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?
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.
Actually, the reason for the inflation was the beer bug back in 2020. And the money printing that went on in very many places. Then on top of that, you had the supply shock from people not working. And that just made it worse.
Inflation in the UK didn’t really go into overdrive until Russia invaded Ukraine and caused a spike in oil and gas prices, which fed through to every other part of the economy because literally everything uses oil and/or gas at some point in the supply chain.