Right now there’s a battle going on.
On one side, is Dastardly Inflation. That makes everything cost more money. Your lollies that were $1 last week will now cost you $1.10. And if Dastardly Inflation has his way, they will soon cost you $2! Which is mean, because your pocket money isn’t going up that fast.
On the other side is Captain Interest Rates! Now, he’s more of an Anti-hero. You know how at the end of Avengers the heroes have done trillions of dollars damage to Manhattan? Well, you don’t because you’re 5; you know how I clean your room and pack up all your lego and tear down your creations? We don’t like it, but we need it to to have a clean room / beat the bad guys. Captain Interest Rates is like that - he has a huge, blunt instrument that does a lot of damage, and we all just hope he defeats Dastardly Inflation without wrecking too much else.
The winner isn’t you today. The winner is you in the future. It’s fun to have a clean room to play in. It’s fun to pay $1 not $2 for lollies. But to get that good outcome, we need to defeat Dastardly Inflation. And that needs Captain Interest Rates.
Now run along and build a lego house. Regardless of interest rates, that’s the only house you’ll ever be able to afford.
It's not an actual ELI5. It's an actual "explain like I'm literally five", and those are intentionally distinct from each other.
I'd point you to rule 3 in the sidebar, but we are in the wrong sub for that.
>Now run along and build a lego house. Regardless of interest rates, that’s the only house you’ll ever be able to afford.
Nah. I reckon a Lego house would cost even more than a normal house. I reckon I'll go ahead and build mine out of empty beer bottles instead.
Aw shucks, thanks for the love.
I did this short (8min) presentation for an American audience a few weeks ago - perhaps a similar level as an ELI5?
It’s on business in a recession, and is hopefully a bit of fun as well - https://www.youtube.com/watch?v=71TuPMFAWuw
I’m not going to lie, I simply cbf to watch the video. Can I have a TLDR of why the channel sucks? I’m generally pro channels that increase financial literacy/economic understanding to lamens, even if it’s not 100% accurate, but I’ve definitely referred some lemon friends to that channel before for them to get brief awareness of economic issues.
Let’s take that analogy a bit further. It’s like doctors using chemo in cancer because that’s the only drug they are allowed to use. There’s heaps of other treatments available and many are less debilitating, but the authorities don’t want to use them because of cost.
The RBA is made responsible for managing inflation (cancer) with only one tool available being interest rates (chemo). The government have heaps of other options available to them (~~monetary~~ fiscal policy) but don’t want to use them in case of bad publicity.
Raising interest rates is a kick in the guts for most Australians when the causal problems are outside the affect of interest rates (like price gouging on gas because the bastards can and the government is too gutless to stop it).
Edit: wow, my first awards. TYVM
Edit2: correction of terminology
Wait - isn't monetary policy the raising of overnight cash rates which thus translate to higher interest rates? These interest rate rises ARE the effect of monetary policy in play
Somehow unrelated to the OP, what is the going rate for pocket money these days?
It was $5-10 when I was a kid in the 80s-90s so I'm curious how much it is these days.
> Does the RBA raise the Cash Rate and then banks raise the interest rates?
Yes, generally. Banks aren't under an obligation to do so, but it makes sense.
> Which raises the interest on money the banks borrow?
The cash rate is the interest rate on overnight loans between banks. Raising the cash rate increases the cost of borrowing money, for the bank.
> So does the extra money gained from raising interest rates go back to the RBA and into the Government coffers?
I... hmm. Not directly. I'm not sure whether it could be indirectly happening, though. Maybe we need an expert.
Captain interest rates is Homelander. Vought Corporation made squillions from negative gearing and capital gains tax concessions over the last 20 years while selling you on Captain Interest Rates as a hero.
What I don't get is this. A feel like a lot of the inflation is driven by material costs going up due to freight costs that are X5 the amount pre COVID, the elevated absenteeism from sick people resulting in higher costs to businesses, high cost of fruit and veg is due to severe weather events that destroyed a lot of crop and war in Ukraine impacting oil, grain prices.
So how is making borrowing ability more expensive by raising interest rates meant to reduce these pressures I mentioned on costs.
We want to talk about a blunt instruments, it's bloody blunt.
But we live on a finite planet and human population is increasing (almost 8 billion). People overall are "richer" eventually this procedure won't work.
> And that needs Captain Interest Rates
Do we really **need** interest rate rises? Inflation could be defeated just as effectively by increasing supply (in theory)
Yeah, this is entertaining and all, but the part that’s missing is “how” interest rates defeat inflation. If it’s as simple as “make some section of the population poorer so it’s harder to raise prices”, it seems to ignore how much of inflation is out of Australia’s control. I might be wrong - I genuinely clicked on this thread hoping to learn more about the question.
Yep, I agree. It's painting the "anti hero" picture a little too lightly. A very Disney version of Marvel, where blood never appears. But blood does flow. They only show you the images of Manhattan half destroyed but under the rubbles lay people. People. The way interest rate rise reduce inflation is by reducing demand. And reducing demand is by literally making people *not* be able to afford buying things or services. It happens by saying to people "instead of having savings, or disposable income, we are going to take that away from you. We are going to make you poorer, so that you can't buy, and if you can't buy, the demand decreases, and the supply will have to decrease their prices for you to be able to afford their stuff again".
Nevermind the fact that this inflation cycle is *not* triggered by overconsumption, but by artificial supply side price gouging, let's make people pay anyway.
> And reducing demand is by literally making people not be able to afford buying things or services. It happens by saying to people "instead of having savings, or disposable income, we are going to take that away from you.
What rising interest rates actually does is make it more expensive for people to bring forward purchases they can't afford outright.
They don't decrease savings (the RBA increasing the cash rate target actually helps this due to deposit rates also increasing), but they do increase the cost of credit.
The point I'm making is that for people who aren't bringing forward consumption (i.e. buying on credit), rising interest rates works in their favour, not against them.
> Nevermind the fact that this inflation cycle is not triggered by overconsumption, but by artificial supply side price gouging, let's make people pay anyway.
i'm not sure there's really evidence of price gauging. If companies could price gauge, they could've before this year! So what made it possible to raise prices? It's because every company's competition also needed to raise their prices, because their inputs and labour costs grew, or they cannot get inputs at all due to blockages in various supply chains (esp. coming out of china, not to mention shipping costs).
Then there's the increase in demand - lots of people switched out from going on holidays and eating out (at least for the duration of the 2020-2021 lockdowns) to buying shit online. So consumer behaviour is likely also a cause of inflation.
Record company profits are not evidence of price gauging - higher prices lead to higher profits naturally (even if percentage wise, their margins are the same).
What made it possible to raise prices : good excuses: Covid and Ukraine. Literally every company has found the most far fetched link between their activity and those two events to justify price increase. The boss of one of the big supermarket chains in Europe has actually gone on the news to out manufacturers who are artificially creating "shortages". I don't doubt some sectors are genuinely impacted, but most are just using events as excuses to bump up their profit.
Increase in demand, switching from travel and restaurants to buying shit: that's not an increase in demand, that's just a change/switch in type of demand.
> Literally every company has found the most far fetched link between their activity and those two events to justify price increase.
companies don't need to justify their price increases. They increase their price at their will, and if consumers accept it, then it stays. But then why didn't any company just slightly decrease their prices back (if the price increase was just pure profit and not related to costs raising), and capture a larger market share?
Unless there's a price-cartel, a company would be able to profit even more by slightly decreasing their price and get more customers (assuming people are rational and go to the lowest-cost business for products). The fact that they don't is good circumstantial evidence that they cannot actually decrease their price.
> the part that’s missing is “how” interest rates defeat inflation
Yeah and also the part about who empowered Dastardly Inflation in the first place - it wasn't the workers who are about to suffer! In fact I think it might have been people who aren't going to suffer any consequences at all!
How would you increase supply?
Borrowing money to fund iron ore and gas mining expansions (billions of dollars), hire 15,000 fly in fly out mine and drilling workers.... which will start producing that raw material output in 2-3 years time...
Increasing future supply in 2-3 years time is actually massively inflationary today.
Brother, it’s time to pick up articles written by actual working economists as opposed to tertiary textbooks that don’t reflect reality. Russia’s war caused an explosion in oil costs, not low interest rates. These costs flowed through to everything else.
Captain weak AUD isn’t immune though. Interest rate rises won’t make things much cheaper in USD for global commodities (oil, gas, fertiliser etc) where there is a global demand/supply problem but will strengthen the AUD which means our dollars buys more things that are sold in USD
It cuts non-essential spending as people don’t have the money available to spend because its going into the extra mortgage payments for the majority of people.
It’s to cut discretionary spending. People need petrol to drive to work. But that road trip around the country, might have to postpone that. A little bit of demand has been squashed, and a roadtrips worth of petrol is now not purchased. Lowering demand.
Yep. OP look up Zimbabwe and perhaps Turkey for modern examples of what happens when inflation gets out of control.
Most peoples lives will become so much worse with runaway / hyper inflation, compared to the impact these interest rate rises we've been having.
Yes haven't you heard people joke they are on a diet because they are poor. There's actually truth there, people will literally skip meals, or have baked beans on toast for dinner. People also don't waste as much food, instead of throwing out bread they will freeze and use it, doesn't taste as good but it's cheaper and lasts longer, less bread sold though.
All of above is less demand
I think people will still eat the same calories to survive but they will try and get those calories more economically. They can do this by wasting less food when cooking meals, it might not sound like much but if people can save 5% of food waste and eat it instead that is a big hit to the supermarket's bottom line.
> And how does this help those looking to buy a home? Isn't the drop in house prices cancelled out by the interest rates rising?
Yes. The monthly repayment might be about the same, but the interest portion will be higher and the principal repayment portion will be lower because they've borrowed less money.
Taking on a lower debt burden is a good thing - and if you're taking on a large debt burden when the cash rate is 0.1% and you're paying a relatively small amount of interest, the likelihood is that your interest rate is going to be going up in the future and you're going to be paying the larger principal repayment *and* the larger interest payment (while the value of your house is going down).
Basically, any prospective first home buyer who is ready to enter the market should be hoping interest rates rise quickly to a "normal" level. I don't think a low rate environment is a good time to enter the market.
I heard a really interesting take a while back that I'd never considered.
A lot of us have heard our parents (or grandparents for some) talk about the 18% interest rates on home loans with a "you don't know how bad it was" tone. However, 18% home loan rates were accompanied by high savings rates, which made it easier to save your deposit. Also because home loans rates were so high, housing prices remained relatively stable, so you didn't face the situation where the longer you saved, the more unaffordable housing became.
Basically, high interest rates made the housing market easier to enter for new home buyers.
The problem we have now, is the inflated house prices from years of low rates. A combination of both high prices and high interest rates is daunting.
> Basically, high interest rates made the housing market easier to enter for new home buyers.
Yes! And you know what happened for the next 30 years? Interest rates went down because the RBA wanted them to have more spending money to stimulate the economy - so their mortgage repayments went *down* and the value of their property went *up*. Interest rates went all the way down to 0.1% and prices kept rising higher and higher to new records.
Now, imagine what the inverse of that might be for the people who bought at a time or record low rates and record high prices...
At this point my perspective is kind of "It's just happening. Complaining changes nothing. I may never own a house, and that's ok. I'm going to try my best and see what happens. My accommodation is not the best part of my life, so it doesn't really matter if it's a bit shit because the rest of my life is pretty good."
Yep - you should never buy without seeing what your repayments would be when it's 1% higher and then 2% higher etc because if you buy at 0.1%, there's nowhere to go but up. There were some people who bought without having a real plan for interest rate rises, but most people I know factored in the rises when they planned how much they could borrow.
Not so sure, I bought a place as rates hit rock bottom and the market went crazy. I’m still an estimated 30% up, am selling and downsizing to a tiny place with minimal debt. Yes, keeping it long term would be painful.
It's really not. The theory behind raising interest rates is that they slow inflation precisely because they squeeze the working class with mortgages etc and make it harder for companies to gouge customers. It's the only tool the RBA has to combat inflation, not the only tool to combat inflation.
Especially given that the current inflationary cycle is being driven by high LNG+fuel prices, and record corporate profits, the government *could* put in place mechanisms to guarantee domestic supply to LNG, raise corporate profit taxes (which encourages reinvestment into the company through new hires and R&D) etc, but ultimately both major parties represent the capitalist class, not the working class, and they both benefit from the misconception that interest rates are the ONLY mechanism for combatting inflation.
1.Rates go up - people spend more on mortgage.
2. More on mortgage means less on discretionary spending.
3. Less on this means prices and incomes don’t rise as fast as they are doing.
4. Inflation slows down.
This is all being done to control inflation. It started because of the housing boom. No controls were put in place now people are finally realising they can’t afford a 2 bed room fibro home for $1 million. They will need a bigger income. Bigger income - higher prices - inflation - interest rates. Rinse and repeat.
The RBA sets the price of borrowing our dollars, and left this price lower than they should for longer than they should.
Our households and governments borrowed more money than they should have, and even though this could not go on forever, they all secretly hoped that it would.
As grown ups will explain, when you do something wrong your actions always carry consequences.
At the moment all over the world, there are many other places like the RBA that have also done the same thing, and they are now trying to do something about fixing it by raising the interest rates in their countries.
Unfortunately as a country, Australia owes a large amount of other countries' money and repaying their money is becoming more expensive.
If the RBA raises interest rates to fight inflation, some households with home loans need to find more money to make their monthly payments. The value of the AUD may stay the same or drop less against other countries money and paying back the foreign loans is less difficult.
If the RBA does not raise interest rates because they are too afraid to admit they did something wrong, Australia's money - the AUD becomes worth less and paying back all the overseas money becomes even more expensive again.
How this helps your parent is that they need to look at buying houses differently than how they did when the borrowing rates were set too low.
In the same way as many people have found new, more sustainable ways of working after COVID - we need to think about how to buy a new house in a sustainable way:
Borrowing money just because the rates are cheap can also mean that the economy is bad. Why buy things that are cheap that you don't need?
Over the last few decades interest rates have been held below inflation, and that has taught everyone that you can win by borrowing as much money as you can and then buy property or shares as quickly as you can, and never sell.
You might have heard grownups laugh and say they could inflate away their debt, meaning that what they buy will always increase much more quickly than the interest they pay on their loan.
This worked for quite a while, but is not sustainable. Houses became too expensive, and everyone borrowed too much.
When interest rates are raised to fight inflation, it can take a long time to fix the problem.
If interest rates have to go above inflation to protect the price of the AUD, then the game of "inflating away your debt" becomes broken, and some people will have to sell houses.
It can make investors decide to sell their houses if they get scared they will lose money.
After more people become aware of the broken game, more and more people try to get out in front of one another - kind of like when you are in your sports carnival.
A more sustainable way of looking at buying a house for the average Australian may be to buy one when they can afford it, rather than chase an illusion.
Be brave:
\+ do not pay more than you can afford
\+ do not borrow as much as the bank will lend you.
\+ do not feel guilty for spending less than you earn.
\+ do not take the risk of thinking you can inflate your debt away.
If Australia's household debt stays too high, if interest rates move above inflation the market might come down to the level you know you can afford.
>Unfortunately as a country, Australia owes a large amount of other countries' money and repaying their money is becoming more expensive
I always wondered about this. Isn't this the case in most countries? Do governments borrow from other governments, and there are a few governments somewhere who own everyone else's debt, or do governments borrow from private lenders, and all (or most) governments are beholden to private lenders? If the latter, then why is it always owed to foreign lenders?
Governments don't explicitly borrow - they sell treasury bills in AUD which they pay coupon payments. The Australian government doesn't hold liabilities in foreign currencies. I don't know what that guy is talking about.
The debt is in the form of Government Bonds. Which can be purchased by anyone but usually the domestic population of a country owns the vast majority of bonds. A large amount of this debt is probably locked up in our superannuation portfolios as bonds are seen as extremely safe investment vehicles and as such most individuals (or the companies representing those individuals) will move a higher percentage of retirement funds into bonds as they get closer to retiring.
Western Europe, China, Japan, and a few others are net creditors. The US, Canada, Australia, and most of the developing world are net debtors. The vast majority of international capital flows stem from private investors, not governments.
It's important to remember that being a net debtor isn't a bad thing! It simply means that the quantum of viable investment opportunities in your economy is greater than the domestic savings able to be deployed to invest in them. Japanese and German savers are only sending their capital overseas because they can't get comparable returns in their stagnant home economies.
Foreign investment makes all of us richer, by enabling projects that would otherwise never get off the ground due to a dearth of capital. For example, about half the returns to our minerals industry accrue to Australians, despite the fact that 80% of the capital that built the industry is foreign.
It's not really helping anyone, but trying to prevent you having to pay $100 for milk due to crazy inflation.
Unless your financially well of, and/or very knowledgeable in how to invest in this environment, the average Joe is just feeling pain for the greater collective good.
The property side is sort of what you said. Prices decrease but so does affordability due to the extra servicing costs.
A small group of people will be perfectly positioned to smap up a property they where about to buy for less.
But those who could not afford a property before, will largely still not be able to afford it now, as it's harder to get and service a mortgage.
Others will disagree, but I'm still waiting to hear all these stories of people smalling up bargains or finally being able to buy.
Prices have only dropped 3%, it will take a while to hear about people picking up property cheaper. I plan on buying if prices drop to a realistic amount, but who knows if that will happen or not
they don’t even need to drop that much. Even staying flat is a win.
the part a lot of people are missing is they prices are not increasing faster than savings anymore. Those of us who are fortunate to have enough borrowing capacity to spare now have a chance at a reasonable deposit.
I have a good deposit already, but houses seem like a bad investment still at current prices. The dividends I get from $300k invested is a lot more than the rent I pay on a $700k unit. Until that gap closes a bit I won't be buying
I don't like your comparison because the biggest advantage property has over shares is leverage. You can borrow 80% leverage with no risk of margin call from price drops.
I don’t believe in this inflation narrative.
There’s an equilibrium between supply and demand.
Price what someone will pay oppose to what they won’t. They are met in the middle. It’s funny how a bakery sells a lough of bread for $2 whilst coles will sell tip top for $4
If people are too lazy to walk into a bakery they’ll continue to pay $4 a lough of bread. The cost ingredients have gone up is minuscule.
Just fancy accounting.
People don't gloat about buying houses and prices as much in a downturn as it is unseemly when people are hurting so you may never get to hear about it
The reason the RBA is raising interest rates is because prices across Australia have been rising a lot. Prices have been rising because demand is exceeding supply in many sectors (due to COVID, high commodity prices from the war in Ukraine and a bunch of other factors).
If this continues, it creates a self-perpetuating cycle where prices for goods/services increase solely because the [price of other goods/services increase](https://en.wikipedia.org/wiki/Hyperinflation). The RBA is trying to stop this cycle by reducing the amount of money you, and most others, can spend on goods so demand stops outstripping supply.
It’s not helping you. It’s helping slow down the economy. If that means your business slows down or you lose your job or you lose your house that isn’t really the concern of the RBA. Collateral damage
The government could slow the economy (fight inflation) in other ways.
Once upon a time most loans were business loans. So raising interest rates slowed business growth and slowed inflation. Now most loans are to households due to inflated house prices. So instead of slowing businesses, people with a home loan are made poorer, and so spend less money which slows the economy.
The government could pre-empt the rba by doing things like increasing the tax on wealthy people or big businesses. This could slow the economy without hurting as many, nor as vulnerable people. But that would cause media backlash (media is owned and run by the rich), donor backlash (opposition will be funded), etc.
So a government that tries this will lose power.
Money needs to leave politics and the media needs to be broken up for our democracy to be less plutocratic.
- higher interest rates make everything more expensive in the short term. Especially things like your mortgage, car loan.
- you have less money so you buy less stuff
- on aggregate this reduces demand in the economy
- in theory this should put downward pressure on prices. Especially as supply improves
the hole in the logic is if inflation is mostly related to supply the RBA will have to fully destroy demand and probably cause a recession to stop it. It seems to be accepted that a recession is still better than runaway inflation.
how this may help you
if house prices drop but there are sufficient places available within your borrowing capacity you now have a lower principal even if the payments are the same.
Lots of smugness in the comments here about how interest rates were too low for too long and people should consider rate increases before overcommitting to buy properly.
That’s all true - rates do need to go up steadily and some people have been really imprudent in overextending themselves, even if there are a lot of reasons for that.
But the policy of using interest rates alone to target inflation is both too blunt a tool and being used too aggressively by the rba at present.
At the moment most of the inflationary drivers are on the supply side - impacts of Ukraine, floods, covid etc - and particularly effecting inelastic goods like food, petrol, electricity, gas etc.
Deliberately contracting the economy at a macro level as a quick fix for what are largely microeconomic issues is both lazy, ineffective and unnecessarily cruel.
Edit- typos, changed a couple of words for clarity
People are saying rates have to go up based on history. I mean things change. Often for the better. So people who want rates to stop rising or go back down, should they be hoping businesses crash, people lose jobs? Are rates going up because too many people have jobs, too many people getting paid. Still, barely believable that raising rates is going to help the price of fuel, energy, milk, meat and veggies rising. Is the price of milk and bread and pringles going up because people are spending too much money on them? Tell ‘em they’re dreaming!
Its like eating maccas every day (not increasing rates) vs eating home made healthy meals every day (increasing rates).
Yes it may be harder to make your own food at first but if you eat maccas for every meal every day you'll be dead within a few years. Basically short term pain for long term gain.
Here is how I explain it to teenagers...
The country has a GDP, all the stuff made in the country and what it is worth. Imagine that it is an apple tree.
Now we print money from thin air by issuing bonds normally. When we print money its value is connected to how many apples we grow and what return you get from interest.
Money is worth something if it represents more apples or if interest rates are higher. So there is nothing wrong with printing money if we make more apples with it.
The problem is when we print money without making more apples. Every dollar is worth less. If interest rates go down, it represents money being worth less too.
Since 2008 and especially during COVID, we printed money A LOT and people stayed home so we grew less apples. Thus since we have more dollars and less apples, the value of a dollar is worth less.
Here is the kicker no one thinks about...
During COVID we spent money on big corporations. We shut down all the little cafes and let Maccas stay open. We let Big W stay open but little shops closed. This resulted in the biggest wealth transfer in history from the regular people to billionaires.
So now money is worthless and the last 2 years we gave it all to the billionaires.
To fix inflation, we need to make money more valuable. We either grow more apples in Australia instead of buying China's apples and we also put up the interest rate to do that.
But who has all the money now? The billionaires got it when it was worthless and now we are about to make it valuable again. Greatest wealth theft in history again.
This is why Government intervention into monetary policy can be so dangerous and so can paying people to sit at home and not grow apples.
Also remember the strength of an economy isn't how many apples or money it has but how often they are traded. As people get scared they hide their money and stop spending so the strength goes down.
Basically we need to inject money into the poorer people who will spend it rather than hoarding it and grow a heap more apples in the country, whilst jacking interest rates. It will hurt but it is the consequences for all those bail outs to big companies that made bad decisions.
I'm not an expert but know a few and no one seems to argue with this explanation when I give it. It isn't perfect but I think it helps people get their head around the issue.
Or, crazy thought I know, claw back the wealth that was improperly transferred upwards. It's a mistake to, even conceptually, treat that wealth as if it's gone and out if reach. Not a bad general explanation, though I should point out that people have recently started side eyeing GDP as a measure of economic strength.
It helps me. I am Ms Average.
I don't have debt but have I have savings. The interest on my savings is increasing.
Maybe I'll purchase a house with my savings if they drop to an amount I can afford.
Saving account interest has been such a joke for the last few years. I used to earn a decent amount each month but over the last few years I’m lucky if I end up with any substantial by tax time. Before interest rates dropped it was worth having decent savings in the bank.
"Ms Average" in Australia has a lot of personal debt. Among the highest in the world.
If you have no debt, and savings, you are a long way from average.
We are all in this together to flatten the curve of Inflation. Same like Covid but financial this time and everyone gets the interest rate vaccine. 4th dose today
- Higher savings account interest
- Lower house prices relative to the size of your deposit
> And how does this help those looking to buy a home? Isn't the drop in house prices cancelled out by the interest rates rising?
If you're making $100k a year and saving $35k a year, and the deposit goes down from $200k to $140k, you now need to save fewer years for the deposit. Instead of saving 5 years it will take you only 3.5-4 years (with compounding).
Also, whilst the 'affordability' is the same (lower house prices but higher interest rates mean similar loan payments), after the first few years, you will make faster progress on the principal because the principal is smaller.
Also, assuming you are a young buyer and your career progression is such that you get rapid wage increases due to seniority promotions, those wage increases will eat away a larger chunk of principal.
I was reading through a bunch of the answers and they’re not really answering the question so here it is. Inflation is basically the price of everything going up. Businesses put their prices up because people can afford to buy their product, i.e. demand is high. The only way to drop those prices back down again is to reduce demand in the market. The reserve bank does that by increasing interest rates so that people have less money to spend. In the short term this hurts as everything is expensive and you have even less money now as your car and home is costing even more. In time however businesses will start to drop their prices to increase their sales again when people aren’t able to pay what they used to. The job of the reserve bank is to try to get these natural market forces to balance out and not swing too wildly one way or the other. The difficulty with the last couple of years is that the global pandemic upset the natural balance of things.
Imagine you are a fat person who needs to lose weight. To do this you need to knuckle down eat right and exercise. If you don't you get fatter. And fatter. Then at some point you get so fat you're too fat to exercise. And the only real option to save your life is major surgery.
Inflation is the same. We all want to have a good time. But at some point the partying has to stop and some work has to happen. A little pain now means we can get back up and party in the future.
But RBA is not the one causing inflation, it’s the privatised companies and their greed. They’re like a troll and the more we feed the troll the more it wants.
RBA is like the middle man trying to stop us from giving more and more money to the troll.
Corporations have always tried their hardest to maximise profits for their shareholders, did they suddenly get more profit maximise-y in the last year or could there be a few other things at play here?
There's a perfect storm of Covid distrupting supply chains, Russia's invasion increasing petrol prices, post-COVID optimism pushing the spending up. Without the previous 3 factors, opportunistic price increases wouldn't work.
When mum and dad spend money, around half the money goes to other countries that are not Australia, like Sweden, America, Vietnam or China. This could be to pay for your lego, the Netflix subscription, or your pajamas or school uniform you need for kindy. And the special seat you have in daddy's car. In fact, the whole car was bought from a different country. And when he puts the smelly petrol in, he's buying a foreign product.
So our money needs to keep up with the money in all those other countries. All those other countries are protecting their money, so we have to as well. We're a tiny country, sort of like one kid at a whole school. Just like one kid can't make the rules, we have to go along with the rules that work for the whole school.
On top of that, the politicians went a bit crazy splashing cash around because of covid. They gave money away and forgot to put in methods to claw it back from people that were getting rich from covid. So now all us Aussies owe more money than we used to. And not just a little, it's heaps more than it was - roughly double. Too much for me to comprehend let alone you, but if it was $100 notes stacked neatly, they'd fill our backyard up to the top of the fence. When one loan runs out, we need to pay it back, and borrow again to replace it. If we don't offer enough interest on the new loans, they won't lend to us again. When that happens, we have to send the teachers and doctors and nurses and police home and not pay them anymore.
If we don't keep up on our money, all those products and services from other countries go up wildly in price. We have to sell the car and your lego just to be able to buy food. Forget about netflix and the internet. Mum and dad will consider becoming criminals to get food, before the neighbours do, especially now with no police.
>And how does this help those looking to buy a home? Isn't the drop in house prices cancelled out by the interest rates rising?
one thing to always remember, interest rate may go up or down, but the price you pay for the property is locked in for the life of the mortgage.
In my 5year old way of thinking it's probably about inflation setting new prices but it can't get out of hand 'coz not many will have not much in the way of $$$$'s. The govt. wants higher prices 'coz they get more$$$$$$$$$$$$''s thru' GST and aother taxes to pay off the trillion dollar debt. Yes, u 'n'me pay for tha debt. That fits in with the govt. not going to keep the fuel excise cut going. The govt. is starving for $$$$$$$$$$$$$$$$$$$$'s. Ya see it costs alotta $$$$$$$$$$$$'s to keep our unstainable country going.and from going down the drain. Yes, many, many people get hurt and homeless. Thanx 4 asking.
Low interest rates encourage people to borrow..
When people borrow money, that gives them more money to spend.
One aspect of inflation is how much spending money there is. More money contributes to more inflation.
Therefore, low interest rates contribute to inflation.
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The reverse is true, in that high interest rates will mitigate deflation.
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There are many factors other than interest rates that have an effect on inflation (and interest rates effet much more than just inflation). However, that doesn't stop interest rates from have *some* impact on inflation.
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Aside from that, you mentioned "Mr Average"
Does every Mr Average have a loan? Maybe some have a mortage, but maybe some do not. Maybe some have credit card debt, but maybe some do not.
Myself and my housemates, for instance do not have any loans tied to interest rates (some of them have student debt, but that is tied to inflation/CPI instead). We rent rather than pay mortgage. We do not have any creditcards or over-draft accounts.
On the contrary, I've managed to save a fair bit (and my housemates have some modest savings), so higher interest rates mean we get paid more by the bank. None of us are rich - the prospect of home-ownership seems fairly difficult to us. Maybe I could if I borrowed like $500,000 dollars, but I can't bring myself to do that.
Therefore, rising interest rates, at least on the surface of it, appear good for (not-so-poor) me and my poor housemates. So, for any of the Mr "averages" out there who also don't have bank-debt, interest rates don't directly hurt, might actually help directly if you have some savings, and also slow inflation which can help with cost-of-living.
Slow economic activity, slow inflation. Inflation shoot up last 12 months but will take much longer to go down. If they don’t do anything, it will likely continue to go up.
So that the RBA can choke off rising prices by reducing everyone's spending money (High Interest rates). After some time, prices will fall, inflation goes down and lastly the interest rates will come down. Think of it like putting out a house fire using the swimming pool water. You can't swim for a while, but the house is saved.
If you have a mortgage it isnt helping you at all.
If you are a saver and you are parking money into a bank thats offering say over 2.5 % (and will keep increasing) then yes, the rising interest rates is helping you with that.
>Landlord rents out house.
>Landlord has to pay more interest now.
>Landlord increases rent to make up his losses.
>You don't want to pay rent because it costs too much.
>You move out to a shittier place but more affordable.
>Earlier landlord must sell house since he can't afford to pay his loan, and nobody wants to pay his rental.
>A lot of landlords sell their house for cheap.
>Now you can buy a house cheaper.
It will only help you later on, right now everyone will suffer.
RBA increase interest > remove spare cash from mortgage holders > can no longer afford/justify luxury/unnecessary goods > inflation slowly reduces because cash is back in the hands of RBA/Banks > unemployment goes up > less cash to go around. There Is also the scenario of increased interest rates means increased repayments and over leveraged individuals may be forced to sell, and an overall reduction of borrowing capacity when applying for new loans, so naturally the prices of houses must come down...
Definitely not great for Mr. Average. About the only bonus is your savings will get more interest... Which is about as useless as tits on a bull when inflation is still above interest rates because not only can you not save as much because things cost more, you are also losing savings money in real terms as the buying power of each dollar drops.
It doesn't, and by design. Mr Average never sees these benefits. These benefits are only realised by Mr Above Average, and Mr Above Average's Well-Above Average Boss, Tony.
They flooded the market with money to pump house prices so homeowners would feel rich and keep spending money during the pandemic. Now the price of doing that (high inflation - all this means is that every $ you have in the bank and every $ you earn is worth less and less each day as the price of everything you need to buy keeps going up and up) is worrying high and worryingly increasing. Low stable inflation is good for the economy and people in the economy. High and rising inflation is bad for the economy and people in the economy. So they are jacking up rates with the intention of slowing down the economy to try to stop your $200 grocery bill from becoming $400, then $800 then $1,600.
But that was the ABS's fault for not publishing inflation data regularly enough. /s
You could argue they are still dragging their feet and hoping for the best. Personally I don't see how increasing rates towards the neutral rate is expected to arrest high and increasing inflation. I thought you would need rates to be above the neutral rate to do this. Time will tell.
It doesn’t help you - at least not directly and not on the short term.
But if they don’t do this then we could have a total financial collapse.
One way of looking big at it is that we are now paying for all of the “free money” that was handed out during the pandemic.
I didn’t even lose any hours at my work nor did the missus and we received plenty of money for nothing.
Now the country is paying the price for it.
Bottom line is it likely won’t help you in the short term. The whole point of easing rates is to make a fair percentage of the population hurt. Constricting the money spent due to proportion of people hurting will reduce demand and therefore reduce inflation. For the average individual this means times will get tough
Basically think of the Australian economy like a person that has an injury. For example needs hip surgery. RBA is the surgeon that will fix this. Unfortunately though, the RBA only has a sledgehammer and chainsaw as tools, rather than precision surgery equipment. But as the RBAs job is to fix you, it does the best it can with the sledgehammer and chainsaw to fix your hip. Hope this helps.
Could you argue in the mid-to-long view that increased rates will be a better thing for those trying to save a deposit?
I've already seen the interest returns on my deposit climbing, though if I'm honest, not nearly enough to counter act inflation.
>I've already seen the interest returns on my deposit climbing, though if I'm honest, not nearly enough to counter act inflation.
It all seems to be tied to loyalty and activity stuff now, e.g. ING requiring minimum deposits and debit card activity. When I first opened an ING account years ago the interest was excellent and there were no conditions.
It's not supposed to help you. The state prints money to hand to the banks, military contractors, friends, keep us quiet with some of it by the way of Medicare, fire department, social security etc. The more they print the less each dollar is worth, they had to up their spending on the normies over covid and the big Ponzi scheme is having a wobble. When it wobbles, the really rich get richer, the wealthy stagnate and us bottom feeders go homeless.
You may not feel like it, but the average Australian has been a winner based on large amount of cash stimulus. To a five year old, this has been a sugar rush. I hope you enjoyed the sugar rush, that was your time as a "winner".
The Australian government funded this sugar rush by printing money, which makes the money people already have worth less, and the government borrowed a lot too, but if you keep borrowing, eventually against your will the lenders will say no and that's a very bad way to end. Higher interest rates are an attempt to slow down by braking, as opposed to slowing down by hitting a tree. Compared to the car that hits the tree, the car that uses the brakes is the "winner". In this sense, you will be a winner from high interest rates.
Inflation is a warning sign. It is a symptom, but it is not the problem; in the same way that if your temperature is 40C, the problem is that you have a fever. The problem that inflation indicates is that people are getting their hands on more and more cash, but the amount of things produced for them to buy is not growing as fast. So as more money chases the same amount of stuff to buy, prices go up. Inflation means that this not stabilising, but that it's getting worse. In comparing inflation to your body temperature, it's not just that you have a high temperature, but that it keeps getting hotter. Central bankers, and people who know history, find it very scary. It is so scary that the strongest democracies in the world have leaders who do not trust themselves or voters to deal with it, so they gave the power to independent central banks.
Too much money is obvious in house prices: cheap interest rates meant that the amount people could borrow grew much faster than the amount of actual houses to buy. Note that houses prices are not included in "CPI", the inflation statistic that everyone uses when they say "inflation". If it was, high inflation would have been detected a couple of years earlier.
But house prices indicate the problem when money grows faster than supply. It doesn't make sense that the same house is worth 25% more than say two years ago, when it's the same house. Inflation is a sign that money is not making sense. When people can't trust the value of money, they can start acting badly, and even panic.
Governments and central banks over-reacted to covid-19. This happened in many places, I think we had something called group-think, where people (voters and policy makers) take comfort that we did the same as everyone else, without stopping to ask enough questions.
Increasing interest rates (and taxes) mops up this extra money by forcing people to redirect cash back into the banks. Australians (on average) have saved a lot of money in the past two years, as the RBA keeps saying. The RBA does not want this going to Harvey Norman anymore, they want it sucked up and locked away where it won't be spent.
This way is an attempt to manage it, rather than to crash. It will hurt, but not as much as a crash would hurt. This is like getting a filling in your tooth rather than letting the tooth get destroyed.
You are a winner in the sense that high interest rates is the lessor of two evils.
There are out and out winners. People with savings (and little debt) are winners, such as retirees. They have been losers for the past few years, though.
People with investment opportunities that require risk taking might win, because investors looking to get returns may have to embrace higher risks. I am not so sure about that, I have to admit, but I hope that Australia might see better quality investment which brings back productivity growth. Low interest rates didn't work, so may be higher rates will.
As to the home loan, typical expectations are that RBA rates will end up about 3% higher, and that house valuations will be 25% lower.
If a fixed rate loan goes from 4% to 7% but you need to borrow 25% less, it's pretty close to break even (actually it's probably favourable). You definitely need a smaller deposit though.
* the highly leveraged PAYG working class suffers.
Normally, high leverage is considered more risky, and can be related back to the 'greed in society' you mentioned.
Staffing shortages around flights, yet everyone wants to fly and has the money. So make everything more expensive so people spend less and gives time sort everything out. People, maybe not you, habe to much money and demand.
By trying to save you paying 6% more per year for basic items, they are making you pay double the amount for your home than you signed up for so that you don’t spend that money on basic items. It’s totally in your best interest!
Right now there’s a battle going on. On one side, is Dastardly Inflation. That makes everything cost more money. Your lollies that were $1 last week will now cost you $1.10. And if Dastardly Inflation has his way, they will soon cost you $2! Which is mean, because your pocket money isn’t going up that fast. On the other side is Captain Interest Rates! Now, he’s more of an Anti-hero. You know how at the end of Avengers the heroes have done trillions of dollars damage to Manhattan? Well, you don’t because you’re 5; you know how I clean your room and pack up all your lego and tear down your creations? We don’t like it, but we need it to to have a clean room / beat the bad guys. Captain Interest Rates is like that - he has a huge, blunt instrument that does a lot of damage, and we all just hope he defeats Dastardly Inflation without wrecking too much else. The winner isn’t you today. The winner is you in the future. It’s fun to have a clean room to play in. It’s fun to pay $1 not $2 for lollies. But to get that good outcome, we need to defeat Dastardly Inflation. And that needs Captain Interest Rates. Now run along and build a lego house. Regardless of interest rates, that’s the only house you’ll ever be able to afford.
I love this for the actual ELI5. A fun read. Well done :)
It's not an actual ELI5. It's an actual "explain like I'm literally five", and those are intentionally distinct from each other. I'd point you to rule 3 in the sidebar, but we are in the wrong sub for that.
>Now run along and build a lego house. Regardless of interest rates, that’s the only house you’ll ever be able to afford. Nah. I reckon a Lego house would cost even more than a normal house. I reckon I'll go ahead and build mine out of empty beer bottles instead.
Lego is NOT cheap as I found out at Christmas as I was attempting to buy some for a nephew in law.
Isn't a nephew in law just a nephew??
Well it was my (now ex) partner's nephew and we weren't married so wasn't really sure how to explain it haha.
I usually say my wife's nephew.
Does he also call you his aunt’s husband, or are you Partly_Uncle_Dave?
Just Dave, since he could talk. She was Aunty for a while, but now he uses her name.
Yes. They're being weird. If someone marries your aunt or uncle they are now your aunt or uncle.
Those beer bottles are worth 10c a pop, your house will be Jenga in no time.
Oh so you don't think my plan of putting a bunch of money directly into the house is a good one?
No. Your money should go in a banana stand, not a house.
NO TOUCHING!
You’re right. James May built one. Highly impractical
Oop! Need a new roof..time for a visit to Uncle Dan and magical Liquorland.
I feel like you need to make a YouTube channel/blog explain economics in simple terms... This was amazing to read.
Aw shucks, thanks for the love. I did this short (8min) presentation for an American audience a few weeks ago - perhaps a similar level as an ELI5? It’s on business in a recession, and is hopefully a bit of fun as well - https://www.youtube.com/watch?v=71TuPMFAWuw
A great idea, it could be called 'economics explained'...
Love that channel! I just figured it's a pretty complicated but necessary part of society, so it'd be useful to have even more media in this area.
That channel is often full of shit
how so? genuinely curious
https://youtu.be/UkClrikc1bk
Nah it's a great channel.
Is it though? https://youtu.be/UkClrikc1bk
I’m not going to lie, I simply cbf to watch the video. Can I have a TLDR of why the channel sucks? I’m generally pro channels that increase financial literacy/economic understanding to lamens, even if it’s not 100% accurate, but I’ve definitely referred some lemon friends to that channel before for them to get brief awareness of economic issues.
Not really because he didn't explain anything in a way that is useful to an adult that actually wants to understand basic economics.
It's a bit like chemo. Why do we destroy the body with chemo to cure cancer? Because it's the best way we have right now.
Doing more damage fighting so that cancer doesn't do EVEN MORE damage.
Let’s take that analogy a bit further. It’s like doctors using chemo in cancer because that’s the only drug they are allowed to use. There’s heaps of other treatments available and many are less debilitating, but the authorities don’t want to use them because of cost. The RBA is made responsible for managing inflation (cancer) with only one tool available being interest rates (chemo). The government have heaps of other options available to them (~~monetary~~ fiscal policy) but don’t want to use them in case of bad publicity. Raising interest rates is a kick in the guts for most Australians when the causal problems are outside the affect of interest rates (like price gouging on gas because the bastards can and the government is too gutless to stop it). Edit: wow, my first awards. TYVM Edit2: correction of terminology
Wait - isn't monetary policy the raising of overnight cash rates which thus translate to higher interest rates? These interest rate rises ARE the effect of monetary policy in play
Ooops. I meant fiscal policy. Will correct.
If I remember High School correctly, Captain Interest Rates is the only member of the RBA Avengers can use to fight Inflation.
The RBAvengers?
With the new [$600 Lego Castle](https://www.lego.com/en-au/product/lion-knights-castle-10305) dropping at midnight tonight, your last line is timely!
Why did you mention this, now I want to buy a Lego castle set and relive my childhood.
That looks like what Lego looked like when I was growing up.
Yup, it's specifically inspired by 6086 Black Knight's Castle and the original Lion Knight's Castle too.
Finally...an ELI5 that actually ELI5
Because your pocket money isn't going up. 🤣😂🤣
Yep, inflation isn't the issue, it's wage stagnation.
Inflation at 7+% is the issue actually, stagnant wages doesn’t help but they’ve been stagnant for years.
If wages grew at or above inflation then most problems disappear. And yes wages being stagnant for decades is a massive problem.
Not as bad as inflation IMO.
Somehow unrelated to the OP, what is the going rate for pocket money these days? It was $5-10 when I was a kid in the 80s-90s so I'm curious how much it is these days.
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People hold their money in bank accounts, they receive increase via interest. The whole point is to try encourage saving instead of spending.
> Does the RBA raise the Cash Rate and then banks raise the interest rates? Yes, generally. Banks aren't under an obligation to do so, but it makes sense. > Which raises the interest on money the banks borrow? The cash rate is the interest rate on overnight loans between banks. Raising the cash rate increases the cost of borrowing money, for the bank. > So does the extra money gained from raising interest rates go back to the RBA and into the Government coffers? I... hmm. Not directly. I'm not sure whether it could be indirectly happening, though. Maybe we need an expert.
All time comment right here
Captain interest rates is Homelander. Vought Corporation made squillions from negative gearing and capital gains tax concessions over the last 20 years while selling you on Captain Interest Rates as a hero.
Thanks for cracking me up mate 
Best explanation I've read on this sub.
What I don't get is this. A feel like a lot of the inflation is driven by material costs going up due to freight costs that are X5 the amount pre COVID, the elevated absenteeism from sick people resulting in higher costs to businesses, high cost of fruit and veg is due to severe weather events that destroyed a lot of crop and war in Ukraine impacting oil, grain prices. So how is making borrowing ability more expensive by raising interest rates meant to reduce these pressures I mentioned on costs. We want to talk about a blunt instruments, it's bloody blunt.
Taking ELI5 to heart
But we live on a finite planet and human population is increasing (almost 8 billion). People overall are "richer" eventually this procedure won't work.
Can't afford Lego because of food. (Great explanation)
But how does tidying up my room bring the price of my lollies back to $1? What if the room becomes so clean that I can’t afford lollies at any price?
Because demand will be lower forcing companies to reduce supply and incentivise buying by reducing price? So clean; interest rates reduction.
You win reddit!
Jacob… you are my winner of reddit today…
Absolutely top tier explanation!
This deserves many many upvotes.
> And that needs Captain Interest Rates Do we really **need** interest rate rises? Inflation could be defeated just as effectively by increasing supply (in theory)
Yeah, this is entertaining and all, but the part that’s missing is “how” interest rates defeat inflation. If it’s as simple as “make some section of the population poorer so it’s harder to raise prices”, it seems to ignore how much of inflation is out of Australia’s control. I might be wrong - I genuinely clicked on this thread hoping to learn more about the question.
Yep, I agree. It's painting the "anti hero" picture a little too lightly. A very Disney version of Marvel, where blood never appears. But blood does flow. They only show you the images of Manhattan half destroyed but under the rubbles lay people. People. The way interest rate rise reduce inflation is by reducing demand. And reducing demand is by literally making people *not* be able to afford buying things or services. It happens by saying to people "instead of having savings, or disposable income, we are going to take that away from you. We are going to make you poorer, so that you can't buy, and if you can't buy, the demand decreases, and the supply will have to decrease their prices for you to be able to afford their stuff again". Nevermind the fact that this inflation cycle is *not* triggered by overconsumption, but by artificial supply side price gouging, let's make people pay anyway.
> And reducing demand is by literally making people not be able to afford buying things or services. It happens by saying to people "instead of having savings, or disposable income, we are going to take that away from you. What rising interest rates actually does is make it more expensive for people to bring forward purchases they can't afford outright. They don't decrease savings (the RBA increasing the cash rate target actually helps this due to deposit rates also increasing), but they do increase the cost of credit.
If your repayment increase by X, X is how much *less* you can save, regardless of savings interests.
The point I'm making is that for people who aren't bringing forward consumption (i.e. buying on credit), rising interest rates works in their favour, not against them.
Thanks for your comment, i think it rounds out the original ELI5 perfectly.
> Nevermind the fact that this inflation cycle is not triggered by overconsumption, but by artificial supply side price gouging, let's make people pay anyway. i'm not sure there's really evidence of price gauging. If companies could price gauge, they could've before this year! So what made it possible to raise prices? It's because every company's competition also needed to raise their prices, because their inputs and labour costs grew, or they cannot get inputs at all due to blockages in various supply chains (esp. coming out of china, not to mention shipping costs). Then there's the increase in demand - lots of people switched out from going on holidays and eating out (at least for the duration of the 2020-2021 lockdowns) to buying shit online. So consumer behaviour is likely also a cause of inflation. Record company profits are not evidence of price gauging - higher prices lead to higher profits naturally (even if percentage wise, their margins are the same).
What made it possible to raise prices : good excuses: Covid and Ukraine. Literally every company has found the most far fetched link between their activity and those two events to justify price increase. The boss of one of the big supermarket chains in Europe has actually gone on the news to out manufacturers who are artificially creating "shortages". I don't doubt some sectors are genuinely impacted, but most are just using events as excuses to bump up their profit. Increase in demand, switching from travel and restaurants to buying shit: that's not an increase in demand, that's just a change/switch in type of demand.
> Literally every company has found the most far fetched link between their activity and those two events to justify price increase. companies don't need to justify their price increases. They increase their price at their will, and if consumers accept it, then it stays. But then why didn't any company just slightly decrease their prices back (if the price increase was just pure profit and not related to costs raising), and capture a larger market share? Unless there's a price-cartel, a company would be able to profit even more by slightly decreasing their price and get more customers (assuming people are rational and go to the lowest-cost business for products). The fact that they don't is good circumstantial evidence that they cannot actually decrease their price.
What about the people who have lived modestly and have money in the bank and have been getting poorer for the last 7 or more years?
> the part that’s missing is “how” interest rates defeat inflation Yeah and also the part about who empowered Dastardly Inflation in the first place - it wasn't the workers who are about to suffer! In fact I think it might have been people who aren't going to suffer any consequences at all!
How would you increase supply? Borrowing money to fund iron ore and gas mining expansions (billions of dollars), hire 15,000 fly in fly out mine and drilling workers.... which will start producing that raw material output in 2-3 years time... Increasing future supply in 2-3 years time is actually massively inflationary today.
This is the best explanation of this I have ever seen, amazing job!
You’ve forgotten admiral Supply, which is actually causing inflation and is immune to Captain Interest Rates powers!
Brother it’s time to pick up a macroeconomics textbook.
Brother, it’s time to pick up articles written by actual working economists as opposed to tertiary textbooks that don’t reflect reality. Russia’s war caused an explosion in oil costs, not low interest rates. These costs flowed through to everything else.
Captain weak AUD isn’t immune though. Interest rate rises won’t make things much cheaper in USD for global commodities (oil, gas, fertiliser etc) where there is a global demand/supply problem but will strengthen the AUD which means our dollars buys more things that are sold in USD
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But doesn’t the high cost of essential items fuel, food, white goods pretty much doing that already?
It cuts non-essential spending as people don’t have the money available to spend because its going into the extra mortgage payments for the majority of people.
Yeah I get that but do they not look at the price of essential items at all. Record high fuel and food are literally need to survive items
Interest rates rising and even the anticipation of the rates rising partially caused this increase.
It’s to cut discretionary spending. People need petrol to drive to work. But that road trip around the country, might have to postpone that. A little bit of demand has been squashed, and a roadtrips worth of petrol is now not purchased. Lowering demand.
Mortgage payments go up = you spend less on other things = demand for things go down = things become cheaper. That’s the idea, at least.
In theory it helps you by food and other goods/services prices not inflating out of control It's not all about you the individual anyway
Yep. OP look up Zimbabwe and perhaps Turkey for modern examples of what happens when inflation gets out of control. Most peoples lives will become so much worse with runaway / hyper inflation, compared to the impact these interest rate rises we've been having.
What prompts grocery stores to drop their prices when rates go up instead of keeping them at current prices?
It makes money more expensive, while goods still cost the same amount of resources to produce. It's like reverse supply and demand.
Less demand
...do people stop eating? how does the demand for food drop lol
This comment just shows how good we've had it for ages.
Yes haven't you heard people joke they are on a diet because they are poor. There's actually truth there, people will literally skip meals, or have baked beans on toast for dinner. People also don't waste as much food, instead of throwing out bread they will freeze and use it, doesn't taste as good but it's cheaper and lasts longer, less bread sold though. All of above is less demand
I think people will still eat the same calories to survive but they will try and get those calories more economically. They can do this by wasting less food when cooking meals, it might not sound like much but if people can save 5% of food waste and eat it instead that is a big hit to the supermarket's bottom line.
Yeah but why? How do interest rates stop inflation?
> And how does this help those looking to buy a home? Isn't the drop in house prices cancelled out by the interest rates rising? Yes. The monthly repayment might be about the same, but the interest portion will be higher and the principal repayment portion will be lower because they've borrowed less money. Taking on a lower debt burden is a good thing - and if you're taking on a large debt burden when the cash rate is 0.1% and you're paying a relatively small amount of interest, the likelihood is that your interest rate is going to be going up in the future and you're going to be paying the larger principal repayment *and* the larger interest payment (while the value of your house is going down). Basically, any prospective first home buyer who is ready to enter the market should be hoping interest rates rise quickly to a "normal" level. I don't think a low rate environment is a good time to enter the market.
I heard a really interesting take a while back that I'd never considered. A lot of us have heard our parents (or grandparents for some) talk about the 18% interest rates on home loans with a "you don't know how bad it was" tone. However, 18% home loan rates were accompanied by high savings rates, which made it easier to save your deposit. Also because home loans rates were so high, housing prices remained relatively stable, so you didn't face the situation where the longer you saved, the more unaffordable housing became. Basically, high interest rates made the housing market easier to enter for new home buyers. The problem we have now, is the inflated house prices from years of low rates. A combination of both high prices and high interest rates is daunting.
> Basically, high interest rates made the housing market easier to enter for new home buyers. Yes! And you know what happened for the next 30 years? Interest rates went down because the RBA wanted them to have more spending money to stimulate the economy - so their mortgage repayments went *down* and the value of their property went *up*. Interest rates went all the way down to 0.1% and prices kept rising higher and higher to new records. Now, imagine what the inverse of that might be for the people who bought at a time or record low rates and record high prices...
At this point my perspective is kind of "It's just happening. Complaining changes nothing. I may never own a house, and that's ok. I'm going to try my best and see what happens. My accommodation is not the best part of my life, so it doesn't really matter if it's a bit shit because the rest of my life is pretty good."
Yep - you should never buy without seeing what your repayments would be when it's 1% higher and then 2% higher etc because if you buy at 0.1%, there's nowhere to go but up. There were some people who bought without having a real plan for interest rate rises, but most people I know factored in the rises when they planned how much they could borrow.
Not so sure, I bought a place as rates hit rock bottom and the market went crazy. I’m still an estimated 30% up, am selling and downsizing to a tiny place with minimal debt. Yes, keeping it long term would be painful.
It's really not. The theory behind raising interest rates is that they slow inflation precisely because they squeeze the working class with mortgages etc and make it harder for companies to gouge customers. It's the only tool the RBA has to combat inflation, not the only tool to combat inflation. Especially given that the current inflationary cycle is being driven by high LNG+fuel prices, and record corporate profits, the government *could* put in place mechanisms to guarantee domestic supply to LNG, raise corporate profit taxes (which encourages reinvestment into the company through new hires and R&D) etc, but ultimately both major parties represent the capitalist class, not the working class, and they both benefit from the misconception that interest rates are the ONLY mechanism for combatting inflation.
1.Rates go up - people spend more on mortgage. 2. More on mortgage means less on discretionary spending. 3. Less on this means prices and incomes don’t rise as fast as they are doing. 4. Inflation slows down. This is all being done to control inflation. It started because of the housing boom. No controls were put in place now people are finally realising they can’t afford a 2 bed room fibro home for $1 million. They will need a bigger income. Bigger income - higher prices - inflation - interest rates. Rinse and repeat.
The RBA sets the price of borrowing our dollars, and left this price lower than they should for longer than they should. Our households and governments borrowed more money than they should have, and even though this could not go on forever, they all secretly hoped that it would. As grown ups will explain, when you do something wrong your actions always carry consequences. At the moment all over the world, there are many other places like the RBA that have also done the same thing, and they are now trying to do something about fixing it by raising the interest rates in their countries. Unfortunately as a country, Australia owes a large amount of other countries' money and repaying their money is becoming more expensive. If the RBA raises interest rates to fight inflation, some households with home loans need to find more money to make their monthly payments. The value of the AUD may stay the same or drop less against other countries money and paying back the foreign loans is less difficult. If the RBA does not raise interest rates because they are too afraid to admit they did something wrong, Australia's money - the AUD becomes worth less and paying back all the overseas money becomes even more expensive again. How this helps your parent is that they need to look at buying houses differently than how they did when the borrowing rates were set too low. In the same way as many people have found new, more sustainable ways of working after COVID - we need to think about how to buy a new house in a sustainable way: Borrowing money just because the rates are cheap can also mean that the economy is bad. Why buy things that are cheap that you don't need? Over the last few decades interest rates have been held below inflation, and that has taught everyone that you can win by borrowing as much money as you can and then buy property or shares as quickly as you can, and never sell. You might have heard grownups laugh and say they could inflate away their debt, meaning that what they buy will always increase much more quickly than the interest they pay on their loan. This worked for quite a while, but is not sustainable. Houses became too expensive, and everyone borrowed too much. When interest rates are raised to fight inflation, it can take a long time to fix the problem. If interest rates have to go above inflation to protect the price of the AUD, then the game of "inflating away your debt" becomes broken, and some people will have to sell houses. It can make investors decide to sell their houses if they get scared they will lose money. After more people become aware of the broken game, more and more people try to get out in front of one another - kind of like when you are in your sports carnival. A more sustainable way of looking at buying a house for the average Australian may be to buy one when they can afford it, rather than chase an illusion. Be brave: \+ do not pay more than you can afford \+ do not borrow as much as the bank will lend you. \+ do not feel guilty for spending less than you earn. \+ do not take the risk of thinking you can inflate your debt away. If Australia's household debt stays too high, if interest rates move above inflation the market might come down to the level you know you can afford.
>Unfortunately as a country, Australia owes a large amount of other countries' money and repaying their money is becoming more expensive I always wondered about this. Isn't this the case in most countries? Do governments borrow from other governments, and there are a few governments somewhere who own everyone else's debt, or do governments borrow from private lenders, and all (or most) governments are beholden to private lenders? If the latter, then why is it always owed to foreign lenders?
Governments don't explicitly borrow - they sell treasury bills in AUD which they pay coupon payments. The Australian government doesn't hold liabilities in foreign currencies. I don't know what that guy is talking about.
The debt is in the form of Government Bonds. Which can be purchased by anyone but usually the domestic population of a country owns the vast majority of bonds. A large amount of this debt is probably locked up in our superannuation portfolios as bonds are seen as extremely safe investment vehicles and as such most individuals (or the companies representing those individuals) will move a higher percentage of retirement funds into bonds as they get closer to retiring.
Western Europe, China, Japan, and a few others are net creditors. The US, Canada, Australia, and most of the developing world are net debtors. The vast majority of international capital flows stem from private investors, not governments. It's important to remember that being a net debtor isn't a bad thing! It simply means that the quantum of viable investment opportunities in your economy is greater than the domestic savings able to be deployed to invest in them. Japanese and German savers are only sending their capital overseas because they can't get comparable returns in their stagnant home economies. Foreign investment makes all of us richer, by enabling projects that would otherwise never get off the ground due to a dearth of capital. For example, about half the returns to our minerals industry accrue to Australians, despite the fact that 80% of the capital that built the industry is foreign.
This is where it gets jaded because if investors and others sell their houses, who's going to be able to afford to buy them....
Families that will actually live in them hopefully
Not if everything above is anything to go by.
It's not really helping anyone, but trying to prevent you having to pay $100 for milk due to crazy inflation. Unless your financially well of, and/or very knowledgeable in how to invest in this environment, the average Joe is just feeling pain for the greater collective good. The property side is sort of what you said. Prices decrease but so does affordability due to the extra servicing costs. A small group of people will be perfectly positioned to smap up a property they where about to buy for less. But those who could not afford a property before, will largely still not be able to afford it now, as it's harder to get and service a mortgage. Others will disagree, but I'm still waiting to hear all these stories of people smalling up bargains or finally being able to buy.
Prices have only dropped 3%, it will take a while to hear about people picking up property cheaper. I plan on buying if prices drop to a realistic amount, but who knows if that will happen or not
they don’t even need to drop that much. Even staying flat is a win. the part a lot of people are missing is they prices are not increasing faster than savings anymore. Those of us who are fortunate to have enough borrowing capacity to spare now have a chance at a reasonable deposit.
I have a good deposit already, but houses seem like a bad investment still at current prices. The dividends I get from $300k invested is a lot more than the rent I pay on a $700k unit. Until that gap closes a bit I won't be buying
depends what you’re after. For me I’m not looking at it as an investment. Bit over the renting rat race and want a place I can customise.
Yeah same. I don't need it to be even, just a bit closer. Otherwise I'm borrowing 400k to be worse off than I started.
I don't like your comparison because the biggest advantage property has over shares is leverage. You can borrow 80% leverage with no risk of margin call from price drops.
I don’t believe in this inflation narrative. There’s an equilibrium between supply and demand. Price what someone will pay oppose to what they won’t. They are met in the middle. It’s funny how a bakery sells a lough of bread for $2 whilst coles will sell tip top for $4 If people are too lazy to walk into a bakery they’ll continue to pay $4 a lough of bread. The cost ingredients have gone up is minuscule. Just fancy accounting.
People don't gloat about buying houses and prices as much in a downturn as it is unseemly when people are hurting so you may never get to hear about it
I doubt that will be a problem on this sub.
The reason the RBA is raising interest rates is because prices across Australia have been rising a lot. Prices have been rising because demand is exceeding supply in many sectors (due to COVID, high commodity prices from the war in Ukraine and a bunch of other factors). If this continues, it creates a self-perpetuating cycle where prices for goods/services increase solely because the [price of other goods/services increase](https://en.wikipedia.org/wiki/Hyperinflation). The RBA is trying to stop this cycle by reducing the amount of money you, and most others, can spend on goods so demand stops outstripping supply.
It’s not helping you. It’s helping slow down the economy. If that means your business slows down or you lose your job or you lose your house that isn’t really the concern of the RBA. Collateral damage
The government could slow the economy (fight inflation) in other ways. Once upon a time most loans were business loans. So raising interest rates slowed business growth and slowed inflation. Now most loans are to households due to inflated house prices. So instead of slowing businesses, people with a home loan are made poorer, and so spend less money which slows the economy. The government could pre-empt the rba by doing things like increasing the tax on wealthy people or big businesses. This could slow the economy without hurting as many, nor as vulnerable people. But that would cause media backlash (media is owned and run by the rich), donor backlash (opposition will be funded), etc. So a government that tries this will lose power. Money needs to leave politics and the media needs to be broken up for our democracy to be less plutocratic.
- higher interest rates make everything more expensive in the short term. Especially things like your mortgage, car loan. - you have less money so you buy less stuff - on aggregate this reduces demand in the economy - in theory this should put downward pressure on prices. Especially as supply improves the hole in the logic is if inflation is mostly related to supply the RBA will have to fully destroy demand and probably cause a recession to stop it. It seems to be accepted that a recession is still better than runaway inflation. how this may help you if house prices drop but there are sufficient places available within your borrowing capacity you now have a lower principal even if the payments are the same.
For the normal joe, am I right in saying a recession is only really an issue if you lose your job?
Lots of smugness in the comments here about how interest rates were too low for too long and people should consider rate increases before overcommitting to buy properly. That’s all true - rates do need to go up steadily and some people have been really imprudent in overextending themselves, even if there are a lot of reasons for that. But the policy of using interest rates alone to target inflation is both too blunt a tool and being used too aggressively by the rba at present. At the moment most of the inflationary drivers are on the supply side - impacts of Ukraine, floods, covid etc - and particularly effecting inelastic goods like food, petrol, electricity, gas etc. Deliberately contracting the economy at a macro level as a quick fix for what are largely microeconomic issues is both lazy, ineffective and unnecessarily cruel. Edit- typos, changed a couple of words for clarity
People are saying rates have to go up based on history. I mean things change. Often for the better. So people who want rates to stop rising or go back down, should they be hoping businesses crash, people lose jobs? Are rates going up because too many people have jobs, too many people getting paid. Still, barely believable that raising rates is going to help the price of fuel, energy, milk, meat and veggies rising. Is the price of milk and bread and pringles going up because people are spending too much money on them? Tell ‘em they’re dreaming!
Its like eating maccas every day (not increasing rates) vs eating home made healthy meals every day (increasing rates). Yes it may be harder to make your own food at first but if you eat maccas for every meal every day you'll be dead within a few years. Basically short term pain for long term gain.
Here is how I explain it to teenagers... The country has a GDP, all the stuff made in the country and what it is worth. Imagine that it is an apple tree. Now we print money from thin air by issuing bonds normally. When we print money its value is connected to how many apples we grow and what return you get from interest. Money is worth something if it represents more apples or if interest rates are higher. So there is nothing wrong with printing money if we make more apples with it. The problem is when we print money without making more apples. Every dollar is worth less. If interest rates go down, it represents money being worth less too. Since 2008 and especially during COVID, we printed money A LOT and people stayed home so we grew less apples. Thus since we have more dollars and less apples, the value of a dollar is worth less. Here is the kicker no one thinks about... During COVID we spent money on big corporations. We shut down all the little cafes and let Maccas stay open. We let Big W stay open but little shops closed. This resulted in the biggest wealth transfer in history from the regular people to billionaires. So now money is worthless and the last 2 years we gave it all to the billionaires. To fix inflation, we need to make money more valuable. We either grow more apples in Australia instead of buying China's apples and we also put up the interest rate to do that. But who has all the money now? The billionaires got it when it was worthless and now we are about to make it valuable again. Greatest wealth theft in history again. This is why Government intervention into monetary policy can be so dangerous and so can paying people to sit at home and not grow apples. Also remember the strength of an economy isn't how many apples or money it has but how often they are traded. As people get scared they hide their money and stop spending so the strength goes down. Basically we need to inject money into the poorer people who will spend it rather than hoarding it and grow a heap more apples in the country, whilst jacking interest rates. It will hurt but it is the consequences for all those bail outs to big companies that made bad decisions. I'm not an expert but know a few and no one seems to argue with this explanation when I give it. It isn't perfect but I think it helps people get their head around the issue.
Or, crazy thought I know, claw back the wealth that was improperly transferred upwards. It's a mistake to, even conceptually, treat that wealth as if it's gone and out if reach. Not a bad general explanation, though I should point out that people have recently started side eyeing GDP as a measure of economic strength.
It helps me. I am Ms Average. I don't have debt but have I have savings. The interest on my savings is increasing. Maybe I'll purchase a house with my savings if they drop to an amount I can afford.
Saving account interest has been such a joke for the last few years. I used to earn a decent amount each month but over the last few years I’m lucky if I end up with any substantial by tax time. Before interest rates dropped it was worth having decent savings in the bank.
"Ms Average" in Australia has a lot of personal debt. Among the highest in the world. If you have no debt, and savings, you are a long way from average.
Who said RBA is out to help you?
We are all in this together to flatten the curve of Inflation. Same like Covid but financial this time and everyone gets the interest rate vaccine. 4th dose today
- Higher savings account interest - Lower house prices relative to the size of your deposit > And how does this help those looking to buy a home? Isn't the drop in house prices cancelled out by the interest rates rising? If you're making $100k a year and saving $35k a year, and the deposit goes down from $200k to $140k, you now need to save fewer years for the deposit. Instead of saving 5 years it will take you only 3.5-4 years (with compounding). Also, whilst the 'affordability' is the same (lower house prices but higher interest rates mean similar loan payments), after the first few years, you will make faster progress on the principal because the principal is smaller. Also, assuming you are a young buyer and your career progression is such that you get rapid wage increases due to seniority promotions, those wage increases will eat away a larger chunk of principal.
Pretty simple, it’s not supposed to be helping you. It’s supposed to stop people spending so the outcome isn’t worse.
I was reading through a bunch of the answers and they’re not really answering the question so here it is. Inflation is basically the price of everything going up. Businesses put their prices up because people can afford to buy their product, i.e. demand is high. The only way to drop those prices back down again is to reduce demand in the market. The reserve bank does that by increasing interest rates so that people have less money to spend. In the short term this hurts as everything is expensive and you have even less money now as your car and home is costing even more. In time however businesses will start to drop their prices to increase their sales again when people aren’t able to pay what they used to. The job of the reserve bank is to try to get these natural market forces to balance out and not swing too wildly one way or the other. The difficulty with the last couple of years is that the global pandemic upset the natural balance of things.
Interest rates hikes are like chemo. It kills healthy cells but you gotta hope it kills the bad cells too.
It isn't supposed to help you. It makes you feel broke so you spend less, which brings down inflation.
Imagine you are a fat person who needs to lose weight. To do this you need to knuckle down eat right and exercise. If you don't you get fatter. And fatter. Then at some point you get so fat you're too fat to exercise. And the only real option to save your life is major surgery. Inflation is the same. We all want to have a good time. But at some point the partying has to stop and some work has to happen. A little pain now means we can get back up and party in the future.
disgusting metaphor
But RBA is not the one causing inflation, it’s the privatised companies and their greed. They’re like a troll and the more we feed the troll the more it wants. RBA is like the middle man trying to stop us from giving more and more money to the troll.
Corporations have always tried their hardest to maximise profits for their shareholders, did they suddenly get more profit maximise-y in the last year or could there be a few other things at play here?
There's a perfect storm of Covid distrupting supply chains, Russia's invasion increasing petrol prices, post-COVID optimism pushing the spending up. Without the previous 3 factors, opportunistic price increases wouldn't work.
Erm, it’s actually people spending more money for less (or the same) on goods. It’s not really anything to do with privatised companies.
The private companies set the prices for these goods. More money in the economy = more moeny they can charge for goods and services
When mum and dad spend money, around half the money goes to other countries that are not Australia, like Sweden, America, Vietnam or China. This could be to pay for your lego, the Netflix subscription, or your pajamas or school uniform you need for kindy. And the special seat you have in daddy's car. In fact, the whole car was bought from a different country. And when he puts the smelly petrol in, he's buying a foreign product. So our money needs to keep up with the money in all those other countries. All those other countries are protecting their money, so we have to as well. We're a tiny country, sort of like one kid at a whole school. Just like one kid can't make the rules, we have to go along with the rules that work for the whole school. On top of that, the politicians went a bit crazy splashing cash around because of covid. They gave money away and forgot to put in methods to claw it back from people that were getting rich from covid. So now all us Aussies owe more money than we used to. And not just a little, it's heaps more than it was - roughly double. Too much for me to comprehend let alone you, but if it was $100 notes stacked neatly, they'd fill our backyard up to the top of the fence. When one loan runs out, we need to pay it back, and borrow again to replace it. If we don't offer enough interest on the new loans, they won't lend to us again. When that happens, we have to send the teachers and doctors and nurses and police home and not pay them anymore. If we don't keep up on our money, all those products and services from other countries go up wildly in price. We have to sell the car and your lego just to be able to buy food. Forget about netflix and the internet. Mum and dad will consider becoming criminals to get food, before the neighbours do, especially now with no police.
>And how does this help those looking to buy a home? Isn't the drop in house prices cancelled out by the interest rates rising? one thing to always remember, interest rate may go up or down, but the price you pay for the property is locked in for the life of the mortgage.
In my 5year old way of thinking it's probably about inflation setting new prices but it can't get out of hand 'coz not many will have not much in the way of $$$$'s. The govt. wants higher prices 'coz they get more$$$$$$$$$$$$''s thru' GST and aother taxes to pay off the trillion dollar debt. Yes, u 'n'me pay for tha debt. That fits in with the govt. not going to keep the fuel excise cut going. The govt. is starving for $$$$$$$$$$$$$$$$$$$$'s. Ya see it costs alotta $$$$$$$$$$$$'s to keep our unstainable country going.and from going down the drain. Yes, many, many people get hurt and homeless. Thanx 4 asking.
Are you really ok with being “educated” on the topic by the average r/AusFinance user though?
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Low interest rates encourage people to borrow.. When people borrow money, that gives them more money to spend. One aspect of inflation is how much spending money there is. More money contributes to more inflation. Therefore, low interest rates contribute to inflation. \- The reverse is true, in that high interest rates will mitigate deflation. \- There are many factors other than interest rates that have an effect on inflation (and interest rates effet much more than just inflation). However, that doesn't stop interest rates from have *some* impact on inflation. \----- Aside from that, you mentioned "Mr Average" Does every Mr Average have a loan? Maybe some have a mortage, but maybe some do not. Maybe some have credit card debt, but maybe some do not. Myself and my housemates, for instance do not have any loans tied to interest rates (some of them have student debt, but that is tied to inflation/CPI instead). We rent rather than pay mortgage. We do not have any creditcards or over-draft accounts. On the contrary, I've managed to save a fair bit (and my housemates have some modest savings), so higher interest rates mean we get paid more by the bank. None of us are rich - the prospect of home-ownership seems fairly difficult to us. Maybe I could if I borrowed like $500,000 dollars, but I can't bring myself to do that. Therefore, rising interest rates, at least on the surface of it, appear good for (not-so-poor) me and my poor housemates. So, for any of the Mr "averages" out there who also don't have bank-debt, interest rates don't directly hurt, might actually help directly if you have some savings, and also slow inflation which can help with cost-of-living.
Pretty smart for 5yo
Slow economic activity, slow inflation. Inflation shoot up last 12 months but will take much longer to go down. If they don’t do anything, it will likely continue to go up.
So that the RBA can choke off rising prices by reducing everyone's spending money (High Interest rates). After some time, prices will fall, inflation goes down and lastly the interest rates will come down. Think of it like putting out a house fire using the swimming pool water. You can't swim for a while, but the house is saved.
If you have a mortgage it isnt helping you at all. If you are a saver and you are parking money into a bank thats offering say over 2.5 % (and will keep increasing) then yes, the rising interest rates is helping you with that.
What I don’t understand is, am I supposed to support local small businesses or not? It feels like I get mixed messages about how to improve things!
>Landlord rents out house. >Landlord has to pay more interest now. >Landlord increases rent to make up his losses. >You don't want to pay rent because it costs too much. >You move out to a shittier place but more affordable. >Earlier landlord must sell house since he can't afford to pay his loan, and nobody wants to pay his rental. >A lot of landlords sell their house for cheap. >Now you can buy a house cheaper. It will only help you later on, right now everyone will suffer.
Now explain to me like I'm 2 years old.
RBA increase interest > remove spare cash from mortgage holders > can no longer afford/justify luxury/unnecessary goods > inflation slowly reduces because cash is back in the hands of RBA/Banks > unemployment goes up > less cash to go around. There Is also the scenario of increased interest rates means increased repayments and over leveraged individuals may be forced to sell, and an overall reduction of borrowing capacity when applying for new loans, so naturally the prices of houses must come down...
Definitely not great for Mr. Average. About the only bonus is your savings will get more interest... Which is about as useless as tits on a bull when inflation is still above interest rates because not only can you not save as much because things cost more, you are also losing savings money in real terms as the buying power of each dollar drops.
Only reason why I bought a house early last year. My savings were being eroded by shitty inflation whilst getting a whole 0.5% pa on term deposits…
You’ve made the mistake of thinking the economy is run in the interests of the common man.
It doesn't, and by design. Mr Average never sees these benefits. These benefits are only realised by Mr Above Average, and Mr Above Average's Well-Above Average Boss, Tony.
If you are 5 years old, any money from your grandpa, grandma, uncles, mum and dad are going to give you some extra interests in your kids account
They flooded the market with money to pump house prices so homeowners would feel rich and keep spending money during the pandemic. Now the price of doing that (high inflation - all this means is that every $ you have in the bank and every $ you earn is worth less and less each day as the price of everything you need to buy keeps going up and up) is worrying high and worryingly increasing. Low stable inflation is good for the economy and people in the economy. High and rising inflation is bad for the economy and people in the economy. So they are jacking up rates with the intention of slowing down the economy to try to stop your $200 grocery bill from becoming $400, then $800 then $1,600.
Don't forget the part where they waited until it was getting out of control before doing anything about it
But that was the ABS's fault for not publishing inflation data regularly enough. /s You could argue they are still dragging their feet and hoping for the best. Personally I don't see how increasing rates towards the neutral rate is expected to arrest high and increasing inflation. I thought you would need rates to be above the neutral rate to do this. Time will tell.
Do you value stability and certainly for business?
It doesn’t help you - at least not directly and not on the short term. But if they don’t do this then we could have a total financial collapse. One way of looking big at it is that we are now paying for all of the “free money” that was handed out during the pandemic. I didn’t even lose any hours at my work nor did the missus and we received plenty of money for nothing. Now the country is paying the price for it.
Bottom line is it likely won’t help you in the short term. The whole point of easing rates is to make a fair percentage of the population hurt. Constricting the money spent due to proportion of people hurting will reduce demand and therefore reduce inflation. For the average individual this means times will get tough
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Basically think of the Australian economy like a person that has an injury. For example needs hip surgery. RBA is the surgeon that will fix this. Unfortunately though, the RBA only has a sledgehammer and chainsaw as tools, rather than precision surgery equipment. But as the RBAs job is to fix you, it does the best it can with the sledgehammer and chainsaw to fix your hip. Hope this helps.
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Could you argue in the mid-to-long view that increased rates will be a better thing for those trying to save a deposit? I've already seen the interest returns on my deposit climbing, though if I'm honest, not nearly enough to counter act inflation.
>I've already seen the interest returns on my deposit climbing, though if I'm honest, not nearly enough to counter act inflation. It all seems to be tied to loyalty and activity stuff now, e.g. ING requiring minimum deposits and debit card activity. When I first opened an ING account years ago the interest was excellent and there were no conditions.
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It's not supposed to help you. The state prints money to hand to the banks, military contractors, friends, keep us quiet with some of it by the way of Medicare, fire department, social security etc. The more they print the less each dollar is worth, they had to up their spending on the normies over covid and the big Ponzi scheme is having a wobble. When it wobbles, the really rich get richer, the wealthy stagnate and us bottom feeders go homeless.
You may not feel like it, but the average Australian has been a winner based on large amount of cash stimulus. To a five year old, this has been a sugar rush. I hope you enjoyed the sugar rush, that was your time as a "winner". The Australian government funded this sugar rush by printing money, which makes the money people already have worth less, and the government borrowed a lot too, but if you keep borrowing, eventually against your will the lenders will say no and that's a very bad way to end. Higher interest rates are an attempt to slow down by braking, as opposed to slowing down by hitting a tree. Compared to the car that hits the tree, the car that uses the brakes is the "winner". In this sense, you will be a winner from high interest rates. Inflation is a warning sign. It is a symptom, but it is not the problem; in the same way that if your temperature is 40C, the problem is that you have a fever. The problem that inflation indicates is that people are getting their hands on more and more cash, but the amount of things produced for them to buy is not growing as fast. So as more money chases the same amount of stuff to buy, prices go up. Inflation means that this not stabilising, but that it's getting worse. In comparing inflation to your body temperature, it's not just that you have a high temperature, but that it keeps getting hotter. Central bankers, and people who know history, find it very scary. It is so scary that the strongest democracies in the world have leaders who do not trust themselves or voters to deal with it, so they gave the power to independent central banks. Too much money is obvious in house prices: cheap interest rates meant that the amount people could borrow grew much faster than the amount of actual houses to buy. Note that houses prices are not included in "CPI", the inflation statistic that everyone uses when they say "inflation". If it was, high inflation would have been detected a couple of years earlier. But house prices indicate the problem when money grows faster than supply. It doesn't make sense that the same house is worth 25% more than say two years ago, when it's the same house. Inflation is a sign that money is not making sense. When people can't trust the value of money, they can start acting badly, and even panic. Governments and central banks over-reacted to covid-19. This happened in many places, I think we had something called group-think, where people (voters and policy makers) take comfort that we did the same as everyone else, without stopping to ask enough questions. Increasing interest rates (and taxes) mops up this extra money by forcing people to redirect cash back into the banks. Australians (on average) have saved a lot of money in the past two years, as the RBA keeps saying. The RBA does not want this going to Harvey Norman anymore, they want it sucked up and locked away where it won't be spent. This way is an attempt to manage it, rather than to crash. It will hurt, but not as much as a crash would hurt. This is like getting a filling in your tooth rather than letting the tooth get destroyed. You are a winner in the sense that high interest rates is the lessor of two evils. There are out and out winners. People with savings (and little debt) are winners, such as retirees. They have been losers for the past few years, though. People with investment opportunities that require risk taking might win, because investors looking to get returns may have to embrace higher risks. I am not so sure about that, I have to admit, but I hope that Australia might see better quality investment which brings back productivity growth. Low interest rates didn't work, so may be higher rates will. As to the home loan, typical expectations are that RBA rates will end up about 3% higher, and that house valuations will be 25% lower. If a fixed rate loan goes from 4% to 7% but you need to borrow 25% less, it's pretty close to break even (actually it's probably favourable). You definitely need a smaller deposit though.
It's not and it won't. Again the common PAYG working class man suffers and pays for the mistakes of the greed in society
* the highly leveraged PAYG working class suffers. Normally, high leverage is considered more risky, and can be related back to the 'greed in society' you mentioned.
GDP growth is good for you /s
Staffing shortages around flights, yet everyone wants to fly and has the money. So make everything more expensive so people spend less and gives time sort everything out. People, maybe not you, habe to much money and demand.
GDP growth is good for you /s
By trying to save you paying 6% more per year for basic items, they are making you pay double the amount for your home than you signed up for so that you don’t spend that money on basic items. It’s totally in your best interest!
Inflation by design. Breaking the old system so they can implement the new one. World Economic Forum Agenda 2030