Question: Exactly what kind of world is it we live in when ordinary people spend perfectly good free time…talking about interest rates? Answer: the kind of world where the price and purchasing power of money are uncertain.
That “thwack” sound you heard about 9:30am this morning (Eastern Time) was one solid nail in John Howard’s political coffin. We don’t honestly know how the Federal government got in the habit of claiming it could control interest rates. But that policy has clearly backfired now, with the Reserve Bank’s decision to raise the cash rate by 25 basis point to 6.5%. It’s the highest rate in 11 years.
Already the papers are full of calculations showing how much the rate rise ads to the average monthly mortgage payment. Yawn. The rise in interest rates matters most to people who are already living on the financial margin. Debtors. There are a lot of them in Australia (and in the U.K. and in the U.S.)
Of course it was central bankers like Alan Greenspan that encouraged savers to take on debt (via mortgages) when rates were low. Thus the relentless rise in rates feels a bit like a repeated sucker punch to homeowners who were sucked (and stepped into) loans that are now harder to service at higher rates. If there’s any consolation, it’s that this is what always happens at the end of a credit cycle.
And here’s a dietary thought. Maybe the silver lining in all of this is that people will be forced to spend less on luxury goods and food as their mortgage payment goes up. At the end of the rate rise cycle, we’ll have a fitter, smarter population. Take that obesity epidemic!
The Daily Reckoning Australia