Is today finally the day? Is Lowe ready to try something naughty and kinky? Something he’s never done before?
I suspect that while Scomo doesn’t really like that sort of action, he’s willing to put up with it. In order to set a precedent that his successor is going to have to roll over and take repeatedly.
Anyone willing to make predictions?
- will it be a rise?
- will it be a special “just the tip” occasion (less than 25bps)
- will banks pass through to borrowers fully & quickly?
- will banks pass on to depositors fully and quickly?
My guesses are:
25bps it is
I love it, the less they raise now the harder they have to go later!
I don’t see how they don’t, at least a tip. AUD at 70 already. Flight to capital might happen (to usd) if inflation expectations from energy disruption in Europe turn out to be worse than consensus.
Otherwise, they will have to go super hard if they don’t prepare now, and that’ll bring the whole house of cards down.
0.15% increase to maintain a shred of credibility
Yawn
Aw, common, this was a decade in the making!
House prices can drop 20% but the MB crew still won’t have the balls to buy anyway
It will never be allowed to drop 20%, so the MB crew will see a maybe 5-10% negative sideways movement, then the government will step back in, and their deposits will remain flaccid for another 5 years
don’t need to go -20% to precepe, +/- 0% for the next 5 to 10 years for IO investment is as bad as untreated diabetes
I honestly think that 0% for the next 5 to 10 years is more unlikely than up or down movements. Our overlords can only make money on volatility, hence, volatility is what they shall have.
The MSM have been spreading interest rates panic for a few months now. Coupled with Putin-caused inflation, the stage has been set for the lemmings to almost expect a drop in housing values. Few are sacrificed, mostly FHBs, but they are young enough to recover.
Next scene (in about 18 months): in rides in a cowboy with both Colt 45’s full of silver bullets able to defeat the nasty house price declines, all rejoice, hosing to the moon. End of the 6-year cycle (two Fed elections).
Or not. What do I know?
I agree, it is unlikely to settle anywhere without a reversal of historical gains which is >60% at the moment.
I think in real terms it will. I feel that the bulk of the pain will be managed via currency moves.
Your house is probably still worth 2m. But this means something very different if Aud is at .5 – .6
If you make money in usd or some other ccy, maybe investing in housing is not the worst idea as it comes apart a little bit.
Is DLS still predicting negative interest rates and MPLOL?
He wrote something last week about why they shouldn’t raise rates
What a nutbag.
I am thinking that EZFKA should do a feature article in the near future comparing:
I reckon the contrast will be spectacular.
need to give it a little while for the effects to manifest, though.
Oh yes, MPLOL is the best way to apply that burn, TBH we are more likely to have negative MP than negative rates as that is easier to hide, and by negative I mean easing MP and actively pushing NINJA loans etc.
🙈🙉🙊
Colleage 1: “We just settled on our house yesterday. Even if rates go up a bit it doesn’t matter, it’s a long term investment”
Colleage 2: “I heard interest rates might go as high as 2%, can you believe it”
Anyone that bought their first house or an IP in the lunacy that has been the past 12 months had better double check their cashflow situation.
Colleague number 1 in particular.
Colleague.
Lol. I recall paying something like 8% on a mortgage back in 2006. Imagine what 8% rates would do to all the people with million dollar mortgages?
Imagine people earning 8% on 300,000 “deposits”
Looking forward to it. Had 8% on term deposits when I first started work and if i wasn’t for the RBA keeping rates low would probably have had enough to retire on. Am currently rebuilding my savings after paying off the house, so should reach 7 figures again in 3-4 years.
…we already have a Coming… 😑
Lots of ree-ing. Salt harvesting is proceeding above all expectations. Lol.
What was the image? Not loading up.
random stuff from twitter. not sure why you can’t see it sorry mate.
Random thoughts. I recall an economist many years ago being highly critical of Volcker and suggesting that higher interest rates contributed to high inflation rather than solving inflation.
Consider the classic Price/Wage Spiral. Consumer prices rise and eat into disposable income. Workers seek higher wages to compensate. Higher wages lead to higher consumer prices (higher input costs + more money chasing goods). Higher interest rates also have a similar effect of raising costs for both businesses and the workers that are in debt. Businesses will raise prices, workers will seek higher wages.
It has to reach an end game of reducing demand via recession or workers losing bargaining power (which can also happen via recession). So, I think we get a recession either way. Maybe US get the recession and workers in Aus cop the immigration pineapple to suppress wages.
That graph that Leith posted today is food for thought. House prices will get crushed in REAL terms. What we don’t know is how high wages will rise and whether house prices will rise or fall in nominal terms. Before assuming house prices could rocket just bear in mind a few things about the 70s:
ps: Peachy, good call on the 25bps.
I couldn’t believe how many people were predicting 0.15% or 0.4%. IMO it would have been very controversial setting the rate back to a multiple of 0.25%.
yes, that’s certainly how rare rises are “meant” to work, in a traditional economy.
the ‘traditional economy’ bit encompasses the assumption that there are people running and expanding businesses (building factories using debt), producing outputs & fighting (ie bidding up) over increasingly scarce labour (and possibly other factors of production).
increased rates => stopping that business expansion by increasing cost; relieving price pressure on wages.
…obviously basically NONE of this applies in EZFKA. There is no debt-financed business growth, let alone business growth of a kind that is pushing wages. That’s just not where the debt has been going, so that’s not where the debt is.
the mode of operation of interest rate rises in EZFKA will be mostly on consumer spending (reduced to the extent that mortgage borrowers pay more interest). This will, eventually, lead to lower business revenues and retrenchment & lower wages.
I can’t see how it will lead to lower consumer prices, other than through the AUD FX channel thru:
but, to get back to the main point – the interest rates rises can only “work” by causing some pain.
What really matters to me is the distributional question of who wears the pain. With the power dynamics in EZFKA (such as the immigration which you mention, Freddy), it’s exceedinglu likely that those who copped the pineapple of low rates will also cop the pineapple of high rates.
There’s a whole school of thought that higher interest rates CAUSE higher inflation
primarily by discouraging new investment in businesses and production (as funding costs rise)
particularly so when it’s supply chain issues that are causing inflation in the first place
and also higher “interest costs” mean higher government deficits , all other things being equal
which means more money
but somebody explain this to me – increased interest rates mean banks earn a higher return on reserves
At its meeting today, the Board decided to increase the cash rate target by 25 basis points to 35 basis points. It also increased the interest rate on Exchange Settlement balances from zero per cent to 25 basis points –
isnt more reserves more money, according to peachy ? the extra reserves just comes directly from the rba/fed right ?
how is this different to the effects of QE?
In the EZFKA there are not really any debt-financed businesses producing stuff, so this mode of creating higher costs really apply.
So you’re not going to address the “money printing” of IOER?
the rba gave the banks a whole bunch of excess reserves and are now going to start paying interest on them ?
See my musings above – https://www.ezfka.com/2022/05/03/raise-teh-rates-and-drop-teh-shoe/#comment-22539
my off the cuff reaction is that there’s a few things at play here.
For one, it’s a matter of relative magnitudes. yes the 25bps interest is money out of thin air. But it’s just 25bps on the net balances – this is much smaller than QE proper.
indeed, the interest on balances is ALWAYS paid, so it’s just the background rate of money creation. By definition, QE is something on top of that.
for two, the interest on balances is (again, by definition) the worst possible investment. It is the risk-free rate. As a banking executive, You don’t earn fat bonuses by earning the risk-free rate, but by the the profits you get manage to generate above it. A few things flow from this:
a. Banks will look to derive their profits from other places (where the profit rate is higher); this means amount on deposit with RBA (the lazy part of the balance sheet) will tend to be managed down.
b. In doing so, banks will demand higher yields. On everything on their balance sheet. As
it seems to me that the increased drain on money from this effect will outweigh the 25bps of money created^.
Can’t find relevant AUD charts but the story is probably the same
https://fred.stlouisfed.org/series/IOER
so this constant background “money creation” peaked at 2.5% just before the pandemic
then to fight deflation they reduced it to nearly zero
now to fight INFLATION they increased it to 0.4% again
either the central banks are confused, or you are confused
because “money creation” should worsen inflation not fight it and vice versa
it’s hard to hold both positions at the same time
either QE is inflationary and so is IOER
or neither of them is inflationary
since they both result in the creation of more reserves
if you take the first position and say oh well yes the flow is small relative to the stock , still need to ask why pay interest on reserves at all ?
why not do QT first before increasing IOER if you think that will help reduce inflation ?
or maybe you are confused 😉
the fact is, that the rate paid on ES balances (and rate charged on ES deficits) are cogs in the machine that the RBA use to implement their target rate.
if they change the cash rate, they also change the rate paid on balances (and rate charged on deficits). You can’t really do one without the other. (Well, you could, but then the whole system would need to look different…much more like a free market, of which RBA largely relinquished control)
for example, can you imagine them purportedly setting the cash rate at 3%, but paying 0% on deposits and charging 1% on overdrafts? The banks would borrow infinitely at 1%… and the cash rate wouldn’t actually be 3%.
whilst not denying that paying interest on balances does create money, this is a small side effect and the wrong thing to focus on, I think. It’s more important to remember that the RBA operates a spread between the deposit and lending rates. So for every increase in the deposit rate (money loosening) there is a broadly corresponding increased in the lending rate (money tightening).
you need to consider the WHOLE machine. As a very crude analogy, I think that what you’re doing is looking at the firetruck and saying “if you want this thing to STOP fires, you shouldn’t fill it with petrol, because petrol is flammable”. It is true that petrol is flammable, but that doesn’t mean that a fire truck, as a whole, will promote a fire, rather than extinguish it.
Anyway, here is some reading on how the rba corridor works…
https://www.bis.org/review/r200319a.htm
https://www.rba.gov.au/education/resources/teacher-updates/bridging-the-textbook-gaps-on-how-the-rba-implements-monetary-policy/index.html
im definitely confused it goes without saying
However, your explanation doesn’t make sense
Sure there are multiple cogs
But if what you say is true, the best way to reverse inflation would be to reverse QE – in other words, do QT.
NOT increase interest rates
That would, according to your purported model, have no inflationary effects while being only deflationary
According to your understanding, by paying IOER, the RBA is creating more “money”, while at the same time this is offset by reducing the propensity for people to create new loans
But that IOER flows through to all commercial deposits – if banks can get free “money” from the RBA, then why would they not want to attract as many deposits as possible and take a small margin completely risk free? lets say 0.24%
Then all the deposits, from all the exiting money that has ever been created since the beginning of the banking system now needs to be paid interest
This flows through to other assets, which in turn attract higher interest rates
Its a stock vs flow equation, but to me the amount of money ever created x 0.25% (and purportedly increasing to 3%!) is way way higher than any reduction in loan creation.
Effectively, the money supply would have to contract by 0.25%/3% per year in order to offset this ie more loans written down than created
To me this suggests that neo-Fisherians are correct
maybe QT would be better at reversing QE than raising rates. I’ve got no truck with that possibility.
but that doesn’t mean RBA will do it. RBA is trying to optimise for multiple goals (stated and unstated) at the same time, so it makes certain trade offs.
besides, the “contributors” to QT, who would have their money confiscated and destroyed (presumably – commercial banks) would fucking SCREAM. So politically untenable.
there are several gaps in this.
“All the money that has been created can’t just be deposited with the central bank, I don’t think because most of it has been loaned into existence by commercial banks”
This is a key point in the theory of the “Volker myth”
The theory states that it wasn’t Volker that DECIDED to raise interest rates in 1979.
It was excessive loan creation by commercial banks, that created a corresponding regulatory requirement for reserves, that led to the overnight rate to rise.
ie banks had to find reserves to keep up with the burgeoning amount of deposits in the banking system, and this led overnight rate to rise
The contrast to now, when banks are flush with reserves, and loan creation isn’t excessive, is quite striking
in 2010 – 22, the banks created a lot of new deposits, but the central banks created a lot of new reserves.
They’re now going to be paying interest on those reserves, creating even more reserves.
I don’t quite follow … possibly because the US prudential/regulatory system is quite different to the EZFKA one. I’m less familiar with the US one
QT is a negative for asset markets reliant on abundant and cheap liquidity. There’s a reason all the years of QE didn’t do much to the CPI but was brilliant for asset markets. Reducing liquidity would eventually lower CPI via negative “wealth effects” reducing consumption, but straight rate rises are the fastest way to do that, just as giving cash directly to people was a far more efficient way to generate demand and inflation than the “wealth effect” magic show.
Bank profits are all about net interest margin. They’re not stuffing around for a 0.01% trim on excess reserves. It would lower their NIM. Lower NIM = lower share price = lower bonuses for management.
Basically, the amount of money creation via IOER is paltry when compared to what banks can create making loans. I’d like to see data on how often IOER has covered inflation. I suspect it has only for brief periods but is actually negative when averaged out.
Forget the margin, it was just a thought example about how change rates will affect the amount of money in the system
+0.25% IOER increases the number of reserves in the system by 0.25% per year
+3% will increase it by 3% per year
Creating new loans do NOT create new reserves
Paying down loans therefore does NOT remove these reserves
According to Peachy’s theory, QE is money printing because it increases the number of reserves
Yet IOER will only serve to increase the number of reserves in the system – any effects it might have on private debt levels will not have any effect on reserves
Therefore, how was QE inflationary?
I’m not following your train of thought.
ok, this seems mostly right, but so what
so does this
yes, and this is inflationary (at the margin, when viewed in isolation)
ok. But private debt levels affect them money supply in themselves.
depends on what your definition of inflation is. But the generic response is that because QE (such as it was) created money directly; it also affected private debt levels
my question is that there is no internally consistent rationale for what they have done (raising IOER, continuing to rollover QE)
They may have everything completely backwards
Steven keen although obviously a legend for being completely wrong, has said similar things last night with Northy ( i know hes also an idiot)
Poor northy couldn’t wrap his head around it all. Steve seemed like he had hit the ritalin pretty hard before this episode
felt like i was watching at 2x speed
https://www.youtube.com/watch?v=4QCenRja7jk
Well, it’s consistent with the rationale of “no sudden moves”.
it doesn’t much matter if certain interventions of theirs tend to pull in different directions. Whatever directions they pull in, they generate some net effect. And this is what matters.
could they get more tightening by keeping rate the same and reversing QE? Maybe.
could they get more tightening by lowering rates and reversing QE? Maybe.
but what does it matter – they yank the various levers until they get a net effect in the direction that they like and of a magnitude that they like.
doesnt matter even if they misunderstand how the levers work from a causative perspective.
it’s not a single-move game.
they will keep pulling different levers until they get the sort of outcome they like. whatever the hell that is, and whatever the hell you want to call it (inflation, deflation, stagflation, disinflation, etc)
I think there is, though. Modern central banks are asset pumpers. My guess it they think rate rises would be less negative for asset markets than QT.
Creating reserves reduces a banks leverage ratio which allows them to create new loans.
It’s not firing up a physical printing press, but the result is functionally identical; it doesn’t matter if a bank is leveraging up reserves or your grandmothers term deposit.
But why would banks want to hold excess reserves?
Higher rates reduces demand at some point, or in Australian mortgage mug terms, reduce ability to take on loans. We could actually see the NIM erode with higher rates. If the demand isn’t there they will have to cut margin in order to keep the book growing. Writing loans will still be far more profitable than sitting on excess reserves earning a pittance.
Mainly via asset inflation and the follow on from that.
There is no reserve ratio anymore
either in the USA or Australia
amen
amen
suspect that is right. possibly by definition. If:
….then IOER will always be lower than inflation (outside an outright deflationary bust)
In parallel , here is a discussion of “neo-Fisherian” theory
https://www.bruegel.org/2015/07/blogs-review-understanding-the-neo-fisherite-rebellion/
separate to the question of whether creating more reserves through interest is inflationary
the idea that low interest rates CAUSE deflation , and high interest rates CAUSE inflation
the causality that had been assigned previously is backwards
hinging on the idea that The economy has an equilibrium real, or inflation-adjusted, interest rate. The real interest rate is essentially the nominal interest rate minus the inflation rate. So if the central bank pushes nominal interest rates down to a low level, then over the long run the inflation rate must inevitably move toward a level consistent with the long-run equilibrium real rate. That is, inflation must fall.
I will read this.
I have read this.
the article is obviously a very general-level outline of the basic gist of the reasoning. My comments are:
Found this interesting timeline. NZ FTW! AU only bronze.
https://twitter.com/WallStreetSilv/status/1521337905817530369?cxt=HHwWgsC5ufqw8JwqAAAA
Same source. Interesting comparison.
https://twitter.com/WallStreetSilv/status/1521328401746903042
Where’s bcnich hiding?
Lying on a beach somewhere in the Caribbean, I imagine.
Sunning his perineum most likely.
Sun boy!
Right under his room of brocken clocks
Lol. Gold
hes probably with brenten pulling each other’s cock
I need an updated prediction from Sunny Boy now the sky is falling! What are the stars telling him now??
The memes are hilarious!
Couldn’t make this up
I couldn’t make this up if I tried to lol
When George W. Bush was asked on his opinion on Roe vs. Wade, he said: “I don’t care how people got out of New Orleans after hurricane Katrina, as long as they are safe”.
cart before horse imo but the raid is on…..
“The first thing to do is to make sure the de-merger doesn’t happen because it’s going to create smaller, weaker entities that are unable to get financing, etc, to manage that transition.”
https://reneweconomy.com.au/im-sick-of-them-f-cking-it-up-cannon-brookes-takes-aim-at-agl-board/
Here’s a go getter – probably already thinking about his first IP!
https://www.theage.com.au/politics/federal/i-ll-drive-trucks-on-a-sunday-if-i-have-to-homeowners-face-rising-mortgage-repayments-20220503-p5ai0t.html
Dalglish and his young family have a variable mortgage of $520,000 with repayments of about $2000 a month. When their bank passes on the rate rise, this increase will add around $100 to their monthly repayments, which is manageable, but he says the prospect of further increases is “a pretty scary thought”.
As a construction worker, Dalglish makes between $100,000 and $150,000 annually but says the increase in cost of living “stings” for the young family’s budget. Mattuchio recently had a child and is not working while she studies to become a nurse.
Dalglish currently works full time, six days a week and commutes over 50 kilometres for work. If interest rates continue to rise, he says selling isn’t an option. He will do what he can to make the repayments.
“If I had to get another job driving trucks on a Sunday I would,” he said.
He plans to vote Labor in the upcoming election, crediting the party’s first home buyer’s scheme, Help to Buy, announced on Sunday.
“Labor has better policy in line for working class people like us,” he said.
that guy is netting over $1500 a week with little or no bookkeeping tweaking and a family of 2+2 can survive healthy on 500 bucks a week.
his mortgage can double and they’ll survive and that is without the misus working.
he is in for an IP as soon as his Italian chick gets a nursing job. sooner rather than later man…
Everyone wants freebies from the government. He wants some too. People on $100k+ are not struggling. As Djenka points out, he is getting $1500 per week. Even with $500 a week mortgage payment, he would be doing okay.