Question
Hi Linda-Margaret,
My understanding of the Reserve Bank hiking interest rates up is that they are trying to curb inflation, which due to our booming economy (thanks to full employment among other things), is growing at too fast a rate. Therefore, the Reserve Bank uses interest rates to clamp on spending, to slow inflation down. Is this what is really happening? Do you think that people will turn to credit to make up the difference in spending, or curb their spending, as the RB want?
Also, it annoys me that the government doesn't do anything to support the RB like making an announcement to explain to the people about why interest rates are going up. Most people don't understand, and they think it’s just the RB trying to get more money. What do you think?
Juliet from Surrey Hills
Answer
Hi Juliet,
Great questions! Your right, the RB puts up interest rates to curb inflation and growth in consumer spending, by increasing mortgage repayments. The problem is the effect isn’t instant. This is the lesson learnt from the 1980's 'recession we had to have.' They jacked interest rates up then, when nobody changed they did it again, and again, and again. Interest rate rises can take 6-12 months to take effect. People struggle for a while, use their credit cards to get by then, as a last resort stop spending. We will probably see it get worse before it gets better I think.
It is true lots of people think the government controls interest rates. The government does very little to dispel this rumour while the rates are low and the economy is good. Reasons for interest rate changes are released by the RB after their monthly meetings on the first Tuesday of the month http://www.rba.gov.au/MediaReleases/2008/mr_08_03.html.
Cheers, Linda-Margaret
