Thursday, 7 April 2011

Other countries increasing base rates

Earlier this week Poland increased its base interest rate by +0.25% to 4% because their inflation rate at 3.6% is above their 2.5% target. That's right, if you're saving in zloties you get a real return on your money.

Today the European Central Bank raised its own base rate by the same amount to 1.25%. Inflation in the eurozone is running at 2.2%.

Also today the Bank of England continued its policy of "vigilance" and held its base rate at 0.5% despite the UK RPI inflation rate being 5.5%.

The BoE has gone past negligent and is now is just plain ridiculous. Mervyn King is beggering us all. (Possible typo in the previous sentence!)


AgainsTTheWall said...

Raising interest rates is not going to bring down the price of oil or the cost of the weekly shopping basket. Neither will it rein back the large wage increases which are NOT ripping through the economy but it will cause many overtaxed overburdened people to lose their homes.

Price rises due to fluctuations in supply and demand are not inflation.

Stick to your guns Mervyn

Nationalist said...

Actually raising interest rates would bring down the price of oil and other imported commodities. Raising interest rates raises the value of sterling and since oil is priced in US dollars it would become cheaper in sterling.

The effect of raising interest rates on mortgage holders would be negligable. Few borrowers are only paying 0.5% or anything like it. And many lenders have already said they probably won't pass through increases in the base rate. The likely effect on someone paying a 3.5% mortgage of a 0.25% base rate rise is nil.

Currently wages are increasing at 2.0% and prices at 5.5% (RPI). So real buying power is dropping by 3% a year. Left untreated this situation will collapse the economy and "hard pressed home owners" will be trying to make mortgage payments without actually having a job at all.

AgainsTTheWall said...

Are you concerned about 'inflation' or expensive oil? The price of crude is rising for everybody and will continue to do so as demand increases and supply does nt (or hardly at all). Tinkering with the interest rates might temporarily ease things until the US follows suit. In the meantime the balance of payments suffers and jobs are lost. At the same time the annual payments against the National Debt rise and probably the govt will tax us even more to cover the extra.

If its just the cost of oil that bothers you then perhaps you should be urging a reduction in or abolition of fuel duty.

Inflation is caused by an increase in the money supply and interest rate rises are supposed to help by reducing new money created by new mortgages and loans. As these are at a low point anyway compared with recent years then there is no reason for interest rates to go up.

I am not so sure as yourself that mortgages will not be impacted. It seems unlikely to me that once the madness of rates rises is unleashed then it wont stop with just quarter point increment.

Nationalist said...

The alternative to rate rises is to let inflation take hold in the economy. As I pointed out in a recent post long term that's a far worse option for everyone.

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