So how does this work? I have read so many online columns yet no idea how it works.
Can someone put in a simple way how raising interest rates helps reduce inflation?
How Does Raising Interest Rates Reduce Inflation?
dodgybrothers on 02/08/2022 - 14:38
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Why would essentials, food products, energy, fuel, whatever rise so fast, but non essentials don’t? I’m sure you can get the best tv, fridge, electronic gear cheaper now that what it was 5, 10 or 20 years ago.
Is the theory really trying to tell us that if we stop wasting money on nonessentials because our debt is more expensive now, the price of fuel, energy, milk, bread for example will stop rising? Surely greedy shops will know if people have to buy these essentials, because people have to buy them and they are not buying non essentials anymore, those things could probably do with another price rise.
It not only reduces the amount of disposable income those with loans have, and it reduces the amount of credit in the economy in general (borrowers borrow less as it's more expensive, lenders lend less as it becomes harder for borrowers to repay).
Less money, means less being spent, which means less being earned, which means less being spent, which means less being earned, and so on…
Very simple - higher rates cause demand destruction.
The not so simple part is that it does not happen right away and not go in a direct line but eventually.
Monetary policy is a blunt tool and is working with long and variable lag.In short, the flow of higher interest rates are:
increased financing costs -> reduces borrowing capacity -> reduced asset prices -> negative wealth effect -> people feel poor and spend less -> reduced demand (finally!)Therefore, as I explained here, RBA will have to make enough damage (including trashed housing prices) before the desired effect kicks in for inflation figures.
https://www.ozbargain.com.au/node/714217I'm with you on this one. I already know all the same stuff people are quoting about less disposable income means stores theoretically lower prices to match sales, but the idiot Lowe said it himself it's largely external factors.
When interest rate increases stop or slow the price hikes in fuel, milk, electricity/gas, vegetables and all the other basic staples then I'll buy the reasoning, for this current climate.
If the rates keep going up then I'm personally ok, maybe my savings will start doing something :P, but I'm dubious as hell people spending less is going to make my weekly shop or monthly bills not be jacked higher than an eBay coupon sale.
My economics teacher explained it this way. Inflation is too much money chasing too few goods. Interest is the cost of borrowing money, if you increase the cost (instead rates) there will be less money to chase those goods therefore reducing inflation
Your teacher forgot to teach you supply shock lead inflation. ABC podcast explains below.
Yes
My understanding is inflation is a result of an economies dollar being worth less, ie stacking badly against not just the green back but other currencies. This is caused by poor economic performance, or a recession.
If there's huge growth in Australia, there will be huge demand for credit. We've already seen a bank on here locking in almost 5 percent for a term deposit, ( that's so they can borrow money from you). They are obviously worried about people getting caught with their pants down, which would lead to poor economic performance… and so on.You spend less
If you raise interest rates high enough, that guy who can't be bothered bringing his own bag to Coles/Woolworths finally starts doing it.
Especially min.24 onwards. Where it explains that printing money in correct quantities creates a 'beautiful deleveraging'. Printing money is an important part of any economy but must be done right as it explains that there is a point where it can cause inflation. We are nowhere near that yet IMHO.
Less economic activity = recession = prices decrease to drive up economic activity
Less money circulating in the economy.
It'll be a nice change from the spending spree the govt has had and also individuals.
It's just a market manipulation game by the bankers
watch this
Money as debt
https://www.youtube.com/watch?v=2nBPN-MKefA&ab_channel=Ethan…Money Masters
https://www.youtube.com/watch?v=mDlnM481Gcg&ab_channel=Dwayn…Beause the government is a net payer of interest on the 1 trillion dollar national debt they end up having to create an extra 31 billion dollars to pay this 3.1% interest and this works against the RBA by stimulating the economy.
Too much money is in the consumers pockets, raising RBA cash rate will assist with taking some of the money back, lowering inflation.
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Yes savings would work but would also push up asset prices