Join our investing community

Why are we crippled with high interest rates?

Discussion in 'The Economy' started by rjc79, 19th Oct, 2008.

  1. rjc79

    rjc79 Member

    Joined:
    18th Jun, 2008
    Posts:
    5
    Location:
    adelaide
    I don't understand the concept. why does Japan have <1% interest rates, and we are crippled with 9-10 %+ at times. If spending goes down so does the economy, why aren't the rates adjusted according to spending. people are forecasting <2% interest rates, I'm thinking if things get real bad next year, they will keep going down, until it hits a point where the economy is going again.
    But my question is why do they let the economy fail first. Why not keep it in check. Obviously you don't need to be a rocket scientist to work out with the 10-15% gains in property a year, people borrowing to 90% of their threshold, for interest rates to go up 2% there would be a lot of people under pressure. that means, then those people have to cut spending to keep their homes, now if a great deal of the population are doing this, all of a sudden we are in a recession. I think there is a problem with property explosion. Prices being driven up, another factor I'm yet to understand.

    I'm understanding with interest rates low, more people buy homes = more debt. Why not keep the interest rate low, but keep loan ratio at no greater than 90%, instead of crippling people.

    I really need some help understanding this.
     
  2. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    One of the reasons is the floating of our $ and the carry trade that takes place with our currency when our interest rates are set above those of the US, EU etc.

    The 2nd reason I think is bad coordination of the RBA and the government.
    They can't get the monetary and fiscal policies to work together.

    Making the RBA independent doesn't help.
    Even blind Freddy can see that there is a problem with this structure and that their policies are often conflicting with each other.

    In the last 1-2 years we had the RBA increasing interest rates because it wanted to curb inflation and at the same time our government was cutting taxes and giving us the ability to spend more therefore fuelling inflation...:eek:

    We also had a lot of speculative buying of properties and our national debt was increasing . The RBA was trying to fix all the above but it only used interest rates as it's tool. It ignored the fact that inflation was largely imported and didn't try to coordinate it's efforts with the fed. government.

    IMHO the RBA went too far and underestimated the affect of their action on our economy. It also didn't act quickly enough to relieve the pressure in the credit markets so we ended up with the highest interest rates in the Western world (together with NZ)

    I am sure they've learned their lesson and hopefully the RBA and the government will now see that monetary and fiscal policies have to work together or we could be creating problems to our economy.

    Cheers
     
    Last edited by a moderator: 20th Oct, 2008
  3. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi RJC,

    So many questions... :)

    Ok, Bank of Japan (BoJ) which is the Japanese government's bank has official interest rates at 0.25%. Reserve Bank of Australia (RBA) has official interest rates at 6.00%.

    "If spending goes down, so does the economy", spot on.

    Before the Financial Crisis everyone was spending lots of money, this increased inflation (which is the general cost of goods in an economy over time). To slow inflation (as it is currently 4.5% as at 19th Oct 2008) the RBA increases interest rates. For individuals, (assuming your salary is a fixed amount per month with a mortgage) this has the affect of less discretionary income as you have to pay more for your mortgage.

    You already answered this question with "there would be a lot of people under pressure. that means, then those people have to cut spending to keep their homes, now if a great deal of the population are doing this, all of a sudden we are in a recession."

    I'm not sure who has suggested that interest rates are going to get below 2%...If that were true alot of people would be buying banks yielding high dividend yields with fully franked dividends...

    I know that ANZ's Saul Eslake is expecting another 1.5% within the next 6 months and Macquarie Bank's Rory Robertson is expecting rates (RBA rates) to be 4% sometime next year.

    Reality is that the propellor heads in the RBA didn't see the crash coming, otherwise they would'nt have raised rates in March 08...Some lenders were actually offering 107% of the purchase price!!! :eek:

    Property explosion, share market explosion...it's all boom and bust cycles.

    Lenders make money by lending money to people, the more people they lend to, the more money they potentially make (as long as the borrowers can pay the interest repayments and some loan repayments).

    Unfortunately the lending market is quite unregulated compared to other areas in finance (eg, financial planning where every client gets a personalised Statement of Advice advising them on a strategy and how to implement that strategy).

    ASIC usually shys away from loans and property as a regulator, they seem to let the ACCC deal with it and ASIC forgets that the "I" in ASIC stands for Investment and reverts back to it's predecessor ASC (Australian Securities Commission).

    Cheers,

    Dan
     
  4. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    I know I personally don't want self serving politicians to also control montery policy. So I think the independance of the RBA is essential to proper management of monetry policy.


    The RBA's independence means the RBA should always work in the interests of the economy.

    So with that noted, it's not the job of the RBA to work with the government, it is the job of the government to work with the RBA, ie don't offer tax cuts to win votes when the economy clearly needed restrictive fiscal and monetry policy.
     
  5. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    We agree on that point
    cheers
     
  6. lorrimer

    lorrimer Well-Known Member

    Joined:
    4th Jun, 2006
    Posts:
    193
    Location:
    Brisbane, Queensland
    Bill,
    You and I were saying this many months ago on 'The price of oil" thread.
    At that time I recall most commentators and many contributors to the thread saying that interest rates needed to rise even further and that there was no chance of Australia falling into recession. I found that most frustrating because I could see very clearly that things were deteriorating very quickly here on the Sunshine Coast. The last 2-3 rate rises were not needed, and that has now been proved to be the case.
    Regards,
    Lorrimer
     
  7. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    Lorrimer

    Those guys and the RBA assumed that the resources boom would last forever.

    The RBA's biggest mistake was that it did not take into consideration the most populous states NSW & VIC because the people in those 2 states had very high mortgages so high interest rates would hurt them most and those people were also not benefiting from the resources sector.

    Also, NSW being the biggest collector of GST is needed to keep spending to keep the economy and the budget in balance.
    Now that a large number of people in NSW lost their homes and the rest of us were forced to stop spending the RBA hit the panic button.

    You would have thought that those highly paid individuals working for the RBA would know what they are doing, but I have my doubts...:eek:

    cheers
     
  8. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    At the time you were making those calls the rest of the world hadn't not dropped into recession. There is a BIG difference between Australia needing rates cuts due to our internal economy needing stimulus and the Australian economy needing stimulus because the rest of the world feel on its ass in a matter of months.

    Plus the RBA was forced to drop rates because the cost of lending skyrocketed with the major US financial bankruptcies, which prompted the banks to raise rates irrespective the RBA just to cover costs (increases which we have largely yet to see removed).

    So Lorrimer, rest assured that the RBA didn't cut rates because Australians were feeling the pinch, they did it because the world is about to fall into recession and the RBA is doing everything its power to make sure it doesn't take us with them.

    The RBA also probably realised that the Australian housing market is well into a speculative bubble (much like the US and UK) and its collapse right now would have dire consequences for the economy and would definitely see us into recession. My guess is they may now be factoring this into their equation, where as before the bubble was self sustaining...

    :rolleyes:

    It is a little hard to blame them when considering their last rate cut was 6 months before the US financials really started tanking and taking the world economy with it. I'm pretty sure most were not predicting the the complete collapse of the world economy...

    I'm standing by my opinion that everyone on the board of the RBA knows a sh*tload more than the average poster dropping their two cents worth on these forums (myself included).
     
  9. try anything once

    try anything once Well-Known Member

    Joined:
    8th Oct, 2008
    Posts:
    117
    Location:
    melb
    Here's two positives for their interest rate rises in the past...

    1) High interest rates discourage borrowing. Given the current problems are a lot to do with people overextending themselves, its likely that we would have a bigger problem on our hands than we do today if interest rates were not raised in the past. Tax cuts may be used for borrowing more, but can also be used for spending/saving/investing.

    2) We now have more headroom for interest rate cists as a stimulus for the economy. If they had left interest rates at 5%, a 1.5% cut to rates would see us now with a negative real interest rate given inflation is 4+%.

    Japan is hardly a poster child for economic management these days. Their economy has been in a steady state of decay for over a decade now.
     
  10. Billv

    Billv Getting there

    Joined:
    15th Jul, 2007
    Posts:
    1,796
    Location:
    Sydney, NSW
    It's very easy actually,
    the role of the RBA (other than the main 1 which is to set the monetary policy) is to maintain the stability of the financial system.

    Therefore it is their job to also make sure that the lending market has enough regulation and acountability and if the country's debt is getting out of control they should recommend that the banks tighten their lending criteria or that they limit the availability of particular loan products.

    It's also not very hard to arrange some high level meetings with the government and to come up with an agreed direction so that monetary and fiscal policys actually work together and not against each other.

    cheers
     
    Last edited by a moderator: 10th Nov, 2008
  11. Chris C

    Chris C Well-Known Member

    Joined:
    2nd Apr, 2008
    Posts:
    1,327
    Location:
    Brisbane, QLD
    Have you compared the Australian financial system to the rest of the world lately... seems to me that to date the Australian financial system has held firm. Firm enough to hold the foundations of the housing bubble that seems to have collapsed in many other developed countries around the world.

    ... and let's not forget that the Australian financial system barely deserves a mention when it comes to world financial issues and I don't think the RBA should be held completely accountable for the negative influence of the rest of the world has had on our small nation of late.


    Arranging a meeting is very different from attempting to get politicians to not serve themselves first.