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U.K. banks raising mortgage interest rates…cause inflation hasn’t fallen as much as expected. Can anyone do an ELI5 as to why? (lemm.ee)

submitted 6 months ago by [email protected] to c/[email protected]

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As the title says, numerous banks in the U.K., maybe across the world, are raising interest rates on mortgages, and the given reason is cause inflation hasn’t fallen as much as expected. Can anyone give me a basic inflation, other than greed, as to why they’d do this?

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[–] [email protected] 13 points 6 months ago (1 children)

Government lends money to banks. Banks lend money to homeowners.

When inflation is too high, the government charges banks higher interest, so banks charge customers higher interest.

Fewer people take out loans, so there is less cash circulating in the economy, which dampens inflation.

At least that’s how it’s supposed to work.

[–] [email protected] 4 points 6 months ago (3 children)

If it did work that way, it might be all right. But you're forgetting that the banks only have a like 5% reserve requirement. So for every thousand dollars they get in the bank from an account, they can lend out 950 more. And they can do this again and again until it hits zero, which is about 9 times. So you end up turning $1,000 into About 9,000.

[–] [email protected] 6 points 6 months ago (1 children)

The real world is far more complicated and fractional reserve is just one small part of it.

[–] [email protected] 1 points 6 months ago

Yes, but it's a large part when it comes to human psychology on the bankers' side

[–] [email protected] 2 points 6 months ago* (last edited 6 months ago)

not really relevant to money lent to them by the government. Fractional reserve is in reference to people who have deposited savings in a bank, they still have to have money to lend it out, they cannot print new money, only the government can do that.

[–] [email protected] 2 points 6 months ago (1 children)

Is it really 5% in the UK?? In the US the reserver is now 0 and has been for years

[–] [email protected] 2 points 6 months ago

I think I heard it went to zero in 2020, and from what I understand, it has not gone back up, so I think it's still a zero reserve requirement, which is crazy. Also, just to let you know, your account shows up as a bot. If you are not a bot, there's a thing in your profile where you can turn that off.