As the title says, numerous banks in the U.K., maybe across the world, are raising interest rates on mortgages, and the given reason is cause inflation hasn’t fallen as much as expected. Can anyone give me a basic inflation, other than greed, as to why they’d do this?
Government lends money to banks. Banks lend money to homeowners.
When inflation is too high, the government charges banks higher interest, so banks charge customers higher interest.
Fewer people take out loans, so there is less cash circulating in the economy, which dampens inflation.
At least that’s how it’s supposed to work.
I’m sure someone else can do a much, much better explanation than I can, but… As I understand it, it comes from the perception that inflation is driven by a “too much demand” problem (ie, too much money in the system chasing the same amount of goods), and by raising interest rates they discourage spending and encourage saving, both serving to reduce demand.
Obviously there are valid questions about whether raising interest rates to deal with a “not enough supply” problem actually helps or causes more harm - and given that the current inflation was initiated by Russia’s invasion of Ukraine, which resulted in supply disruptions. The problem was not a surplus of money, but a deficit of goods. And, of course, a lot of things most hit by inflation are impossible to meaningfully reduce demand for, like food and electricity.
I have suspected for a while that raising interest rates to deal with inflation is largely a “when all you have is a hammer, everything looks like a nail” situation: the Bank of England only has one tool - changing interest rates - so when faced with a problem, the only thing they can do is raise or lower interest rates.
They are upping the rates on their fixed rate deals ( 5.84% for the next two years for example).
Because these rates can’t be changed once agreed the banks forecast what they think the cost of their borrowing will be over the next two years (based on the central bank/gov interest rates) and set a customer facing rate that is competitive but will make them good money.
They have been setting their rates with the assumption that the government set interest rates will fall sharply this year. That would mean they could give customers an interest rate that’s lower than the current government rate now because in a years time the government rate will have fallen and the customer would still be paying the fixed (higher) rate they agreed. (Making the bank good money)
However, inflation is proving more entrenched than expected and the government isn’t reducing interest rates like expected. The banks are therefore not offering those lower interest deals to customers as they’re not expecting to make it back later.
new money enters the economy from government loans to banks, banks then lend that money on to consumers and businesses. The interest rate charge is effectively the price, by raising the price they’re hoping to decrease the amount of new money entering the economy, which is thought by many to be the main cause of inflation.
Normally new loans/investment creates growth in the economy, so there are more goods and services for that money to be spent on, so prices don’t go up, or at least go up more slowly than new money is entering the economy. But lately, despite new money entering the economy, supply for goods and services has not grown quickly enough (or even shrunk), so more money is competing for the fixed amount of stuff, so prices have gone up (inflation). They only really have one tool they’re willing to use to address the issue, how “expensive”(interest rates) new loans are.
