Interest Rates

[flyernzl]

We are now constantly being told that the Reserve Bank is raising mortgage interest rates in order to reduce demand in the economy.
I cannot see how that works.

If my mortgage interest rate increases so I now have to pay $500 more to the bank each month. That money does not disappear, it goes into the bank.
So the bank now has my $500.

What do they do with that money?
As I see it, they can do three things (probably a mix of all three):
- they can pay a higher interest rate to those people who have deposits at the bank
- they can pay the bank staff a higher salary
- they can pay higher dividends to their shareholders.

So admittedly my own spending has been reduced but the banks depositors, their staff and/or their shareholders have more money to spend so surely that makes up for my reduction?
So could you explain how do higher interest rates actually reduce overall demand in the economy?

[McDuck]

So could you explain how do higher interest rates actually reduce overall demand in the economy?

New "fake: Money is introduced into the system through new bank loans.
When less people can afford the loans, there are fewer loans, and as a result less fake money about.

What is fake money?
What is real money.?

Fake money is money you say you will earn and pay back later.

Real money is what you have actually swapped your moments of your life for,
and stored on a bank vault (historically as gold coins).

A bird in the hand should be valued at two in the bush.
In this case, that fact has been overlooked.
intentionally.

The inflation figure is a measure of how backwards they have that actual real relative value.

[Perry]

But banks have debt, too, don't they?
If so, that adds a fourth option:
The bank uses your $500 to pay off some debt.

[flyernzl]

Which then goes to someone else, and they spend it.

[Perry]

But what if that someone is o'seas - outside the NZ economy?

Don't we often get told that the Oz banks source little of their loan money domestically?

Plus there's the awkward matter of credit creation. (Erroneously called 'money printing.')

It was an illusion so can be made to return to nothing inside the money magicians' box.

[McDuck]

Which then goes to someone else, and they spend it.

Yup.
There is a lot of money that just circulates around and around the system.

Forget about thta stuff.

Ask yourself this.

How does money enter and exit the system?

For the purposes of the exercise, you can consider the system as all transactions in NZ dollars.

There are other larger systems of course.

I've got my idea in how it comes in and goes out.

But someone else might have figured other entry and exit points.

I'd be keen to hear of them.

[McDuck]

I guess the first question you need to ask yourself is how much?

How much money is there?

How else are you going to see if it's growing or shrinking?

And since a real paper dollar, (that has already been worked for and saved), will compete with an imaginary loan dollar, (from a bank)..
(At a house auction say..)

Then it's difficult to choose what to count.
I mean they both have the same purchasing power.

This following fact surprised me.

" The New Zealand dollar is one of the most heavily traded currencies,
There are 5 billion NZD in circulation, with 105 billion NZD
traded daily in global foreign exchange markets."

Apparently, the main job our dollar has is as a bauble to be swapped by speculators.

[acseeker]

Hey all,

Was hoping I could ask a question around interest rates for anyone who has fixed this month or is going to fix.
What is the best rate you've been offered by your bank for 12 months? ASB has offered 6.58% for 1 year which is .3% discount off their advertised rate but still higher than most of the large banks advertised rates.

Was keen to hear what others had been offered.

[JBM]

Hey all,

Was hoping I could ask a question around interest rates for anyone who has fixed this month or is going to fix.
What is the best rate you've been offered by your bank for 12 months? ASB has offered 6.58% for 1 year which is .3% discount off their advertised rate but still higher than most of the large banks advertised rates.

Was keen to hear what others had been offered.

Bad timing....... I got onto my recent 1yr fixed term loan that was going expiry end of JAN ... I locked in 5.95% 1yr fixed end of NOV with westpac that allows you to lock in rates 60 days prior to roll-over date

[jamesdonlad]

We are now constantly being told that the Reserve Bank is raising mortgage interest rates in order to reduce demand in the economy.
I cannot see how that works.

If my mortgage interest rate increases so I now have to pay $500 more to the bank each month. That money does not disappear, it goes into the bank.
So the bank now has my $500.

What do they do with that money?
As I see it, they can do three things (probably a mix of all three):
- they can pay a higher interest rate to those people who have deposits at the bank
- they can pay the bank staff a higher salary
- they can pay higher dividends to their shareholders.

So admittedly my own spending has been reduced but the banks depositors, their staff and/or their shareholders have more money to spend so surely that makes up for my reduction?
So could you explain how do higher interest rates actually reduce overall demand in the economy?

I understand the confusion around the Reserve Bank's decision to raise mortgage interest rates in order to reduce demand in the economy. It may seem counterintuitive that higher interest rates would reduce overall demand, but there are several ways in which this can happen.

Firstly, when mortgage interest rates increase, it becomes more expensive for people to borrow money to buy homes or invest in property. This means that some potential buyers may decide to delay their purchases or choose not to invest in property at all. This decrease in demand can have a ripple effect on other related industries, such as construction, real estate, and retail.

Secondly, higher interest rates can also reduce the amount of disposable income that people have available to spend on non-essential items. This can lead to a decrease in consumer spending, which can have a negative impact on businesses and the wider economy.

Lastly, the increase in mortgage interest rates can also lead to a decrease in the value of homes, which can impact household wealth and overall consumer confidence. This can further decrease demand and slow down economic growth.

In regards to the concern about where the extra money from the increased interest rates goes, it is true that banks can use this money to pay higher interest rates to their depositors, staff, or shareholders. However, it is important to note that the overall impact on the economy depends on how this money is spent. If the extra money is used to invest in new businesses, infrastructure, or other productive assets, it can have a positive impact on economic growth. On the other hand, if the money is simply used for consumption or non-productive purposes, it may not have the same positive impact.

In conclusion, while the impact of higher mortgage interest rates on the economy can be complex, it is important to understand that it is just one tool that the Reserve Bank can use to manage the economy. The overall impact depends on various factors, including how the extra money is used and the behavior of consumers and businesses in response to the change.

[donna]

But banks have debt, too, don't they?
If so, that adds a fourth option:
The bank uses your $500 to pay off some debt.

Don’t they just lend it out 5 x (or more)? Or is that only allowed with customers savings?

[Perry]

Likely depends on their capital adequacy ratio figures.

[JBM]

I understand the confusion around the Reserve Bank's decision to raise mortgage interest rates in order to reduce demand in the economy. It may seem counterintuitive that higher interest rates would reduce overall demand, but there are several ways in which this can happen.

Firstly, when mortgage interest rates increase, it becomes more expensive for people to borrow money to buy homes or invest in property. This means that some potential buyers may decide to delay their purchases or choose not to invest in property at all. This decrease in demand can have a ripple effect on other related industries, such as construction, real estate, and retail.

Secondly, higher interest rates can also reduce the amount of disposable income that people have available to spend on non-essential items. This can lead to a decrease in consumer spending, which can have a negative impact on businesses and the wider economy.

Lastly, the increase in mortgage interest rates can also lead to a decrease in the value of homes, which can impact household wealth and overall consumer confidence. This can further decrease demand and slow down economic growth.

In regards to the concern about where the extra money from the increased interest rates goes, it is true that banks can use this money to pay higher interest rates to their depositors, staff, or shareholders. However, it is important to note that the overall impact on the economy depends on how this money is spent. If the extra money is used to invest in new businesses, infrastructure, or other productive assets, it can have a positive impact on economic growth. On the other hand, if the money is simply used for consumption or non-productive purposes, it may not have the same positive impact.

In conclusion, while the impact of higher mortgage interest rates on the economy can be complex, it is important to understand that it is just one tool that the Reserve Bank can use to manage the economy. The overall impact depends on various factors, including how the extra money is used and the behavior of consumers and businesses in response to the change.

Higher Interest rates esp spiking rates like we have see moving up 200% in just a few short years can also lead to inflation in the likes of rental properties and business operations as their DEBT costs increase they must pass it on to keep the same profit margins ..