Inflation and Interest Rates

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taz722

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Guys,


My apologies if this seems like a lame question. Central banks raise interest rates to keep infalation in check and higher interest rates typically boost a country's currency. Does this mean that inflation is indirectly good since it leads to cheaper imports as a result of the currency getting stronger or is my logic all screwed up ?
 
No, your thinking is right. But with imports becoming cheaper vis-a-vis domestic goods (and exports getting more expensive to foreign consumers) this means aggregate demand in the domestic economy falls.

Some people might lose their jobs due to lower demand, profits might fall as sales decline - neither of these are 'good' and outwiegh the fact that you can now import plastic Christmas trees for �1 less.

Eventually this lower demand for domestic goods means inflation should fall.
 
Will the Bank of England keep moving rates up at some point later in this year DC? I know inflation is quite high over there.

Speaking of rates, the 10 yr is really moving again!



Edited 1 time(s). Last edit at Thursday, July 5, 2007 at 01:47PM by CFA_Halifax.
 
"higher interest rates typically boost a country's currency"
i dont think so. It is not Higher interest rates, but higher REAL interest rates which boost a country's currency.
 
I think the general view is that the BOE is likely to raise rates by another 25bp before the end of the year.
 
yeah, that's what I had thought, wasn't sure if that was still consesus. What about ECB? It sounds like they may have a hike down the road...
 
SOME inflation is good yes, and "normal". That's why in a "healthy" economy the yield curve is UPward slopping. What central banks are doing when they raise rates is trying to curtail EXCESSIVE levels of inflation, which can cause an economy to go into recession. Think of it this ways, tomorrow's widgets have to be more expensive than today's widgets because the widgets of tomorrow should be, in theory, "better" than those of today.

Willy
 
The last I read on Bloomberg was that the ECB was likely to raise rates again in September.
 
Well, one thing i've noticed is that if rates are on an upward trend the 'experts' always say "there's one more rate rise to come". Its always just one more rise. They seem happy to say if the NEXT move will be up or down, but are cr*p at predicting any further out.

For what its worth I think rates in the UK have another, maybe, 50-75bps to go. Certainly I think there will be a prolonged period with UK rates north of 6%.

1) Inflation has been above the bank of england's target for so long that people are starting to factor this higher rate into their expectations for pay, price rises, etc. This makes stamping down on inflation harder.

2) Money supply in the UK is also well above what is a suitable level. Money supply has been in double digits for a number of years now. However you cut it, a large chunk of that has to end up in inflation sooner or later.

3) Oil, agricultural commodies etc keep rising and - according to the Bank of England - UK industry is close to full capacity. This should keep the supply-push inflation coming for a while to come.
 
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