Property prices in London fell 2.4% in June

According to this article here.

The real question is why? Despite inflation going up to 2.9%, interest rates remain unchanged. See article on this: here

The scary thing is, one of the key ways to deal with inflation is interest rates. Put simply, one of the reasons for inflation is too much money chasing a limited amount of goods. Why is there too much money? With low interest rates, people are encouraged to borrow more. So, if you normally don’t borrow and earn say £2,000/month, then you only have to £2,000 to buy goods. If you borrow another £1,000 then you have £3,000 to buy goods. The more money people have to buy goods, the more prices go up.

Put another way: Imagine an auction. If something is being sold that people really want and everyone only has £2,000. What does the item sell for? You guessed it: £2,000. If, however, people have £3,000 as per the above example, then what is the max price the item can sell for? You guessed right again: £3,000. More money = higher prices. Inflation 101.

The Bank of England is in a tough spot though. One of the key ways to grow an economy is also through interest rates. You lower interest rates to stimulate the economy. For businesses to expand, they usually need to borrow money. If interest rates are high they tend not to borrow and not to expand and may even reduce in size and lay off workers. When this happens the Bank of England usually lowers interest rates which means businesses can borrow cheaply and can expand their businesses and hire more workers.

At the moment, because of Brexit, there is so much uncertainty about the future, businesses are not in the mood to expand and everyone is tightening up. If the Bank of England raises interest rates it could push the economy off a cliff. If it does not, it can’t curb inflation which is being mainly driven by a weak pound (which has nothing to do with extra money through borrowing which is usually the culprit).

Quite frankly, I don’t think the Bank of England knows what to do which is why there are so much conflicting theories floating around.

So basically, interest rates should be going up but they can’t for political reasons.

Fun times…

 

 

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