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People wanting interest rates to be raised....

I am no economist and don't pretend to have expertise in this area (just an interest).  But am struggling to understand how pushing up the interest rates will help anybody?  Less cash to spend on products and services provided by businesses....just when we need it most????    

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15th Feb 2011 13:06

Seriously?

An interest rate rise is great for anyone with savings!  Pensioners in particular rely on interest income to supplement their pension income, and are being very hard hit by the low return on their investments.

High interest rates also encourage people to save money, which you could argue is a good thing.

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By stevie
15th Feb 2011 13:15

Inflation Control

Inflation control has been seen as a top priority. If inflation is rising owing to increased demand you can, in theory, slow it down by increasing interest rates thus reducing access to funds.

The problem is that inflation doesn't seem to be on the up because of increased diposable income in the UK - it's more to do with global increases in fuel costs etc.

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By JC
15th Feb 2011 14:55

Interest rates & inflation ...

Are artifically capped interest rates the right approach and who determines the winners & losers?

Statistics from the European Commission reveal that the UK has the fourth-highest levels of poverty amongst over-65s in Europe and this is compounded by millions of pensioners who rely on interest from savings to boost their income seeing their returns cut dramatically

Of course the other side of the coin is that borrowers are doing very well - even those who haven't been prudent and end up taking out 90-100% mortgages but are now in negative equity. So raising interest rates would cause enormous fallout in the housing market but is that any reason to sacrifice pensioners to underwrite those on 100% mortgages and basically borrowed far more than they should have done?

If the government can engineer a situation where it is not worth saving then the assumption is that money destined for savings would then ben channelled into spending. This solves the immediate 'high street' problem but unfortunately builds up issues for the future when more people have to fall back on the state because they have no savings - but with politicians & short term-ism who cares 'let tomorrow take care of itself'!

And we all know that the classic way of reducing a debt is to encourage inflation because over time the loan is erroded and in real terms the debt drops

Unfortunately at the moment there is far too much interference from governments rather than letting the markets operate freely. The beauty about markets is that they are a great leveller and whilst it may be unpaletable for politicians one should just let market forces prevail - if this means that people 'go bust' then that is what economic cycles are all about and it does weed out the strong business from those that are weak

If you are interested

http://www.youtube.com/watch?v=H0sS6a9RW2E

However, it is about 1hr 5mins long, so not for the faint hearted – nevertheless, well worth listening

You can pick it up and start at about 0:30mins without missing a large amount

See Marc Faber’s site - http://www.gloomboomdoom.com/portalgbd/homegbd.cfm

Basically interest rates should be set a sensible level and not kept artifically low for unproven reasons - especially as the only real beneficiaries of this policy are the banks.

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15th Feb 2011 15:33

Lunacy

Increase interest rates, and you increase mortgage repayments (& loans etc). That is hugly inflationary to the ordinary man in the street with 2.4 kids, a BMW and a £100k mortgage.

However, when calculating the "official" inflation rate the brain dead muppets in government dont include mortgages in their meaningless calculations, so, they get a nice headling of "inflation down", and three quarters of the country can no longer afford its mortgage.

I saw estimates that said if mortgage interest goes up by just 2% as many as three million families could face repossession.

And they think whats happening in Egypt couldnt happen here ????????

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Official inflation rate does include mortgage payments now ....

as it was changed a while back. Personally I do not believe that increasing rates to a 'market' level of circa 5% will seriously affect mortage rates. Apart from the lucky souls who fixed on a tracker prior to the recession, most peoples' mortgages have little relationship to the Official 0.5% rate with lenders taking a huge margin. I think you will just see margins squeezed and SVR's increase by only a small amount. Remember 5 years ago when the bank rate was 6.0% it was 'easy' to get rates of 4.5 - 5.0% and I am guessing lots of people are paying that now when rates are 0.5%.

The affect on pensioners who 'have done the right thing' has been disastrous as it has for anyone who has been trying to fix on an annuity for their pension. I agree that the theory that reducing rates will stimulate the economy is unproven. I am on a tracker and have been paying 0.5% over base for the last 24 months. Very welcome but not a penny has been spent and I suspect that is the case with lots of people.

You cannot on one hand tell people that we have got in this mess because of stupid levels of debt and greed and then expect them to spend to stimulate the economy. It doesn't make any sense.

 

 

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By JC
15th Feb 2011 16:20

Which sector of the population to sacrifice ....

@cymraeg_draig - Obviously this is getting onto dangerous ground - but .....

Depends on what sector one wants to sacrifice which is determined by political expediency and who is going to make the most noise and pensioners are a fairly placid group - no rioting on the streets

But why should anyone be rescued from what in the majority of cases is presumably a situation of their own making?

If a person is a pensioner with no earning power and has been prudent by saving all their lives why should they be called to underwrite a wage earner who has potentially over borrowed and doesn't want to have the consequences of their own actions?

Yes increasing interest rates will cause huge fallout in the housing market but that is an economic cycle which should level things out.

At the present time the housing market is overvalued to the detriment of first time buyers and this situation is being perpetuated by the fact that some of those with mortgages are quite frankly 'bust' - only surviving on pegged interest rates and paid for by non-existent interest to savers. Rather than address the issues today the thinking is that if one waits long enough then eventually naturally rising prices will sort out the situation

As with every market there are winners and losers but that is the whole point of a market - and why should savers be penalised and first time buyers be prevented from buying because others who have over stretched themselves are being supported at their expense?

Economic cycles & housing crashes have happened before (1990's where interest rates were 15%+) so what is different this time - except government interference to soften the pain.

Furthermore, where does government interference stop and is a precedence being set for no-one to be accountable for their own actions - do we all line up for the mandatory bail out if we get it wrong? (aka the banking system - i'll take the upside but you can have the downside)

What about the 'fair' society?

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.

I would suggest it was deliberate policy to make the debt mountain smaller, or at least one that wont be changed.

A (modest) extra 10% inflation in the current parliment will scrub off 10% of the £1,000 billion (ish) debt, or about 15 months TOTAL tax revenues in real terms.

Its also far less painful to freeze budgets and (largely) freeze pay than cut it in cash terms, so it works all ways round.  A 5% cut off your wages in zero inflation is far harder to get through than a pay freeze with 5% inflation.

It also helps out the housing market as there is a huge mental barrier to cutting asking prices for houses below what that person paid for it (or their neighbours sold at), and prices still need to come down by what 30% or more, and in some cases 40% or more to get back to a reasonable level.

It is of course a big kick in the teeth to people with little mortgage debt and lots of savings held in cash but that seems to be the way its going.  The careful and sensible shall get screwed as usual.

 

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15th Feb 2011 18:00

Which sector of the population to sacrifice .... 

Posted by JC on Tue, 15/02/2011 - 16:20

 

How about we sacrifice the bankers?

The margin between base rate and mortgage rates has widened considerably. Perhaps legislation is needed to peg this at a reasonable level.

Saying houses are over valued is ridiculous, for the simple reason that until house prices recover builders are simply not building. I could take you to a site near my parents home on which 6,000 houses were supposed to be built starting a year ago - the site has been indefinitely mothballed by the developer.

Yes, savers are also suffering, again that is because banks are deliberately depressing interest rates so they can cream more off as "profit" for their shareholders (and their bonuses).

I'm afraid the term rip off Britain is true, and banks are the biggest rip off merchants of the lot, closly followed by the utility companies.

Hit those with mortgages, and we end up with soaring repossessions, soaring bankruptcies (and increasing suicide rates).   Hit savers and the real savers with serious cash will move it abroad. As for "ordinary" pensioners with modest savings - quite simply they have no power, and will always lose out.

 

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15th Feb 2011 22:11

Interest rates will have to go up, and they will no doubt "print

... the only way out is a hope that other countries and economies collapse or are worse than us. For us, a selfish but ideal situation would be China splitting up into separate countries and their economy being severely damaged, such a severe world event could POSSIBLY stop an economic depression hitting this country. 

It amazes me that so many people haven't worked out how bad the world economy is, that so many companies and industries are unsustainable and will default on their debt. No government in the world is safe from internal economic pressures, even in 2008 the western governments (inc UK and USA) were ensuring police etc had good riot control training; Germany even has their own currency printed for when the Euro fails. 

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