Tiered Interest Rate Increases?

We are told that interest rates are raised to slow the economy, so why do we not have a tiered system that hits the credit card first (where most credit spending occurs) followed by business loans once the credit card measure reached a certain ceiling (maybe an additional 15%), with mortgages bringing up the tail end of the process? It has always seemed unfair to me that increases in interest rates today create hardship for those who took out a mortgage years ago. Surely, if the rises are meant to slow the economy, they should affect only those who are considering the use of credit at the time the decision to raise rates is made? Just seems to me that the things that keep the economy going would then be more protected - businesses and people's homes. OK, I know that reduced purchasing on the high street would lead to less demand from the businesses that supply the retail market, but isn't that what "slowing the economy" is supposed to achieve?

Answer:
You raise an interesting point, but the underlying system which organizes interest rates into tiers is not so well organized as you might suggest.

I should first point out, though, that most variable rates are tied to an underyling rate (prime, LIBOR) and adjust based on this quoted rate as of a certain date and time as stipulated in the small print.

The response of creditors to an increase in the cost of borrowing depends on several factors, notably:
(1) Their source of funds
(2) The responsiveness of debtors to interest rate changes

An increase in the prime rate, or LIBOR, or any other centrally-planned rate generally strikes borrowers in the capital markets first. This is because government bonds tend to track the Central Bank-determined rates most closely as they are "risk-free" and their purchase and sale are usually the mechanism through which monetary policy is enacted. The immediate effect of an increase in rates, therefore, occurs primarily in the capital markets where the financing decisions are benchmarked against government yields. This is where you will find large corporate bonds, as well as some mortgage-backed securities, such as those offered by the mortgage companies.

Credit card, companies, on the other hand, are not limited to borrowing from the capital markets but have access (through their bank subsidiaries) to demand deposit accounts, money market accounts and CDs. The cost of capital here is generally well below that of the capital markets, and can be more easily controlled (although competition has to be taken into account).

Moreover, consider the relative competitiveness of the various creditors. It is difficult to change mortgage providers in order to find a lower rate - and there's generally a high cost incurred (ie, closing fees). On the other hand, there are hundreds of credit cards, such that a small increase in the finance rate may lead to a defection of large numbers of balance-bearing cardholders to the next card with a low introductory rate. Thus, rate increases do not necessarily arrive as rapidly.

Finally, consider that even if all rates are adjusted in a tiering regime with the emphasis on reducing consumption of consumer light goods and consumables, many consumers who rely upon credit cards may not be sensitive to the rate changes. We have to go into behavioral finance to really understand this, but basically where the interest cost amounts to an additional five or ten dollars a month, many consumers simply won't care. Where big ticket items are concerned, however, a point or two increase in interest rates can translate into a substantially larger monthly payment, and thus here are consumers more sensitive.
As a life-long saver, I don't give a damn how much the BoE put up the interest rate.

At long horrible last, we savers are just beginning to get a decent return on our savings.

There's one bank which is offereing 12% interest, but your money will probably be tied up for a long time with no access for months.

There are plenty giving 6%.

Roll on the next intereste rate rise.

Please note that house prices are beinning to fall. If you've put your money into property, don't blame me. Sell up and buy into a savings account, you might earn more that way.
In order to try and hit the inflation target, the Bank of England set a single short-term interest rate - the one they pay on commercial bank reserves held at the Bank of England. Neither they nor the Government have any right or ability to force anyone else as to what interest rate to charge for borrowing. Rather, thats determined by the demand and supply for loans. Those rates do vary with the Bank Rate but not precisely: interest rates for different uses are determined by the market. Usually they reflect the riskiness of lending and the cost of funds. In particular lending rates reflect credit worthiness (credit cards have extremely high interest rates) and maturity (longer loans normally cost more although current market conditions are very odd in that respect).
There is no 'system' of tiered rates. Certainly credit card borrowing costs a lot more than borrowing on a mortgage rate. But putting rates up is a general encouragement to everyone to save more and borrow less. Why protect any one group? The whole idea is to slow the economy down. Borrowing for house purchase is one of the first things it should affect. Given how crazy house prices are, its a classic symptom of money being too cheap!! If someone had taken out a mortgage 'ages ago' then they shouldn't be too badly affected because house prices (and most people's earnings) are much higher now. Its recent borrowers who will be affected most. But they should have taken the possible level of interest rates into account when they decided how much they could afford to borrow.
Besides, any attempt to fix a variety of rates is usually doomed - you cant stop people borrowing against their house to spend instead of using their credit card.

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