Interest Rate Shock

All the mortgage holders in Australia had a reprieve this month with interest rates staying steady. More on that in a minute.

Succeed With Money

I had a very enthusiastic audience in Melbourne last week-end at the ‘Succeed With Money’ workshop there. Here is just one comment I received from someone who attended one of these workshops…

“I learnt more from you in half a day than I have in months of reading and research. The simple but effective models you teach are so valuable and I would strongly recommend your seminars to everyone I know.”

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Interest Rate Shock

Everything I am hearing tells me that people are being very conservative with their money right now. I think the threat of an interest rate rise has many people concerned and playing it safe. This month we were all told a rise was as good as a ‘done deal’ so it was a shock to hear that the rise did not materialise.

The Real Estate agents I have been talking to are telling me it is very quiet out there and I hear retail sales are quite slow as well so you would think we don’t need a rate rise to keep our spending in check.

The strengthening Aussie Dollar is helping to keep the interest rates from rising because it helps to keep prices of imported goods down. A rise in interest rates would attract more currency buyers to the Aussie Dollar. That would actually push it higher against other currencies (supply and demand) which would in turn lower the cost of imported goods (including crude oil), push the cost of living figures down (lower inflation) and put downward pressure on interest rates. This all sound good!

When the Honeymoon ends

That is all great news but…. when the Honeymoon with the Aussie dollar ends and it starts to fall, the price of imported goods will go up and we will be told inflation is rampant and we’re all spending too much money and we need to be held in check via increased interest rates!

You can imagine that when that happens, not one of us will actually be out there spending up big (which is the assumption when prices are going up) and the RBA will be cracking the ‘stop spending so much money’ whip to try to control us. Prices will be going up regardless of the fact that we are all trying to spend as little as possible and not one of us will understand why we are being punished for something we didn’t do!

Something is fundamentally wrong!

I have said it before and I will say it again now. Clearly there is a problem with the formula used to calculate inflation figures as they do not really give an indication of our spending patterns. The above example makes that clear. Here is another example

Mortgage repayments are included in the cost of living figures used to monitor inflation. If interest rates go up, mortgage repayments go up. The RBA responds by reading that as inflation and puts up interest rates which puts up mortgage repayments! Do you see a problem here?

I think the Reserve Bank got it right this time round but a time is coming when we will all be asking what on earth is going on… Now you know in advance!

I would like to see compulsory personal contributions to our superannuation funds used as a way of taking money off us when we need controlling rather than increased interest rates.

What do you think? Please leave a comment.