Reserve Bank of Australia raises interest rate by 0.25% (2 Viewers)

[S.H.O.D.A.N.]

MONEY MARKETS-Curves steepen after Australia hikes rates | Currencies | Reuters

LONDON, Oct 6 (Reuters) - U.S. and European money market curves steepened slightly on Tuesday as traders priced in higher interest rates in the second half of next year after Australia became the first major economic power to raise rates.

While not totally unexpected, the Reserve Bank of Australia's 25 bps rate rise was still something of a surprise, and set off talk in financial markets on if, when, and how much other major central banks will follow.

It's pretty much old news now that Australia is recovering from a recession it never had.

The interest rate rises are clearly necessary - for Australia's economic health they'll need to reach about 5% or higher. It's bemusing that the Liberal party would like to keep the interest rate at 3% instead. Do they want another bubble?

 

[niloony]

Opposition parties will always have something to whinge about no matter which side they're on.

The opposition is just pissed because inflation remains undercontrol and this raise stemmed alot from a jump in job ads so their arguement against a big deficet has to wait a while longer to have any legitimacy... if it ever does xD.

Christmas looks good if our dollar is able to go above 90c to the US dollar...but the american economy might start looking up soon as well =/

 

[volition]

The interest rates are generally too low in the first place, and it has had the effect of attempting to create another bubble

 

[yoddle]

Debt is evil.

 

[timw7845]

meh.. precaution basically...

have to watch out for inflation soon

 

[S.H.O.D.A.N.]

Australia's interest rate increase has caused the world's stock markets to rise.

Stocks, Commodities Climb as Australia Raises Interest Rates - Bloomberg.com

 

[Planck]

MONEY MARKETS-Curves steepen after Australia hikes rates | Currencies | Reuters



It's pretty much old news now that Australia is recovering from a recession it never had.

The interest rate rises are clearly necessary - for Australia's economic health they'll need to reach about 5% or higher. It's bemusing that the Liberal party would like to keep the interest rate at 3% instead. Do they want another bubble?

Forcing a mandatory rate of interest (Risk on capital) for individuals fucks with capital availability and *causes* bubbles, dude.

 

[niloony]

Australia's interest rate increase has caused the world's stock markets to rise.

Stocks, Commodities Climb as Australia Raises Interest Rates - Bloomberg.com

Which is funny because our stock market slid to a very small gain on the announcment lol...ah well it'll rally today

 

[ComingUpForAir]

end the fed!

 

[S.H.O.D.A.N.]

Which is funny because our stock market slid to a very small gain on the announcment lol...ah well it'll rally today

Yep, it rallied strongly today. In a funny way, too: it rallied because the American stock exchange rallied because Australia's interest rate increased.

Australian share market up 1.5pc at open | The Australian
Australian sharemarket rises after RBA rates call strengthens Wall Street | The Australian
Australia Helped by Rate Increase as Stocks Advance (Update2) - Bloomberg.com

Looks like we'll soon be seeing the Aussie dollar worth more than the American dollar, too. Currently: 1 Australian dollar = 0.8906 U.S. dollars

This still puts Australia's interest rate at a strong emergency stimulus level.

 

[volition]

So when you say interest rate at a strong emergency stimulus level, can you expand on that? I'd just like to clear up why you think that.

 

[Mu5hi]

Yep, it rallied strongly today. In a funny way, too: it rallied because the American stock exchange rallied because Australia's interest rate increased.

http://www.theaustralian.news.com.au/business/story/0,28124,26177339-36418,00.html

Thats what exactly happened lol,


I expect Aussie dollar to be worth equal par with US by christmas. With Another rise expected next month, which will just fuel more demand for Aussie dollar. Australia has really gained respect of International community by not entering recession.

 

[S.H.O.D.A.N.]

So when you say interest rate at a strong emergency stimulus level, can you expand on that?

Dropping immediately from a high, inflation-lowering interest rate to the lowest interest rate Australia has ever had is a strong emergency stimulus level. Can you please explain to me why that's not obvious to you?

Here's an example in case you still don't get it. My mother has a modest mortgage. She is saving about 500 dollars a month since the rate was cut from 7.5% to 3.0%. That's like one of Kevin Rudd's fiscal stimulus hand-outs every 2 months. It's probably the largest, strongest consumer stimulus in the world (per capita).

Remember, most Australians have a mortgage, and 80% of those mortgages are on variable interest rates.

 

[volition]

shodan I think that this whole idea of stimulus is stupid in the first place. btw, you don't need to use sentences like "in case you still don't get it", that's pretty condescending since I'm only asking you to confirm what I think you're saying - so that way I don't accuse you of something you didn't say.

1. If it is so easy to make the 'economy go faster' by dropping the interest rate, why doesn't the RBA just do it all the time?

2. How do you respond to the criticism that dropping the interest rates (below the level that would be set by the market if it were not being price controlled) will only create more malinvestment? The problem is not one of aggregates (as in, aggregate demand or capital), it is about the structure and allocation of resources.

 

[murphyad]

1. If it is so easy to make the 'economy go faster' by dropping the interest rate, why doesn't the RBA just do it all the time?

Just quickly, wouldn't such a policy create economic bubbles and overinflation? Interest rates in the US were exceptionally low for many years (and continue to remain so) and this led to excess borrowing and that much-condemned housing bubble. I'm no expert on these matters, but it would appear that interest rates remain low in the US to encourage lending, which has dropped in the past year or so, in order to promote economic spending.

In Australia the RBA seems to have successfully walked the fine line between growth and inflation fairly well. Australia's interest rates are traditionally higher than most other OECD countries and this has stopped the credit bubbles that other countries have experienced.

 

[volition]

murphyad, that is the very point I'm making - that such a policy of artificially reducing the interest rate below what the market (the matrix of millions of exchanges) would set, merely induces bubbles. I'm saying that keeping the interest rates low in this manner creates bubbles whether it is done all the time or just some of the time.

The problem is with the analysis that is done by people appealing to concepts of aggregate demand and capital structure. Capital is treated as a "homogenous blob" - when really there are many different types and when the money gets malinvested into certain areas, it is hard to undo that work. eg. let's say the malinvestment was in construction and too much money was diverted to the wrong area, such as making cement trucks - you can't easily turn a cement truck into an office computer. And given that the 'bubble' in this case was in construction, there is no need for this cement truck.

To use the mainstream view of capital as a "blob" of uniform stuff is to ignore the time and costs involved with reallocating those resources elsewhere.

 

[niloony]

Well unemployment dropped to 5.7% last month so something is working :balloon: ...though i do see where your coming from

 

[volition]

Well unemployment dropped to 5.7% last month so something is working :balloon: ...though i do see where your coming from

No this needs to be analysed via counter factual. ie. If unemployment dropped to 5.7% last month with RBA action, well then we need to look at what would have happened if the RBA did not take action. What if without the RBA, it would have been even better? If it is this case, the stimulus package and RBA action are failed policies.

Working this out can be hard/impossible, but it is possible to look at the result via the theories that we have. The Austrian economic theory would suggest that dropping interest rates is merely attempting to reinflate the bubble and that government action will have the effect of delaying the recovery.

 

[jennyfromdabloc]

1. If it is so easy to make the 'economy go faster' by dropping the interest rate, why doesn't the RBA just do it all the time?

Because the economy is like a car or some shit, so wise leaders need to put their foot on the gas for a while, then slam on the breaks. Sometimes they should even have their foot on the accelerator and the break pedal at the same time.

We can't have the "market" set interest rates because market participants are not perfectly rational.

Instead of having interest rates determined by the voluntary interaction of millions of people, a small handful of really smart old guys should get together periodically for a chat and they should decide exactly what the interest rate will be.

 

[murphyad]

The Austrian economic theory would suggest that dropping interest rates is merely attempting to reinflate the bubble and that government action will have the effect of delaying the recovery.

(This is also a response to your previous post vol)

Firstly the Austrian school is only one subset of greater economic theory (obviously) and while it is harder to conclusively prove or disprove than other branches because it does not rely on mathematics, it is not without its deficiencies.

Who is to say that there is any definitive relationship between artificially stimulated investments and malinvestments? As you say, since the central bank's inflation cannot continue indefinitely, it is eventually necessary to let interest rates rise back to the 'market' rate, which allegedly reveals the underlying unprofitability of the artificially stimulated investments. The objection is simple: Given that interest rates are artificially and unsustainably low, why would any businessman make his profitability calculations based on the assumption that the low interest rates will prevail indefinitely? No, what would happen is that entrepreneurs would realize that interest rates are only temporarily low, and take this into account.

According to the Austrian theory, entrepreneurs are strangely irrational when it comes to government policy. The theory credits them with entrepreneurial foresight about all market-generated conditions, but curiously finds them unable to forecast government policy, or even to avoid falling prey to simple accounting illusions generated by inflation and deflation. This seems to be a fairly simple internal inconsistency.

NB. I got most of this from Caplan's critique of Austrian economics to be found here:

Why I Am Not an Austrian Economist