How does increasing the interest rate control factors such as oil and energy prices?

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Nosmo-King

Well-known member
Not an economist but I can’t see how you can control inflation when the 2 motivators contributing to inflationary pressures are outside the BOE control. Can anyone advise?
 
As commodities are priced in dollars this could make them slightly cheaper as a higher interest rate usually results in a higher pound - it has gone up 1.5 percent today also due to US rates only going up by half the expected rise 6esterday.
 
Which is fair enough - although the pound v the dollar the pound has dropped significantly against the dollar - so interest rates haven’t helped to date
 
Centralscrutinizer said:
A higher interest rate makes money "more expensive" so reduces spending and encourages saving, this helps dampen down inflation.
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You really believe this? Food shopping, a staple requirement has shot up in recent times.Some estimates claim around 15%. I can’t see spending being a major issue - a lot of folk can barely get by as it is! Playing a bit of devil’s advocate here but you get my point
 
Centralscrutinizer said:
A higher interest rate makes money "more expensive" so reduces spending and encourages saving, this helps dampen down inflation.
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This approach only works if people are spending in excess on items above and beyond what they need and have spare money to save.

The logic behind increasing the rate when services are the driving factor behind inflation is to ensure your currency stays strong, unfortunately because we decided to leave the EU you could put interest rates up to 20% and there would still be no confidence in the pound.

Not being an economist I can’t tell you the technical term for the position we find ourselves in but I think, up a creek without a paddle will suffice for now
 
Nosmo-King said:
You really believe this? Food shopping, a staple requirement has shot up in recent times.Some estimates claim around 15%. I can’t see spending being a major issue - a lot of folk can barely get by as it is! Playing a bit of devil’s advocate here but you get my point
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I do get your point. The intention of the BOE increasing interest rates is to attempt to "control" inflation though. I'm not saying it'll have much effect.
 
it's not that people are buying more - it's that everything has gone up & now costs more - we're buying less or at best the same as previously....

This inflation is not consumer led, it's being driven by corporations & fear the Ukraine conflict will cause shortages.
 
Nosmo-King said:
You really believe this? Food shopping, a staple requirement has shot up in recent times.Some estimates claim around 15%. I can’t see spending being a major issue - a lot of folk can barely get by as it is! Playing a bit of devil’s advocate here but you get my point
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Price of food is up and will continue to rise - chicken up circa 30% by October.
Higher interest rates mean people can’t borrow to fund purchases so…. They buy less and inflation falls.
Theoretically, at least.
 
Increase in rates is to try and strengthen the pound, to help import/export prices. You also have to respond to leading economy’s raising their rates like America

It won’t stop inflation increasing in this instance but it might prevent from being even higher.
 
Nosmo-King said:
Which is fair enough - although the pound v the dollar the pound has dropped significantly against the dollar - so interest rates haven’t helped to date
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When is your comparison from? Interest rates are rising in US as well. Our major drop in the pound is because we are no longer a currency of safe haven after financial crash and rise in importance of the Euro.
 
junos_boots said:
When is your comparison from? Interest rates are rising in US as well. Our major drop in the pound is because we are no longer a currency of safe haven after financial crash and rise in importance of the Euro.
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Pound sank to its lowest level earlier in the week since March 2020.Against the dollar.
 
GazC_MFC said:
Increase in rates is to try and strengthen the pound, to help import/export prices. You also have to respond to leading economy’s raising their rates like America

It won’t stop inflation increasing in this instance but it might prevent from being even higher.
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A weak pound helps exports, of course.
 
They raise interest rates to subdue inflation caused by consumer booms…

I must’ve missed that boom… surely it’s just adding to inflation..
 
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