The recent slew of rises in EU interest rates is meant to slow or lower inflation.
Inflation is due to demand for goods/services exceeding supply, so pushing up prices.
Classic Supply & Demand - Leaving Cert Economics.
By making borrowing expensive, the aim is to take money out of the consumer market and reduce borrowing debt.
Basically reducing the amount of money chasing goods/services and causing prices to fall again - lower inflation
Passing these interest rate rises onto depositors is meant to encourage people to save rather than spend - also
reducing demand and inflation (Remember SSIA's ?)
Well, that's the theory.
But....
The banks are only targeting borrowers.
Savers are still better off spending now than saving due to poor deposit rates and high inflation degrading the value of deposits.
So inflation will remain high anyway.
The only people to benefit are the banks, as can be seen with the huge profits.
The key drivers of inflation has been the increase in cost of energy rather than high consumer demand.
I would argue that the EU policy of raising rates to combat inflation in this environment is mistaken, and just leads to
massive profits for banks. Inflation will fall when energy costs fall regardless of interest rates.
The aim of reducing inflation by raising rates will not work and will just cause more money to flow into the
banks coffers and encourage those with cash on deposit to spend it.
Inflation is due to demand for goods/services exceeding supply, so pushing up prices.
Classic Supply & Demand - Leaving Cert Economics.
By making borrowing expensive, the aim is to take money out of the consumer market and reduce borrowing debt.
Basically reducing the amount of money chasing goods/services and causing prices to fall again - lower inflation
Passing these interest rate rises onto depositors is meant to encourage people to save rather than spend - also
reducing demand and inflation (Remember SSIA's ?)
Well, that's the theory.
But....
The banks are only targeting borrowers.
Savers are still better off spending now than saving due to poor deposit rates and high inflation degrading the value of deposits.
So inflation will remain high anyway.
The only people to benefit are the banks, as can be seen with the huge profits.
The key drivers of inflation has been the increase in cost of energy rather than high consumer demand.
I would argue that the EU policy of raising rates to combat inflation in this environment is mistaken, and just leads to
massive profits for banks. Inflation will fall when energy costs fall regardless of interest rates.
The aim of reducing inflation by raising rates will not work and will just cause more money to flow into the
banks coffers and encourage those with cash on deposit to spend it.