While savings accounts and CD yields are at historic lows, inflation this year is expected to increase at the fastest pace since 1991, eroding consumers’ purchasing power and reducing the value of their dollars. Normally, high inflation leads to higher interest rates that translate to higher rates on savings accounts as banks seek out deposits.
Umm, why would higher inflation increase bank demand for deposits?
If prices for goods and services increase then the working capital requirements of businesses increase so they queue up for bank loans to meet the temporary shortfall in cash flow versus cost of replacing stocks/capital equipment [even if they are trigger-happy on raising sale prices when input prices rise that won’t cover the rise in the cost of capital equipment replacements and lots of them will have contracts to sell the goods in stock at prices set prior to the rise in inflation].
So the banks have an increase in demand for loans which they wish to match with an increase in customer deposits because those are cheaper than inter-bank lending and because they are making the loans at rates that will generate profits after allowance for defaults.
Inflation is a tax on capital-intensive businesses (including working-capital-intensive businesses but not supermarkets which sell goods before they pay for them – a fact of which Healey seemed unaware) as well as savers.
Banks seek deposits – they have an anticipated or actual shortfall. So they increase rates in an attempt to cover that.
Inflation is an attack on all of us resulting from Govt caring only for what it wants. If interest rates rise to even 6 or 7 % most of Govt tax thieving will have to go to pay interest on the state’s borrowing.
Bad news for us all but with a silver lining that Blojob Johnson will soon be in very big trouble. NI rises, inflation and greenscum subs put on energy prices. The pain so far has been covered by con-vid BS and furlough. Now the Fat Bastard and his crew will be exposed to very cold and strong winds indeed.
why would higher inflation increase bank demand for deposits?
That’s the wrong question. Central Bank base rate would increase to prevent an outflow of hot money. Even with exchange controls (to prevent domestic savers fleeing), negative real interest rates would stimulate consumption and hence exaccerbate inflationary pressure.
We’ve lived through all this once before.
Interest rates are the go-to tool for quelling inflation.