RBA Rate Rises Are Based on an Incorrect Theory?

azero on 13/02/2023 - 11:59
Last edited 13/02/2023 - 13:19 by 1 other user

Recently I saw this article on abc that says the theory behind the rate rises might not be correct any more.

Why the Reserve Bank is pushing us towards a recession that we don't need to have

Also it says there should be 5% unemployment for economy to perform well. i.e. Some people need to be jobless and some companies need to fail…!

This doesn't sound very fair. Specially if the underlying theory could be wrong and the people who make those decisions that ruins lives of millions does not have any accountability at all.

Kill a patient and a doctor will go to jail. Kill hundreds and Phillip Lowe will just be fine.

EDIT: Also my rant is partly due to -

I am in one of the lucky sectors where we are paid very well although we do zero service to the wider society. My friend who is a nurse looking after cancer patients only gets half of my salary, can't refinance her 400K 5.2% mortgage due to serviceability and literally living pay check to pay check now. I thought this country was better than that.

So fellow bargainers, what am I missing here? Are the rate rises fair in your opinion?

Financial

Comments

  • JIMB0 on 13/02/2023 - 12:12
    +27

    No, they should be higher. We now lag the US on interest rates, which has pushed our currency down and caused inflation due to the higher cost of imported goods.

    • burningrage on 13/02/2023 - 12:29
      +6

      This.

      To be honest, looking at another angle, these same people were silent during lower interest rates, sustainable economic growth, near full employment, and wages growth coupled with tax cuts. It was dubbed at the time as Golden Year. Yes, it was during John Howard's & Peter Costello's year when this was achieved.

      In other words, there is nothing wrong with the economy theory as most have known.

      They were perpetuating new economic theory (remember MMT?) and now this?

      I think these "economists" are now looking for excuses for the bad decisions people made and we are all about to be made to pay for it for their bad decisions (including their votes in the last election).

      You can't have it both ways.

      • Nugs on 13/02/2023 - 13:39
        +1

        Needed bigger jumps earlier on. We've been subjected to a slow rise just like a crab put in cold water before boiling
        .

    • Hamish125 on 14/02/2023 - 06:02
      -1

      AUD to USD has been hovering around the 0.70 for quite a few weeks now? Historically this has been considered a 'normal' conversion rate. A similar rate as most of 2019.

      In fact if you take a look at currency over the last five years, the currency conversion rate for the last two years of high inflation has looked normal to the historic average/trend.

  • cheekymonkey on 13/02/2023 - 12:17
    +3

    Remember, that it's just that- a theory. This theory is also used by many other central banks around the world.
    Are the rate rises fair, to target businesses and people with a mortgage? probably not. But it seem that governments from past (and current) are not giving central banks any other tools to use. Also, rates of the last few years have been historically very, very low and there would have to be an expectation for them to eventually increase.

    • orangetrain on 13/02/2023 - 12:42
      +4

      Other central banks have economists on their board. We have a supermarket director and mining director and probably other ones which can influence the outcome of "theory" by RBA.

      Apples around world compared to Australia's clown orange.

    • paullovesbargains on 15/02/2023 - 14:36

      The idea was the RBA had independence from the government and therefore changes to policy were not politically influenced. It seemed a good idea, but with high indebtedness, its now targeted at debt holders as you say.
      Ironically it seems interest rates also drive asset prices for investment class houses such as sharemarkets and property. That last one proved a bit of an issue. Seems we manage "cost of living" (aka inflation) on purchased goods by influencing cost of living on the houses we live in. Control inflation in one by creating volatility in the price of the other (and yes that includes rents). So nothing gained form a consumer perspective.
      I think we will see a new school of thought on this with a shift back to fiscal policy.

  • orangetrain on 13/02/2023 - 12:24
    -1

    That 5% target unemployment. Bet top 5% benefits enormously from suppressing wages. Tax the top 5% to pay the bottom 5% an average wage then.

    RBA are evil and inhumane in treating 5% of population as cattle. Corrupt group too. I can't believe Coles has influence on rates.

    • burningrage on 13/02/2023 - 12:31
      -3

      Why are people blaming RBA when they are not the ones running the country? Interest Rates were higher too (around 7% or so - I lived through it) in the past and nobody blamed RBA?

      Are we really that tribal that we must blame other people instead of the actual current Govt that runs the country.

      • orangetrain on 13/02/2023 - 12:34
        +9

        You're telling me they are not responsible for lowering rates to 0% despite increasing money supply even though the government dumped money into the economy too?

        Also, I saw that they are one of the last countries to raise rates to probably please scomo and boy, they jacked it up hard when it looks like Labor was going to win.

        What a very competent department, not.

      • Ghost47 on 13/02/2023 - 13:49
        +8

        Blame Labor? Seriously?

        You do realise that shortly before the election the RBA started to pump rates up, probably because everyone with a functioning brain foresaw the LNP absolutely losing the election because of the way they’ve carried on the past few years with the Black Summer bushfires and the pandemic.

        Interest rates have steadily and continuously headed downwards the past 10 years under the LNP’s lazy watch.

        Labor are trying to fix the mess the LNP have left in their wake. This stuff doesn’t happen overnight, it’s a symptom of a decade-long reign by the LNP.

        The RBA’s independence from 2013 to 2022 needs to be closely scrutinised.

      • ssfps on 13/02/2023 - 14:45

        The central banks of the world are evil. If you don't realize this, look into where they came from, who started them, and what inflation was like before them.

        • freefall101 on 13/02/2023 - 14:56
          +1

          The change is less to do with central banks and all to do with slow economic growth being the mantra. Depressions were a regular thing prior to 1940, it takes big economic shocks or insane banking practices to trigger one these days.

          Prior to central banks, things just sort of happened, at random, for not a whole lot of reason. Central banks just smooth it out. That a bunch of people are able to milk that for profit is hardly surprising.

          We're heading into a recession now because the governments of the world spent a massive amount of cash they didn't have and overcooked the economy. The reserve bank has one lever, interest rates, and is pulling it to calm things back down.

          • ssfps on 13/02/2023 - 17:17

            @freefall101:

            Depressions were a regular thing prior to 1940

            So were central banks.

            Prior to central banks, things just sort of happened, at random, for not a whole lot of reason. Central banks just smooth it out.

            I agree in princple, but those "random" happenings were much less severe then the last 100 years of constant inflation, which is essentially wealth redistribution/theft.

            • freefall101 on 13/02/2023 - 19:29

              @ssfps:

              So were central banks.

              Not for long they weren't. The fed reserve in the US was created in the early 20th century because of the constant "panics" that were happening and gained most of their power post-great depression.

              I agree in princple, but those "random" happenings were much less severe then the last 100 years of constant inflation, which is essentially wealth redistribution/theft.

              I'd read up about those panics I mentioned above. They generally happened every few years for the couple of hundred years leading up to the great depression. All it took was a small sustained era of growth to have it crash down to earth hard. There basically was no economic policy and sustained growth was impossible.

              Inflation targeting only started in the 1990s too, once we unpegged currencies.

              And "wealth" for most of history could be measured in goats. 100 years ago the richest 1% owned about 50% of the wealth, that's now down to 30%. The redistribution over the past few decades can mostly be attributed to fantasies about cutting taxes creating economic growth and the idea if we tax Gina Rinehart she'll move to South Sudan to pay less tax, or the government handing out money left, right and centre that mostly flows through to a handful of donors wealthy investment groups.

              During the 60s we had low unemployment, high taxes, proper finance regulation and the best wealth distribution we've ever had. We should go back to that instead of yahoos running unregulated and the idea that taxes are evil.

      • DarkOz on 14/02/2023 - 08:00
        +2

        I blame both the Government and the RBA. The RBA claim to be independent but I call that BS. Had the RBA only had inflation in mind they would have dealt with inflation earlier and harder like most other major countries. What did they do in the end?

    • azero on 16/02/2023 - 14:40

      Saw in news today that RBA is happy that the unemployment will be 4+% next year so the economy will be better.

      I just can't understand how people think that it is acceptable to make 5% of the working population intentinally jobless.

      Either the policy makers are the ones that benefit from that or they are just too dumb to see the big picture. We can all guess which one it is…

      • orangetrain on 16/02/2023 - 16:07

        RBA board has a Wesfarmers director who has influence on the RBA. Im sure Coles love desperate unemployed people.

  • cloudy on 13/02/2023 - 12:37
    +1

    If Ian is happy to attack the Phillips theory maybe he should then go into some detail as to why this

    Higher interest rates at some stage will curb spending, cut profits and result in mass layoffs.

    Will hold true.

    With employment at historic lows it’s hard to see how a recession will occur.

    • Nugs on 13/02/2023 - 13:37

      Yup, and there was another article linked from within the ABC one.
      https://qz.com/inflation-is-too-important-to-be-left-to-the-…
      Dismissed the Phillips rule and later in the article stating that
      "To achieve it, the demand for labor would have to decrease, as seen in falling job openings and wages. At the same time, the economy would have to avoid a sudden rise in the unemployment rate."

      What? Just wait for retirements?

      And more
      "But interest rate hikes are, in fact, an inefficient way of dealing with this conflict. One would hope, Blanchard wrote, that the constant negotiations between workers, companies, and the state can produce outcomes “without triggering inflation and requiring a painful slowdown.”
      Huh? So just wait for employees to stop asking for pay rises?
      .

  • Ryk on 13/02/2023 - 12:52
    +2

    The interest rates are the real cost to you of JobKeeper HomeBuilder and other "free" money the Government handed out over the past 3 years, plus impacts and supply shocks filtering back into Australia from the pandemic, and a significant war in Europe directly impacting oil prices.

    • orangetrain on 13/02/2023 - 12:56
      +2

      Anything but the corporate profits!

      https://www.abc.net.au/news/2022-08-03/skyrocketing-inflatio…

    • dcep on 13/02/2023 - 20:07
      +1

      You left out the $188b that RBA gifted the banks for 0.1% interest.

    • Lunarboogie on 14/02/2023 - 01:43
      +2

      No they are not. The price for the handouts (which began long before Covid-19) will be born through higher taxes, most likely paid by our kids. The current hikes relate a lot to overseas impacts which have increased inflation and hence interest rates.

      What most people don't realise is that real interest rates (RBA rate/ CPU), remains low. The problem so far is the absence of reciprocal wage increases in response to inflation. If that in built equaliser was working, the pain felt by many Australians would be a lot less.

    • gyrex on 14/02/2023 - 09:52

      After scrolling through copious nonsense in this thread; this is the first meaningful and correct explanation of why we're experiencing high inflation and higher interest rates as a result. You can't keep pumping hundreds of billions of dollars into an economy and not expect to end up where we are. To those clowns blaming the RBA, save your ire for this Labor and previous Liberal government who love to spend your hard earned tax dollars on spurious, wasteful welfare schemes, rather than investing that same money into large scale, long term infrastructure projects which add value and jobs to an economy and offer sustainable growth.

  • big1964 on 13/02/2023 - 13:38
    +1

    Wow who would of thought the RBA making mistakes not like that haven’t done it before cheap money, over inflated houses prices land rats spruiking FOMO, I am sorry to say it’s going to end in tears for some, boom bust cycle may continue!!

  • Ghost47 on 13/02/2023 - 13:39

    Does the author of that article have a mortgage(s)? Anyone who writes about interest rates will inherently be biased for or against depending on their financial situation IMO.

  • Drakesy on 13/02/2023 - 14:03
    +7

    Well,
    If you look at Turkey who didn't stop churning out cheap money and kept interest rates at all time lows you won't need to look far to realise that interest rates still hold true in controlling inflation.

    It's the board and the guy at the top pulling the leavers who are the problem. A big issue is the RBA board is stacked with big business representatives who naturally would prefer record low interest rates, this is why it took them so long to do anything. They sat there for the better part of a decade reducing rates to give them access to cheap money, pushing up asset prices and increasing consumption (they make more money) only for us to end up in a bubble.

    Basically RBA could see the writing was on the wall for inflation with NZ the canary in the coal mine and denied that it was a problem until too late. I usually wouldn't blame anyone for this but Lowe and the big business cronies on the board really cooked it.

    *Also OP We were in a recession under the liberal party prior to Covid then the money printer went burrr and we kicked it down the road till now.

    • netjock on 13/02/2023 - 16:29
      +1

      Turkey has a populous government. Popular policies always run economies into the ground because they just keep printing money to spend on stuff and never balance the books. Lucky for OzBargainer, cheap netflix!

  • vodamerc on 13/02/2023 - 14:10
    +2

    Not everyone can thrive. That's not how the world works and the economy wouldn't function otherwise. Yes it sucks, but that's life.

    • ssfps on 13/02/2023 - 14:50
      +1

      What's this theory based on?
      Early in the industrial revolution many industrialists predicted that we would all be working a mere few hours a day at most by now, since mass production and automation would free us from much of the toil of work. Well, we have cheap goods yet we're as poor as ever.
      Increasing population? But we have a below-replacement fertility rate in Australia.
      Individuals own far less tangible assets than before (land).

      I wonder if this has something to do with the wealth disparity (rich vs poor) continuing to grow as the wealth production of the world has increased, almost like the larger population's toil remains constant and the excess wealth generated via new tech is controlled by the rich, and destroyed via meaningless conflict.

      • Ghost47 on 13/02/2023 - 17:56

        For capitalism to function there will always be the working and lower class holding up the upper class. It is simply impossible for everyone to be prosperous, this is just how capitalism works. Even if everyone became billionaires, you would have people that are quadrillionaires, and by then it wouldn't matter if people are billionaires because the value of the dollar would have decreased anyway. Even if we all one day have robots doing all the work, human nature (e.g. greed, selfishness, hatred) will separate the powerful and the weak and society will still be stratified. Equality and universal prosperity is a myth peddled by people on both sides of the political spectrum.

        There are other variations of that image that cater to the current era we live in.

  • devize on 13/02/2023 - 14:15
    +9

    Dumb article. 'Recession we don't need to have', yet doesn't provide any solution other than rate hikes to fix the inflation problem. Also blames the Russia/US war for global inflation but doesn't acknowledge the government handouts and near zero interest rates of the last few years.

  • Cho0028 on 13/02/2023 - 14:53
    +4

    Interest rates were always going to go higher (or at least closer to the average over history), it was just a matter of when and how much. Anyone who thought otherwise were kidding themselves and you didn't need a finance or economics background to figure that out.

  • Seraphin7 on 13/02/2023 - 15:11

    Noting the author of OP's referenced article, I wouldn't be jumping to support it's conclusions.

    The part that everyone recognises, but then in the next breath conveniently ignores, is that governments must be a part of the solution in taming inflation. The reason its conveniently ignored is that it's code for governments need to reduce spending … a concept that has become completely anathema to Western governments over the last 10-odd years.

    • Lunarboogie on 14/02/2023 - 01:50

      This. NSW and Victorian state fiscal spending is pouring billions into an over heated economy at the same time that the RBA is trying to cool it down. This is working against Jim Chalmers efforts and helping push rates higher.

  • zoombie on 13/02/2023 - 15:18
    +3

    I'm sorry that your friend is living pay cheque to pay cheque, the bigger/better question is why have we allowed housing prices to skyrocket so much that financing a house becomes a herculean task that even the most productive member of society struggles with.

    • gyrex on 14/02/2023 - 10:00
      -1

      why have we allowed housing prices to skyrocket

      No one allowed anything and house prices operate in free and open market; as such, prices rise and fall based on supply and demand.

      • zoombie on 14/02/2023 - 11:38

        Is it really a free market if the investors have huge tax advantage over the homeowner? Demand and supply is controlled by the government. They control population growth rate, the planning/zoning laws and the infrastructure needed to accomodate it.

        So no, sorry but the Australian people have allow house prices to get out of control. We vote in the government that enables all these policies to occur, we do not protest about it, the majority of homeowners enjoy the windfall while the rest of us just occasionally makes forum posts to vents.

  • netjock on 13/02/2023 - 16:28
    +1

    Interest rates need to cater for:

    • Unemployment
    • Inflation
    • Economic growth

    It is like a Swiss army knife. You'd like to say your Swiss army knife can help you fight off a brown bear attack but you might be trying to stab it with the can opener tool.

    There is lots of smart people at the RBA, smarter than all of us but not bullet proof. They do bring knifes to a gun fight sometimes.

    There is a podcast about how Christopher Joye's team took RBA house price predictions and figured out rate rises will drop 10%+ from house prices and the RBA had not idea their model screwed it up (predicting no house price drop)

    • Pete10001 on 13/02/2023 - 17:28

      Spot on. Also I think it's unrealistic for anyone to think that the interest rates would stay low permanently, especially if you look at the historical rates and the fact that the average rate is 3.84% from 1990 to 2023. As some will recall, back in 1990 official interest rates were 17.50%. As much as I feel for those affected, the banks should not be lending to people that have no chance of making the repayments if the rates rise a few percent.

  • treekangagaroo on 13/02/2023 - 16:31

    Is the editor going to be the next RBA governor if knew the unknown when COVID stuck ?

    When things started improving everyone started blaming RBA and every news outlets wants to stand with the people !! May be they should donate their profits to improve housing affordability in this country if they are very concerned rather than creating click baits to make money.

    Looking back we can pinpoint a few errors or improvements but we should rather look what info RBA had when they made those decisions and what was the economic outlook then.
    The only thing he did wrong in my eyes is he waited too long to raise the rates and still is going slow

  • JimmyF on 13/02/2023 - 16:53

    and some companies need to fail…!
    This doesn't sound very fair.

    Not every company will succeed. The weaker companies will 'fail' as such. This is what our entire world is built on!

    Should the GOV/Tax Payer/RBA keep handing money out to companies that are not profitable?

    • dcep on 13/02/2023 - 20:13

      Qantas disagrees.

      • JimmyF on 13/02/2023 - 20:19

        and Qantas needs to die too……

        • dcep on 13/02/2023 - 20:48

          The privilege of too big to fail.

  • Daniel Plainview on 13/02/2023 - 17:30
    +2

    I thought this country was better than that.

    OP, you seem a measured chap but with all due respect it's hardly Australia's issue that a person borrows too much to purchase what is first and foremost a financial asset, can't refinance when rates move from literal alltime lows and now is under financial stress.

    Kill a patient and a doctor will go to jail. Kill hundreds and Phillip Lowe will just be fine.

    that ruins lives of millions

    Those are very silly comments - the RBA is trying with a very limited toolbox to achieve a bunch of different things at once on an ever changing pitch. Far from a precise science and a significant % of the populace will be unhappy regardless of what you do but to use such over the top terms is really undermining ANY logic your argument may have had.

    You can do a lot better to assist a balanced and constructive conversation on the matter.

    • azero on 13/02/2023 - 19:13
      -2

      It was more of a reference to,

      If the article was indeed correct and RBA mistakenly put us into a recession - would Lowe and co face any real repurcussions ? I hardly think so. At most they'd get fired.

      Also I think that a full time nurse should have an enough income to get a mortgage that is less than half the median property price….

      • Daniel Plainview on 14/02/2023 - 15:47
        +1

        You respond but completely sidestep the preposterous language & claims you made - but fair enough.

        Firstly, pinpointing any one thing that puts an economy into a recession is near impossible. An economy by its very nature is so vast and diverse it would take an epic polict change for that alone to be the difference maker. The cash rate's increase alone will not do that and folks that swear it will have their own agenda for this. But you're being mislead.

        So lets say all you say is correct - and he and other senior RBA personnel are fired - this isn't enough for you? You would want criminal charges against them?

        Please don't say such crazy things. I am no fan boi for the RBA but it's as I said one of those where a massive % of the population is unhappy with whatever you do - they're specifically setup to be independant of Govt policy and influence (which in theory is smart) but only have very, very limited tools to do an immense job.

        If Govts do not support them with fiscal polict well ahead of when the results are needed - their job is made that much more difficult. I know our unofficial national hobby is 'complaining' but the RBA is not the boogeyman in the real estate sector many would have you believe. Often a long hard look in the mirror will get folks closer to the actual principal offender - but that goes down like a lead balloon.

        FWIW I agree on your comment regarding the Nurse - average pay for them is $80k, so that she can't refinance her $400k loan sounds odd. Perhaps there's other issues at play so hard to comment with any weight.

        • azero on 16/02/2023 - 14:30

          So lets say all you say is correct - and he and other senior RBA personnel are fired - this isn't enough for you? You would want criminal charges against them?

          Doesn't need to be criminal but charges indeed. They are there because they are the experts. Making high level decisions affecting lives of millions.

          IF the ABC article was correct and RBA simply ignored those things - is it fair to just walk away from the job ?

          Or is the dity of care and moral / ethical / legal considerations only apply for "operational" level jobs ?

  • Boogerman on 14/02/2023 - 07:20
    -1

    Neoliberalism is awesome, innit?

    • garddn on 14/02/2023 - 11:03
      +1

      Is for me.

  • joshash on 14/02/2023 - 08:33
    +1

    Interest rate rises protect most people's biggest asset - their earnings.

    Unfortunately we seem to have a population that can't learn something unless they experience it themselves.
    I thought that's what we had an education system for, but I'm obviously wrong.

    It's unsurprising that a population way over their head in public and private debt would bemoan interest rate rises. The levels of the complaints reveal the frightening magnitude of the debt bubble…

  • DarkOz on 14/02/2023 - 09:26
    +2

    Let's keep interest rate at around 1% for another 3 years and keep the property boom going! What can go wrong? Who cares if inflation goes up to 20% and stays there for years when we all own a million dollar property?

    • Ghost47 on 14/02/2023 - 20:34
      -1

      Agreed! Nothing can go wrong, and if something does go wrong, let's just import more Indian and Chinese people!

  • garddn on 14/02/2023 - 11:03

    If you look at the charter of the reserve bank, it does not mention anything about inflation. Does mention that one of the aims is full employment though

    • gyrex on 14/02/2023 - 11:07

      "the stability of the currency of Australia" - what do you think affects this more than any other economic metric?

      • garddn on 16/02/2023 - 21:37

        Our currency value is going up with increased interest rates and is stable, unemployment is rising though

  • xylarr on 15/02/2023 - 18:25

    If you want to pull money out of the system to tame inflation, and you want to do it without raising interest rates, we need to raise taxes. Of course, no elected official is going to do that. Leave hard work to the unelected people.
    One option I have seen is to have special bonds. The government basically taxes you extra, but the money just goes into a bank account - sort of forced savings. It removes money from the system, but you'll get it back at some stage when it isn't so infltionary. Though good luck seeing that happend and remain untouched by meddling elected officials.
    All in all, I don't think this is an easily solved problem given our system of government.

  • mr_vino89 on 16/02/2023 - 12:56

    All i know is that part of my hard earned money that I would be saving for my family is now being used to pay interest to a bank and filling their pockets.

  • Gnilgorf on 20/02/2023 - 15:40

    Some extra food for thought regarding the unemployment rate, albeit in a very simplified manner.

    If we think of employment / unemployment like any other market with supply and demand, then we should recognise that if supply gets too low but demand stays the same, then costs for the limited supply go up, which would then have a drastic flow on effect.

    Or in the case of employment, a low unemployment % (i.e available pool of potential workers either out of work or looking), means any business attempting to hire may have to raises wages in order to do so. Great in the interim for the workers. But then this could have a series of flow on effects, from the business raising their own products costs (inflation), hiring fewer employees (increased unemployment), reduce their expenses (reduce income for someone else down the line) or even shutting down entirely, which then just turns a potential employer into part of the unemployed %…which ends up increasing the % anyway.

    Now if we went the other way, but too far. Higher unemployment, leads to low wage growth, but cost of products / living stays unchanged, businesses potentially hiring more staff (comparatively), spending more on expansions / upgrades and well…staying open for business. All of which leads to the % dropping.

    Not saying any % figure should be a be all and end all, but there does need to be a balance somewhere and its a vicious cycle either way.
    And it is unfortunate for those who happen to be in the % involuntarily, remembering there is a certain subset of 'unemployed' who are happily so and simply choose not to work. Whether that be someone undertaking studies, a midlife sabbatical, or early retiree, but they still get counted. Likewise being employed is by no means a measure of happiness either, as per the OP's scenario.

    After all that, I'd still like to think we are very lucky to be in Oz, where we have access to a welfare system, and other support systems such as food banks and what not. And whilst not everyone is in the greatest position, those of us who can, do give back and help out those who might be down on their luck.

    Meanwhile, geebus. That went on longer than expected. I should probably stop being distracted and get back to work before I become one of the 5%.

Login or Join to leave a comment
Login Join