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 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?
Comment