Why would interest rate ever rise?

oztite on 05/02/2017 - 12:42
Last edited 05/02/2017 - 12:42

OK, so looking at buying a new house, and trying to decide how much I should borrow myself rather than blindly follow what the mortgage broker tells me I can borrow. One big factor is obviously the future/ long term interest rate.

Now, ever since I started paying attention to interest rate (in the past 5 years or so), it has been going down. And while the Fed or our own reserve bank often plays with the idea that it's on the way up, they keep delaying any interest rate rise and would jump at any opportunity to cut it further.

I also feel that there is no real benefit for the reserve bank to raise interest rate, as higher interest rate means high interest for the government to pay on its forever growing national debt (every country, not just Australia), and it would be extremely unpopular with the general public as many people would not be able to afford the mortgage.

The only benefit for interest rate hike seems to "curb inflation", but as we know, the data on inflation can be easily manipulated - house price has been shooting up 10-20%/ yr in Syd and Melb for the last 20 years or so, and despite the cost of mortgage and rent going up, our inflation seems to be "stubbornly low at 1-1.5% per year" as our reserve bank loves to quote.

I have read up briefly on what government interest rate is meant to be used for, and how it's related to the general economy and inflation historically - but I start to feel the keyword is "historically".

So my question to someone with financial/ accounting background is this: is the whole interest rate thing just a big scam? It'll actually never go up, because no government in the world wants to pay more interest on its own debt, and no government wants to see property price falls.

Poll Options

  • 0
    Interest rate will rise to 3% and no more
  • 8
    Interest rate will rise to 5% and no more
  • 28
    Interest rate can go as high as 20%
  • 5
    It's a scam, it will stay low in the next 20 years
Financial

Comments

  • zoombie on 05/02/2017 - 12:54

    What was the interest rate prior to the 5 years that you've been following it?

    • oztite on 05/02/2017 - 13:38

      I believe it went as high as 20% for a few months in the 90's… but I start to get a feeling just watching how the reserve bank characterise the economy that things have changed. The Fed for example maintains the US economy is fragile and only in the early stage of recovery despite almost record low unemployment rate and historic high Dow index. Similar story in Australia. All negative talk and therefore it seems very unlikely for any substantial rise would ever come in effect.

  • modsec802 on 05/02/2017 - 13:26
    +5

    It's more that the cost of credit will rise as no one will want to lend wholesale funds when the asset bubble goes pear shaped, so that means you'll be paying a lot more interest. Even if official rates were zero you'd still be paying about what you pay now - as the wholesale cost determines rates not the RBA rate.

  • chumlee on 05/02/2017 - 14:14
    +1

    Government borrowing costs are determined by the coupon rate on the bonds they sell not the RBA rate. RBA sets the overnight cash rate.

    At some point rates will increase. Even after the Great Depression interest rates climb.

  • EightImmortals on 05/02/2017 - 14:33
    +2

    Food for thought, the U.S. fed has signalled 3 rate rises for 2017.

    And this http://cecaust.com.au/releases/2016_11_17_Global_Bond_Turmoi…

    What an irony: the election of a real estate mogul as President of the USA could be the pin that pops the real estate bubble in Australia!

    Donald Trump’s election has triggered a sell-off in global bond markets, the financial markets that are much bigger and much more important than stock markets.

    The sell-off is not because Trump is dangerous, but because the global financial system is so sick. Outside of China’s investment program there has been no recovery since 2008, only central bank life support in the form of created money called quantitative easing, which has driven interest rates down to zero and negative.

    The bond markets are reacting to Trump’s plans to actually do something, namely invest US$1 trillion over 10 years into infrastructure. Trump promised that America “will build the next generation of roads, bridges, railways, tunnels, seaports and airports that our country deserves. American cars will travel the roads, American planes will connect our cities, and American ships will patrol the seas. American steel will send new skyscrapers soaring. We will put new American metal into the spine of this nation.”

    It isn’t clear if Trump will be able to do this, given the ideological opposition he will encounter in Washington, and also his ill-advised proposal to use public-private partnerships. However, the mere thought that it could be possible has sparked fears that the US government borrowing a trillion dollars will push up interest rates.

    It is this fear of rising rates that is crashing the bond market, which was already poised to collapse: Wolf Street reported on 2 November the warning of successful hedge fund manager Ray Dalio that “it would only take a 100 basis point rise in [US] Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash”. According to London’s 13 November Telegraph the sell-off has already wiped US$1.14 trillion off Bank of America’s Global Broad Market Index.

    Calming the bond markets will not be simple, as the panic is among speculators who have placed massive gambling bets on the market that will go bad as rates rise. The sell-off is occurring because they are trying to get out of their positions.

    What does it mean for Australia?

    Very likely it means higher home loan interest rates.

    Australia’s big banks rely on overseas borrowing for 20-30 per cent of their funding. That overseas borrowing is already more expensive than the interest they pay on deposits—now the banks will have to pay more. This will push up Australian deposit rates and home loan rates.

    Australia’s housing market is so inflated that it is unaffordable even with record low interest rates. A rise in home loan rates will be too much for many families. It could force a sell-off that pops the bubble.

    This spells disaster for the property market, but even more so for the banks, which have bet everything on housing.

    No one has a crystal ball however so if you factor rate rises into your monthly payments then you 'should' be OK, depending on how bad things get. If you have the income to pay off the debt quickly then do that.

    • ggrant on 05/02/2017 - 23:35
      +7

      No one has a crystal ball

      You're wrong about that, I actually have a 6" crystal ball from Aliexpress $82. But haven't worked out how to talk with it yet.

      • itajac on 06/02/2017 - 12:06

        Mmm…for that price I think it would be a cubic zirconia ball and not a genuine crystal ball. You got scammed :P

        • ggrant on 06/02/2017 - 19:19

          It says it's K9 crystal. Can you have a look.
          http://www.ebay.com.au/itm/272261650128?_trksid=p2057872.m27…

          Bear in mind it had 10% off, and I got the 20% off ebay as well to get it to $82.
          The things a beautiful thing, and it talks!

        • itajac on 06/02/2017 - 22:13

          @ggrant:
          Yep, had a look. See my playdough ball says ur lying ,cause you gave me an ebay link but in the previous comment you said you purchased it from Aliexpress.
          Regardless…the important thing here is if it can tell you the next interest rate hike and if it does, be a mate and let us all know.

        • ggrant on 06/02/2017 - 22:42

          @itajac:
          I did but I simply forgot. It 'was' the right link.
          Now to the point. Do you know anything about using these by any chance. Just after a good link or two to start.

          I will ask the ball in a minute…

  • chazfg on 05/02/2017 - 14:40

    only a handful of reserve banks are actually owned by the government. Credit market is pure business where money will be lent to the highest bidder.

    • oztite on 05/02/2017 - 22:12
      +2

      Yeah, unfortunately after a while, I now only believe that RBA is a separate and independent entity from the governing body as much as the fact that politicians are required to travel at exuberant tax payer's expenses to better serve the tax payers and to guide the country to prosperity… they clearly say one thing and do another in my humble opinion…

  • Almost Banned on 05/02/2017 - 18:38

    Holy crap mate.
    Venezuela has an interest rate of about 22.5%.
    Argentina is about 24%.
    Brazil is about 13%.
    but of course they must just all be a scam (actually, one probably is. The official interest rate in Venezuela is probably much lower than the true rate).
    Much of the Western World has been in a historically low inflation environment at least since the GFC when borrowing dried up and people put away their wallets.
    Once you have been around a few years you realise these things tend to be cyclical with booms and busts.

    • oztite on 05/02/2017 - 22:09

      True, but none of the "more developed" countries have an interest rate above 5%. And the reality is that if it does go to say 7%, a bunch of people simply won't be able to pay for their mortgage repayments, meaning the government will probably have to bail them/banks out, so it is very much NOT in the government's interest to raise the interest rate…

      • Almost Banned on 06/02/2017 - 00:29
        +2

        But the Reserve Bank is independent of Government. Government doesn't set interest rates in this country - or developed countries.
        I also wouldn't bet on a bank or homeowner bailout if interest rates get above 7%.
        Those who fail to learn the lessons of history…

      • EightImmortals on 06/02/2017 - 13:32

        Bail them out with what?

        The government (both state and federal) are broke and in debt, they WILL NOT bail out the citizens in trouble and they can't afford to bail out their bankster buddies like the U.S. did back in 2008 (instead of bailing out the mortgagees for real lasting benefit). From memory our idiots in Canberra added around 8 billion dollars to our debt to bail out failed European banks!

        The global (western) model for disasters has shifted to 'bail-in' in some form instead. It was 'in train' to be passed here a couple of years ago which would have given the banksters free crack at your savings in the event of a 'crisis' but enough people made enough noise forcing them to change tack. So instead they came up with 'hybrid bonds' and went after mum and dads superannuation instead. Hybrid bonds off great interest but in the event of the aforementioned 'crisis' can be converted into shares instead of bonds. But in a crisis the share price will plummet rendering your shares worthless.

        More on hybrid bonds.

        https://www.australianshareholders.com.au/resources/buyer-be…

        http://cecaust.com.au/releases/2016_07_08_Warning_Aus_Invest…

        http://www.afr.com/business/banking-and-finance/apra-warns-o…

        Of course the total of all public deposits, bonds and shares is minuscule compared to the banksters derivatives exposure so if things do hit the wall then pinching depositors finds would merely be an act of spite rather than a move to make any meaningful dent in the hypothetical crisis. All IMHO of course, DYOR. :)

  • Peck on 05/02/2017 - 23:41
    +1

    I have it on hearsay, that if Australia loses its AAA credit rating, then the cost of borrowing from overseas will go up and this will flow on to increased interest rates.

    • EightImmortals on 06/02/2017 - 13:34

      True. But they (the government) should be creating our own currency and interest free credit instead of borrowing it from others who just crank it out of thin air then add interest. :)

  • Euphemistic on 06/02/2017 - 08:11
    +1

    If I was borrowing today I'd be calculating repayments on an interest rate 5% higher than it is currently and aiming to pay down the debt at that rate. While I can't see it going up for a while (2-3yr), being able to afford 5% higher will give you a decent buffer should they rise.

  • ggrant on 06/02/2017 - 19:48

    I think the recent rates freefall may simply be part of the recovery from the GFC. US, UK and Euro printed fake money in unbelievable amounts as was well known
    I want to warn you that interest rates may one day go up 10% in two years for all anyone knows. So be careful getting into a 30 year loan.

    My sister and a neighbour lost their homes to the bank in 1986ish, with near 20% rates. It will likely happen again eventually. If boom happens, I expect rates will compensate.

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