The Bank of England

oracle75 


If they don't want the higher interest rates, then the alternative is to not be able to afford the price restaurants would have to charge for food anyway.
There's no such thing as a free lunch ! 

In textbook terms and an average economy, that is the purpose of raising the interest rates. But it isnt very effective in an economy in which so many people are already just managing. It isnt as if the average consumer is profligate...retail and food have been reported flat or falling consumption.
There isnt enough unnecessary consumption in the economy to squeeze which will correct the inflation, which is coming from outside the country and very difficult to control.
For example supermarkets have long contracts with suppliers and have to take what they signed for or absorb the cost differential.
QE is out of the question when it means every pound in your pocket is worth less and import costs will go up. A counterfactual idea.
Demanding more money by the banks only makes the banks richer and the already financially stressed average person even more stressed...there is no more to stop spending.

It is the cost of energy and agricultural aids causing inflation. Demands for more by the banks will just cause more misery and wont solve the problem.

The cynical answer is that house prices/cost of rent/mortgage costs aren't included in the inflation figures, but obviously it's much more complicated than that. 

You're right that raising interest rates won't help much to bring down prices in the current situation because our inflation isn't caused by demand exceeding supply - it's caused by manufacturers' costs increasing. It's "cost push" not "demand pull" in the jargon. However, higher interest rates do prop up the value of Sterling which stops the cost of imports rising. If we kept interest rates low the pound would sink and imports would go up (i.e. food). 

But the fundamental problem is government debt - as always. It's nice to think that the BoE has full control of the bank rate and can set it where it wants, but ultimately the government has to finance its debt. The govt now has a debt of £2.6 trillion which is well over 100% of GDP - and  it has a budget deficit of about £20 billion per month. In other words it's borrowing £20 billion a month to balance the books. This is huge. In order to finance this spending the government has to "sell its debt" on the international market, which it does in the form of "gilts" which are govt bonds. The market determines what the interest rate (the coupon) for these bonds will be. And that rate is determined by a few factors - like the international rate for example. But a major factor is "confidence". If the market thinks that the govt hasn't got control of its money it will demand a higher interest rate because it has to insure itself against Sterling depreciating. When a country has a national debt over 100% of GDP the market wants a good interest rate on its loans - this is what happened to Greece remember. And the current rate for 2 year gilts is over 5% and going up.  

If the BoE decided to keep the bank rate at, say, 2% this would be nice for borrowers of course. But the banks would be reluctant to lend to anybody at this rate when they can lend internationally at 5%. So the BoE is not at liberty to do exactly as it wants.

The reason we're in this mess goes back a long way to when Gordon Brown decided to expand state expenditure to nearly 50% of GDP, which is unsustainable. He chose to support this expenditure by removing controls on bank lending - with disastrous consequences. He left office with the biggest budget deficit in peace time history and the next Coalition govt had to borrow nearly £800 billion from the BoE - which they're never repaid. And then Sunak pissed £400 billion away during Covid. That's why we're in this mess.

That's a pretty simplistic summary of why the BoE is raising rates anyway. IMO the best way of bringing down inflation is to tackle energy prices. We need to become self-sufficient in energy - and I mean fossil fuels. And we need to slash taxes on energy. 

Currently inflation is being driven by higher wage demands (especially in the service sector) - we currently have a wage-price spiral.

Dont know if your figures are correct Red, but regardless.  

You would be right that there would be no point pursuing net zero either a) if there was no economic or severe impact of the damage climate change will cause to the country if we dont pursue Net Zero or b) we dont believe other countries will similarly invest in Net Zero as it will need a corodinated world approach to tackle the problem.  

All evidence suggests that man made climate change will massively impact our economy and our lives if we do not address it with a cost (if you really just want to look at the financials and ignore quality of life) dwarfing the cost of Net Zero. So that leaves us with the question of whether other countries will move in parallel. They say they will as we say they will.  If they dont humanity appears to be largely screwed.

   Some of our inflation is from outside the country, obviously, but the fact that our inflation is so embedded is down to our government's debt. Economics is fairly simple in many ways - if you try to live beyond your means by borrowing there will be a price to pay. And the UK has been living beyond its means for decades - and it's not a party political point because govts of all hues have been to blame. 

We're having to put up interest rates to protect our currency because the market has looked at our debt and said that they're not willing to finance our debt anymore - except at high interest rates. And this has screwed our monetary policy because it's destroyed our bond market. It's all about confidence. If we were in the EU and the euro we would now be bankrupt - like Greece. The only reason that we're not is because we control our own currency. But our huge borrowing requirements mean that we need to protect Sterling.  

The amusing thing is that the person who has done most to damage Sterling is Sunak. He deliberately destabilised Sterling in order to unseat Truss. He destroyed any confidence that there might have been in her mini-budget by saying that £45 billion was unfunded - when £400 billion of his spending was unfunded. Unfortunately Sunak is respected in the city (for reasons I don't understand) and the market turned on Truss. Sunak then popped up to point out that the trashing of the bond market would would destroy pensions (which are largely based on LDIs - Liability Driven Investments) saying that her policies would lead to interest rates of 5%.

Well sorry Sunak, but you've already reached 5% in a few months with your own policies and you've increased taxation radically and stifled growth - which was the only conceivable  way out. I'm dead sure that Sunak is on a mission to destroy this country - but so is Starmer..