Quick Question If You Would Be So Kind?!

[mad'un]

Discussing this today and I couldn't explain why raising interest rates would help our economy.

The person I was talking to was insisting it would slow spending and promote saving.

Surely though, if the majority (myself included) would find themselves stretched even further to pay a mortgage, then they certainly aren't going to save.

And they'll also have far less disposable income to spend into the economy.

Winners are the banks - again.

So what is the political reason and what is the real reason?

Thanks!

[mikthe20]

Surely though, if the majority (myself included) would find themselves stretched even further to pay a mortgage, then they certainly aren't going to save.

This is not true. Less than half of UK households have a mortgage at all, therefore those who would be stretched by rate rises would be very much in the minority, and would have been rather foolish to put themselves in so much debt.

[rantnrave]

Savers get a higher return, which they could then spend in the economy (and there are many more savers in this country than debtors).

If interest rates go up, this will raise the value of the Pound. This will in turn make it cheaper to buy imports, such as oil. Inflation will drop from its current highs, leaving people with more disposable income.

It's not quite this simple, but unless you're arguing with an economist or someone from this site, then it should suffice.

[Jason]

Just to expand, the main target of the Bank of England is to control inflation (CPI). To do this there main tool is interest rates. This affects:

+ Currency - higher interest rates will encourage overseas investors, hence push the currency value higher. This will make importing goods cheaper, and so lower inflation.

+ Savings - higher interest rates gives a higher return to those with savings, so more spending.

+ Mortgages and loans - lower interest rates make borrowing cheaper, so people borrow more and hence spend more

+ Businesses - lower interest rates allows business to borrow more cheaply, and hence grow.

+ Exporters - lower interest rates causes a lower currency, and makes UK products cheaper to overseas customers. Higher interest rates make our products less competitive.

The reality is it effects many different things, and the BOE needs to balance the whole lot to steer the economy correctly. In the past 3 years they have clearly ignored inflation to help the economy. I wouldn't object to this, but they clearly targeted inflation, hence ignoring the inflating debt bubble. They can't have it both ways!

[LJAR]

higher interest rates also cause the weak businesses, (those not expanding and investing) to fail.

this in turn causes a pool of labour and capital to be released (via liquidation) which can then be put to more productive use.

[easy2012]

higher interest rates also cause the weak businesses, (those not expanding and investing) to fail.

this in turn causes a pool of labour and capital to be released (via liquidation) which can then be put to more productive use.

Of course. There will be plenty of pain for the reallocation though. Most people prefer just to muddle along and see if miracle turns up..

Also - no mortgage doesn't mean not a debtor. Further, many businesses are debtors too.

Central bank is the monopoly setter of rates and so has to be reasonable fair to all stake holders (so, that is saver and borrower), otherwise it creates huge moral hazards when people can be over leveraged and be rescued via low interest rates - that is one of the reason why we are where we are thanks to central bank meddling with the business cycle since WW2.

[LJAR]

Personally I think we shouldn't have a central bank at all.

We should have each lender setting their own interest rates and a very tightly controlled monetary system that grows mechanically at the same speed as GDP (or a bit more)

We certainly shouldn't have the banks creating money out of thin air like they do nowadays, and the central bank lending us our money at interest!

[24gray24]

capitalism is about increasing capital.

zero interest rates is (given inflation) equivalent to wealth confiscation.

You can have capitalism based on wealth confiscation, but since theft is a zero sum game, the only capitalist in such a system is the robber baron, and he's a parasite. No one is going to invest if he gets back less in real terms after a year (and takes the risk of business as well); you lose less in such a system by burying gold in your garden and avoiding the depreciating currency .