Can someone explain why, if petrol increases the reserve bank will raise interest rates!? I’ve heard the comment a couple of times in the media that it will limit people’s spending – but this doesn’t make any sense to me, as people already will be spending less because of paying more for petrol. So why drive spending down even further, making people’s financial situation even more difficult?
It does seem counter intuitive until you consider that the RBA does not make decisions based on one criteria alone.
They give an analysis to each and every decision on http://www.rba.gov.au/
Regards.
The RBA has an inflation target of 2-3% for the current fiscal year. The rappidly rising price of petrol is jeopardising that target, and the RBA has said if inflation exceeds 3% they will seriously consider further rate increases. However, there is a general consensus that, I think this is correct, that every 10 cent rise in the price of petrol is the equivalent of a 0.25% interest rate increase. Becaus of this factor, there are few industry experts saying that the increase in petrol will affect rates even though inflation has in fact recently lifted above 3%. If it were other items affecting inflation, then yes the case for an increase would be stronger.
It’s also a factor that lifting rates because of rising petrol, which is hurting everyone, especially the mortgae belt areas, is such a sensiive and sore area that only a very brave person would want to enter that territory.Hope this helps…FL
Fast Lane- The poster formerly known as g7
I bought my first property back in the late 80’s and when I was still single. It was my PPOR and, back then, I had not even thought of PI let alone read anything about it. Also, I happened to buy my home only a few months before the interest rate skyrocketed up to 17 – 18% or more!!! I cannot remember what the cause was, or even if I heard what it was, but man-oh-man, did it make life tough. All except about $120.oo of my fortnightly pay was going to the bank!! Sorry, I know that bit has nothing to do, directly, with the original question but it does show what can happen to borrowers.
But to follow along the same line as the original post I would like to ask a question too and also make a statement of which I would be interested to read how many agree or disagree.
My question is: To “rein in” or “put a halt” to rising inflation, why is it only, or mostly, the mortgagees that are forced to ‘foot the bill’? Surely there must be other ways of stopping the rise of, or bringing back down, the inflation rate without always making what I can only guess is approx. 50% of the population pay for it. (Yes, I know I am speaking in broad terms but I think you get what I mean?).
It always seems to me that the home-owner/mortgagee is the “patsy”!
And my statement is that I find this to be highly discriminatory that, on the whole, a minority is made to carry the burden. Regardless of politics, it makes every government guilty of gross discrimination. Anyone else, person or company, would be charged and/or fined heavily.
Well, this is my opinion and it really makes me cross every time I think about it. What are your thoughts? But if you disagree with this statement, don’t just say so, rather explain why.Cheers all and thanks for the great forums,
Forklift.
Well you know the saying
If you haven’t figured out who the patsy is then you are being taken.
It won’t change either.
cheers
SGLife should NOT be a journey to the grave with the intention of arriving safely in an attractive and well preserved body, but rather to skid in sideways Beer in one hand – Pizza in the other, body thoroughly used up, totally worn out, and screaming WOO HOO!”
Originally posted by Forklift:My question is: To “rein in” or “put a halt” to rising inflation, why is it only, or mostly, the mortgagees that are forced to ‘foot the bill’?
Heh – Well, I’m not going to be any use answering this, as I’m more confused than when I began! [blink]
How increasing the price of petrol or interest rates, prevents inflation (things costing more) is beyond me. What I can see it doing is it would stop people buying, not make anything cheaper.
Furthermore, less people buying stuff and driving their cars = businesses making less money = reduced profits = let’s charge more on what we do sell, to maintain profits = inflation rise.
I’m officially confused now.
Allan.
Interesting question Allan. I am not an economist but here’s my simplistic take on it.
Interest rate is basically the “price” of money.
If the “price of money” goes up, the price of everything else goes up respectively – but isn’t that what we call “inflation”? So, raising interest rates has the effect of raising inflation in the immediate term. However, economics tells us that there is a close relationship between supply/demand and price. So as inflation (or prices in general) rise, demand falls and there is an excess supply. To counter the excess supply, sellers have to drop the prices – hence you get deflation (or reduction in inflation).
The price of petrol is just one part in the bigger mix. Hope this makes sense![specool]Cheers
PyramidHi Stargazer, As I wrote, I know who the patsy’s are but we are still “getting taken”, as you wrote. And it is possible to change it, although not very probable. The hard part is not changing it but rather getting enough of the people to step up and demand it be changed.
And JustAllen, you hit the nail on the head!! Your statement ties in with a piece that I remember reading quite a while ago. I can’t remember who, but some noted person was quoted as saying that all governments’ philosophy, unofficial & whether they admit to it or not, is to keep the people poor. Pay them just enough to survive but not enough to get ahead. Therefore keeping the people dependant on them (the government of the time).
I don’t think I have remembered the quote verbatim but this is what the person was saying. I have heard other commentators agree with it, over the years.
However, Allen, like you I am at a loss to understand their rationale too.[weird]Regards,
Forklift
It’s also a factor that lifting rates because of rising petrol, which is hurting everyone, especially the mortgae belt areas, is such a sensiive and sore area that only a very brave person would want to enter that territory.G’day G7…. ;
Not everyone is hurting because of the high petrol prices. I absolutely love this “territory” as you put it. Can’t wait for the pump price to get over $ 2 / litre where it should be. Bring it on. Life will be very sweet indeed when that happens.
Petrol is dirt cheap. People in the western world have had the luxury of cheap fuel for too long. The people who really control the supply have strong intentions to change that, despite the US sabre rattling.
When China and India start demanding what the western world take for granted now, then it’ll get really interesting. What you are witnessing now is just the entree. Mains and dessert are yet to come.
As for the inflation link, it is pretty clear to me. Just imagine the typical shopaholic western woman. She has $ 100 in her purse. She is forced to increase her spend on the daily mortgage from $ 35 to $ 40. She fills up her snazzy Mazda 121, which rises from $ 20 to $ 25 for a tank. She drives to the sterile banal nirvana of the shopping mall to eat cake and coffee and shop for shoes and pretty sparkly things.
Instead of $ 45 in her purse (100-35-20) she’s only got $ 35 (100-40-25). So what’s her course of action ??
Well, the economists would have us believe she’d restrict her spending to only $ 35. Credit card providers would confirm however this has little bearing on her spending habits and hence both interest rates and petrol prices keep going up until one of two things happens…..either (a) the message gets through and the spending is curtailed, or more likely (b) the person at the end of the line eventually footing the bill gives up in hopelessness.
All shop owners and their victims – the “retail therapy” crowd, would violently disagree but that’s what my observations in a nutshell have been.
Not everyone is hurting because of the high petrol prices. I absolutely love this “territory” as you put it. Can’t wait for the pump price to get over $ 2 / litre where it should be. Bring it on. Life will be very sweet indeed when that happens.
I’ve got to ask… In what way do you mean will life be sweet?
Petrol is dirt cheap. People in the western world have had the luxury of cheap fuel for too long. The people who really control the supply have strong intentions to change that, despite the US sabre rattling.
To be honest, I hope fuel does keep going up – a lot – and quickly. The more they increase the price, the more they’ll cut their own throat. The more motivated people will be to use the alteratives, fuel sales will decline and so will their income. The best thing the world can do is cut off income to those OPEC leeches and the countries who take fuel profits we hand them and use it buy weapons to shoot back in gratitude.
As for the reserve bank and interest rates rising – who are they to decide if I should pay more for a loan? Sheesh! I pick a low-rate loan and they say, “Nah, ah… Add another 0.5% on that in a weeks time.” What we need is (another) John Symons (spelling?) to get off his tubby backside, give the reserve bank a slap in the face and start another interest rate war – instead of falling in line like a yes man as he’s done now for years.
Allan.
Another reason why interest rates going up controls inflation.
When our interest rate is lower than another country investors take their money out of australia and invest it in the other country. This movement of money affects the exchange rate and causes imported products to increase in price. As we purchase more imported products than we export we increase the balance of payments deficit meaning we borrow more money from overseas. Also our exports become cheaper to oversea buyers and less money is recovered back into Australia. This is what caused “the recession we had to have” P.Keating 1991 . . Keating floated our dollar and didn’t take into account the effect the movement of money had.Why petrol increases inflation.
When the oil price increases so does the cost of paint. Paint is made from oil. Synthetic chemicals are made from oil. The food you buy has to be transported using diesel in a truck. Does the truck driver pay for the increased cost of the diesel or does the consumer have to pay more for the food. In the long run the price of food increases rather than the truck driver going broke. The bricks, wood, roof tiles, bathroom fixtures, carpets, wall paper, ect travel by trucks. When a worker goes to the shop and buys less food for their wage they ask for a wage increase. If there are more jobs than workers and a wage rise doesn’t occur, the worker moves to another higher paying job. Increasing interest rates makes business invest less which cools the rate of expansion of business thus controlling inflation. Unfortunately it also creams anyone who has borrowed lots of money at cheap interest rates. I dread the adverts at the moment that offer 100% finance for a home purchase as this doesn’t leave room for any interest rate increase. In 1991 interest rates were 18% !!Originally posted by Forklift:My question is: To “rein in” or “put a halt” to rising inflation, why is it only, or mostly, the mortgagees that are forced to ‘foot the bill’? Surely there must be other ways of stopping the rise of, or bringing back down, the inflation rate without always making what I can only guess is approx. 50% of the population pay for it. (Yes, I know I am speaking in broad terms but I think you get what I mean?).
It always seems to me that the home-owner/mortgagee is the “patsy”!
And my statement is that I find this to be highly discriminatory that, on the whole, a minority is made to carry the burden.Nope. you’re putting the cart before the horse, I’m afraid. These mortgage holders are the ones (largely) responsible for the inflation in the first place! Borrowing money is inflationary, because our banking system effectively creates new money every time a new loan is created. Somewhere up the chain (the vendor or the vendor’s vendor etc), this money leaks out into the broader economy, increasing demand for consumer goods.
So how can the Reserve Bank control the rate at which the money supply expands? By lowering demand for these (inflationary) loans. And this is done by raising the cost (interest) of the new money.Cheers, F.[cowboy2]
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