It will not slow inflation because inflation isn’t being caused by spending. I’ve always thought it an unfair way to manage the economy, it was unfair on our generation and it’s unfair on this generation.

A BoE rate of 5% means variable mortgage rates of 7% maybe more, if that is unaffordable homeowners need to go onto interest only for a couple of years. It just extends the mortgage for that time, bank are happy to do that because the last thing they want is prices falling and negative equity.

In current circumstances raising rates is not going to cure inflation.

Katie59

A BoE rate of 5% means variable mortgage rates of 7% maybe more, if that is unaffordable homeowners need to go onto interest only for a couple of years. It just extends the mortgage for that time, bank are happy to do that because the last thing they want is prices falling and negative equity.

In current circumstances raising rates is not going to cure inflation.

The average mortgage rate over time has been 7%.
Lenders rarely offer interest only mortgages to the private buyer except in certain circumstances.
Interest only is mainly used for buy to let landlords this market has now tanked due to the ratio of rental income against the cost of the loan.
Lenders may well offer longer repayment terms.
Many are still on fixed rates so the full impact will only be felt over time.

When people are already struggling to cope with rising prices everywhere, this is simply piling on more pressure than many will be able to cope with. I'm old enough to remember when interest rates peaked at 17% in the late 70's. We hadn't been house-owners for long, had a large mortgage by the standards of the day, and had 2 children under 5 to support. Frankly, I think we would have gone under if DH's lovely parents hadn't stepped in with regular financial support. History is now repeating itself, as we are the ones who are now having to help out our own adult children. What a mess our economy is in, and I can't see it getting much better any time soon.

Maisie,
If you are interested in inflation please do a little research into the 1978/ 1979 Winter of Discontent under Labour, when the country really was broke, Thatcher got in because Labour gave up, that year interest rates soared to over 17% as Tories were left a sweet note in the treasury, from Labour, the kitties empty hold luck. You can't Norris and not take tge consequences, there isn't really a free lunch.
We have had a Pandemic, the world almost stood still, the boring and very expensive Brexit battle where instead of dealing with the economy we had to battle a load of bad losers worried mostly about their holiday homes. Now instead of getting on with things other little groups are not interest in getting things on track, just to get heard about some perceived slight.

One of the reasons our economy is so sluggish is because of lack of investment, in things like productivity.

How does making borrowing to invest much more expensive help?

Ww2 I thought we had outsourced manufacturing to China? Although productivity is more than manufacturing I guess?

DaisyAnnReturns I am not offering solutions because I do not have any, nor am I endorsing the government's policy.

I just think that if people are going to be so critical of what has been proposed, then they should say what they think should be done in its place.

ronib

Ww2 I thought we had outsourced manufacturing to China? Although productivity is more than manufacturing I guess?

I work for a manufacturing company, the stuff produced in China is quite frankly rubbish compared with what we are producing in the UK in our very small team. The difference is remarkable. I think it is a shame and short sighted to be honest. Yes it is cheap but it falls to pieces in a matter of moths in some cases