Discussion in 'Markets & Economies' started by willrocks, May 29, 2019.
Can anyone explain how low cash rates stimulate the economy and drive growth?
I can tell you their thoughts.
1. devalue the currency, thus improving exports. (though if every country devalues it has no net effect)
2. Entice people to borrow more to boost property market, thus making people "feel" wealthier. (though a 1% drop for here will do stuff all)
3. Due to people "feeling" wealthier, they will spend more. (hopefully they will spend in the local economy)
Well that's what their bible/textbooks say and there is no time for them to think if it makes any logical sense in the current environment. Remember these people don't like thinking, it hurts their head.
By reducing mortgage payments?
Except that moves in the official cash rate is not necessarily reflected in mortgage rates. The official cash rates are the targeted overnight money market rates I think. The cash rate has been declining for a decade, and so too has the Australian economy.
I’m not good on monetarist theory which I think is what drives the thinking of most Reserve Banks - but clearly it’s not working. It’s my view that you can’t punch a formula into a calculator in order to tweak an economy.
@leo25s, so basically you think it’s BS as well?
I think they just issue impressive sounding statements and policy decisions just to keep their jobs because no one in parliament dares to confront them.
And increasing house prices... until mortgage payments rise to previous high.
If housing is so sacred as it appears to be, what would they do if the economy did improve and interest rates went up and put a lot of mortgage payers to the slaughter?
They would keep interest rates low and we will have very high inflation. Central banks are caught between a rock and a hard place.
Lower interest rates 'can' (based on the BS theory) stimulate an economy, but this also lowers the RBA bond rates (which shows Australia's economy is weakening and drops our currency value). The only way to attract larger (namely international) investment is to increase rates (higher bond rate to offset higher risk) which then hurts everyday Australian citizens with high mortgages/debt levels. 'Central banks are caught between a rock and a hard place....' is very true with no real option either way.
Tricky business running an economy...but if you fiddle with the norm too much it comes back in spades of retaliation
It's not just property, lower interest rates are supposed to stimulate business investment, overall.
Not many businesses are willing to invest big in this environment. Central banks have caused too much distortion in markets and have made people unsure about the future.
Who in their right mind will buy a 1.5% 10yr AUS bond? Answer is no one, just central banks playing a shell game.
Looks like the RBA is doing what the FED, ECB, BOJ, PBC and well every other central bank is doing and buying up government debt to try and stimulate.
We can use the old milk analogy.
If consumers won’t buy milk the government can either force consumers to buy it (the Soviet experience) or it can artificially manipulate the milk price and encourage consumption by driving the price lower. Naturally the producers of milk will not get a return on their investment and will stop supplying the market.
The Singapore government bond earns nearly 2.2% over 10 years. Over the last year or so I’ve been buying a special “savings” version of the government bond that allows redemption anytime with a month notice.
That sounds like a term deposit. Maybe in makes sense to do that where you are since your governments savings “bond” pays higher then a bank. Though it seems capped at 200k, so it’s not available to big money people.
But in Australia any bank will pay 2% while a government bond will pay less than 1.5%. Also here in Australia our big banks are as safe as our government.
I wrote about the false theory that lower interest rates always increase borrowing/risk taking in this week's market update https://www.abcbullion.com.au/investor-centre/pdf/westpacs-call-2000-gold
Yes, this used to be capped at $100k and was only recently raised to $200k. I suspect that the purpose is to draw liquidity out from the system so less funds goes into properties. The Singapore government uses all ways to control the bubble. There are various bank savings plans here that pay more than 2.5% (also for a limited sum of $100-200k) but none guarantees that the rate for 10 years.
I'm going to go out on a limb and say the RBA will hold today, followed by news reports showing struggling property investors.
Thats a big call on RBA rates but maybe they will hold? unfortunately its FUBAR either direction. I'm more curious to see if a drop, then what percentage the banks will pass through? if they gauge 10-15 points (based on a 1/4 percent drop), then the media will start a monster hunt...if they pass it all through then shareholders get pissy. Wont just be the central banks who will need to backpay the piper for years of poor decisions and greed
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