I'm No Economist But...

[Hopkirk]

I don't see how ramping up mortgage rates for a few, which might filter through for some as increased rents, will reduce inflation.

[brainiac]

Mortgage rates had been unrealistically low for many years; this is just bringing them back to something sensible

[ToraToraTora]

It's not for a few and it's not just mortgage rates. the base rate affects all borrowing costs. It is the weapon of choice to control inflation, which is in essence a money surplus.

[Hopkirk]

That may be true, but the BoE's reason for raising rates is to bring down inflation.
Surely increased costs mean people will demand more pay.

[ToraToraTora]

Yes they will try and get more pay, we must resist that.

[Hopkirk]

I want more oay

[Hopkirk]

pay

[ToraToraTora]

We all want more, good luck with that.

[ToraToraTora]

I agree, you are definitely not an economist.

[Toorak]

The aim is to curtail spending which contributes to inflation

[Hopkirk]

Andrew Bailey on half a million says those on low pay must not get more

BoE chief blames 'unsustainable' pay rises after interest rate hike https://mol.im/a/12223281 via https://dailym.ai/android

[Hopkirk]

OK I'm not an economist.

Explain to me how raising interest rates reduces inflation.

[Hopkirk]

Reducing spending leads to recession doesn't it?

[JimF]

In theory, increasing interest rates reduces the rate of inflation by forcing people to reduce their spending, lowering demand, and ultimately bringing down prices.

That's the theory, anyway...

[ToraToraTora]

....what jimF said.

[fripfrip]

^^ ^^
That's correct,it's painful but has to be done.

[Buenchico]

An example for you, Hoppy:

One of the factors that's been pushing the inflation figures up recently is the healthy market in second hand cars. If people can easily borrow money to buy them, dealers can keep pushing their prices up. If, however, people struggle to borrow money at affordable rates, there will be less demand for the cars, forcing dealers to hold or drop their prices in order to get any sales.

It works much the same for anything else that people tend to borrow money for, such as home improvements and business expansions.

[Hopkirk]

If people don't do home improvements there is less work available.

[JimF]

Yes but, like everything in economics, the only people who really suffer from economic policy are those with the lowest (disposable) income. If you don't have a mortgage, or any other type of loan, then rising interest rates make no difference to you. On the contrary, if you have substantial savings, then they are of huge benefit to you!

It's similar to the negative equity that used to be everywhere in the late 80s / early 90s. Negative equity makes it difficult to sell your house but, if you don't want to sell your house, it makes no difference whatsoever to you, so long as you can afford the monthly mortgage payments.

Of course, it's easy to say that raising interest rates means that the rich get richer and the poor get poorer. That's true to a certain extent...

[ToraToraTora]

...and further to chico's answer if existing debt costs more to service then less money is available to spend on other things. Thus we have sellers of goods and services chasing less and less money so they will reduce their prices thus inflation is curtailed. It doesn't happen in 5 minutes of course all this takes time to filter through.

[Hopkirk]

I don't think the people in control have the faintest Idea.