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Aussies and NZers: Four seasons in one protest


karaddin
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I hope they hike and I hope they hike hard.

Rates should've been going up for awhile now, but they keep waiting for the supply chain correction that's always "coming soon" or the mythical super-duper wage growth (or whatever excuse it is not to raise). If they don't raise next week, I'm sure it'll be because of the election.

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7 hours ago, Skyrazer said:

I hope they hike and I hope they hike hard.

Rates should've been going up for awhile now, but they keep waiting for the supply chain correction that's always "coming soon" or the mythical super-duper wage growth (or whatever excuse it is not to raise). If they don't raise next week, I'm sure it'll be because of the election.

Yes, unfortunately they have found themselves listening to the Fed too much. The Bank of England and RBNZ were smarter.

Anyway a couple of months shouldn’t matter too much (monetary policy is a blunt tool that operates with a lag), but they need to raise to around 2% in short order and probably higher after that.

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I also don't think it matters whether they raise in May or June, whichever way it's happening, we'll definitely be at a cash rate of at least 0.5% by then. I think raising to around 2% will probably be enough - as more people come off their fixed loans and onto these higher rates, time will probably do the RBA's work for them. I think the neutral rate is probably somewhere around 2%.

I'm guessing they might do a small hike in May (to 0.25%) and then a bigger hike in June (to 0.75%) based on more data.

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7 hours ago, Jeor said:

I also don't think it matters whether they raise in May or June, whichever way it's happening, we'll definitely be at a cash rate of at least 0.5% by then. I think raising to around 2% will probably be enough - as more people come off their fixed loans and onto these higher rates, time will probably do the RBA's work for them. I think the neutral rate is probably somewhere around 2%.

I'm guessing they might do a small hike in May (to 0.25%) and then a bigger hike in June (to 0.75%) based on more data.

The problem is we don't know if moving to a neutral rate (i.e. a rate that is neither tight nor loose policy) will be enough.

It may be that the Reserve (and the Fed and co) will need to move above neutral to get the desired cool-down - noting that some of these supply chain snarls do not seem to be going away, and may worsen in the near-term as China's lockdown gains pace. And demand is strong with both households and corporates sitting on record piles of post-COVID cash and very few health restrictions now in place (the "great reopening").  

Australia may also experience some imported inflation if the USD and other tightening economies experience currency appreciations. 

ETA: Bit nerdy on central banking globally - but it is interesting in the inflation-targeting era that central banks continue with a backward looking approach. In the 2000s central banks were too loose because they were repairing markets after the tech bubble, in the 2010s central banks were too tight because they didn't want to encourage more financial speculation and were obsessed with austerity. Now in the 2020s we have gone back to overly loose as central banks are trying to dig economies out of COVID (even economies like Aus that did not experience large recessions and have record low unemployment rates!)

The above is not how central banking is supposed to work...

Edited by Paxter
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I'm no RBA or monetary policy expert, but I think you'd raise it to neutral (say around 2%) in relatively short order - e.g. by the end of this year - and then look at how the data plays out as to whether you overcook the rates or let it stay at neutral.

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2 hours ago, Jeor said:

I'm no RBA or monetary policy expert, but I think you'd raise it to neutral (say around 2%) in relatively short order - e.g. by the end of this year - and then look at how the data plays out as to whether you overcook the rates or let it stay at neutral.

The potential issue with the above is the phenomenon of inflationary expectations. If you wait too long to raise rates to above a neutral level, economic actors start to expect higher inflation. This can lead (amongst other things) to workers demanding higher wages, which in turn drives even higher prices (the so-called "wage-price spiral"). Once inflationary expectations have been altered in this way, you basically have to emulate Paul Volcker and send the economy into recession (he did this by raising the interest rate to around 20%). 

What the Fed and others are trying to do now is promise to hike rates fast enough and by a large enough amount to avoid the above change in inflationary expectations. But they want to try to thread the needle and do this in a way that avoids massive demand destruction leading to a recession or a financial crisis (the latter should be less likely in a post-2008 world but it's of course still possible).  

Edited by Paxter
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Under those circumstances, a couple of big increases might do the trick of both the messaging and getting to a neutral rate quickly. It is true they might have to overcook the rates just to get inflation back down - something novel for most of us. I bought my first apartment in 2009, so I just got on the tail end of a rate rise cycle, but ever since then it's always gone down. Now I have a stand-alone house, but thankfully not too much owing on the mortgage.

Apart from inflation and interest rates, we're likely to encounter bigger problems down the road with the Chinese economy seriously slowing down. Apart from the current COVID lockdowns hampering the supply chains and Chinese demand, they're going to have issues with propping up their property market and all of that is going to flow through to the Australian materials sector.

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7 hours ago, Jeor said:

Under those circumstances, a couple of big increases might do the trick of both the messaging and getting to a neutral rate quickly. It is true they might have to overcook the rates just to get inflation back down - something novel for most of us. I bought my first apartment in 2009, so I just got on the tail end of a rate rise cycle, but ever since then it's always gone down. Now I have a stand-alone house, but thankfully not too much owing on the mortgage.

Apart from inflation and interest rates, we're likely to encounter bigger problems down the road with the Chinese economy seriously slowing down. Apart from the current COVID lockdowns hampering the supply chains and Chinese demand, they're going to have issues with propping up their property market and all of that is going to flow through to the Australian materials sector.

Oh I forget that people own homes. Not a concept I’m familiar with!

:P

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In the current situation that we're in with household debt sky-high, all it's going to take is moderate hike in rates to spook markets into compliance.

Housing market is already starting to cool (has topped out in Melb & Sydney) just on the anticipation of rates going up. It won't take much to kick the wind out of it.

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2 hours ago, Skyrazer said:

In the current situation that we're in with household debt sky-high, all it's going to take is moderate hike in rates to spook markets into compliance.

Housing market is already starting to cool (has topped out in Melb & Sydney) just on the anticipation of rates going up. It won't take much to kick the wind out of it.

A ton of people are on fixed rate mortgages now. The big banks moved away from variables as they were all competing over market share. So the hike may take longer to be effective than it normally would (as the fixed mortgages eventually reprice).

Most people on variables have also been overpaying their mortgage for years, so are in a strong position.

And while debt may be high, Australia is more awash with cash than ever.

Edited by Paxter
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It will put a dampener on demand fairly quickly IMO as it signals that we're entering a cycle of rising rates. Potential buyers will be less keen to take on mortgages when rates are going up which means less demand and hence a cooling housing market.

I wasn't really commenting about those with existing mortgages. As I said, the housing market is already cooling, and when rates inevitably go up, it's only going to throw more cold water on the market.

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36 minutes ago, Skyrazer said:

It will put a dampener on demand fairly quickly IMO as it signals that we're entering a cycle of rising rates. Potential buyers will be less keen to take on mortgages when rates are going up which means less demand and hence a cooling housing market.

I wasn't really commenting about those with existing mortgages. As I said, the housing market is already cooling, and when rates inevitably go up, it's only going to throw more cold water on the market.

Whoops we were at cross purposes. I was thinking broader economy; you housing prices.

Agree with the above. 

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The broader economy I agree should hum along ok.

As you said, we're swimming in cash and labour market is so hungry for workers, people can practically walk into jobs right now. So should be plenty of work around to keep jobs secure atleast for the medium-term.

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20 hours ago, The Anti-Targ said:

I feel a bit sorry for these guys, because it seems like they have absolutely no confidence a Labour govt would be any better.

 

Can’t disagree with the ad though. I’m a fairly close political watcher, but it’s hard to really separate the two major parties on the policy domains I care about.

Things were very different under Shorten’s leadership- he created some very clear policy differentiation (which unfortunately nobody liked). Albo is going for the “anyone but Coalition” approach. 

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3 hours ago, Paxter said:

Things were very different under Shorten’s leadership- he created some very clear policy differentiation (which unfortunately nobody liked). Albo is going for the “anyone but Coalition” approach. 

The change in Labor's direction was entirely predictable though. After they lost ground in the last election, it's kind of understandable they would just say "You know what, fuck it. We'll just take the easy path like the LNP and just scare voters into voting for us". It takes more effort to convince voters on why they should be voting for you rather than just convincing them on why they shouldn't vote for the other guys. Labor took the former while the LNP took the latter at the last election and it worked out in the LNP's favor.

If Labor have to lower their standards to meet voter expectations, well then I guess that's what they'll do (as unfortunate as it is).

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The left always has a harder sell than the right. When the left is in opposition they can make lots of social spending promises, but the right can scare the voters by saying all that will come with hiking taxes on "hard working citizens", and of course a lot of the social spending is aimed at the poor, who are always painted as undeserving freeloaders who are leeches on hard working true citizens "like you". So the middle is scared into voting right because they think they will get taxed more but not see any of the benefits. When the left is in govt, the right has a simple message: we will cut taxes and cut "wasteful spending", but all the good spending that hard working citizens benefit from will go up. The left govt doesn't see enough unnecessary spending to be able to make any meaningful shift on taxes, even though there are plenty of instances of a few million here and a few million there that can be recognised as wasted money. It doesn't add up to enough of a tax cut to promise anything in the tax relief department for those hard working citizens.

And now with the environment looming large*, the messaging challenge isn't that much different. The left wants to spend to get on top of climate change. The right says that will come at the expense of severe taxation and loss of jobs and traditional way of life.

 

*Some parts of coastal NZ may become unlivable by 2040 unless mitigations like sea walls or other anti-erosion measures are put in place. Due to erosion sea level rise in some parts of the country is happening twice as fast as previously predicted.

And speaking of the problems of sea level rise in these parts, a website set up for people and local councils to check the probable fate of their coastlines / properties has been crashing because of cyber attacks. I can't imagine who would be doing that...:rolleyes:

Lastly, on climate change. An NZ university paper recently published says our beef and sheep meat sectors are almost carbon neutral now, compared to 1990. With a combination of reduced stock numbers, improved productivity (including using pasture that causes less methane release) and reduction of nitrogen loss from soils, and re-forestation of some farmland. The productivity, re-forestation and nitrogen fixing elements are legit, but the stock numbers reduction has come about because of a massive conversion to dairy farming, so it's not like the overall agriculture emissions picture has changed substantially. Still, on a per production unit basis GHG emissions in beef and sheep have gone down. Dairy is our biggest emitter, but since we export ~90% of our dairy production perhaps we should do similar creative accounting to the Aus coal sector and externalise all those emissions rather than keep them on our national carbon account.

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I'll say one thing on climate change/economic impact - if I owned a place in Brisbane I'd already have been looking to sell it before the recent flooding. I understand why prices had been blowing up but I think it's very short sighted given climate impact isn't "the future" anymore, it's now.

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RBA hikes interest rates by 0.25% (defying expectations that it would be either a 0.15% or 0.4% hike to fit in with the traditional 0.25% incremental strategy given the previous rate was 0.10%).

This is the beginning of a fairly relentless hiking cycle that won't stop until at least 2% but potentially go much further. I think the fixed rate mortgages will hold off some of the effects so it will be hard for the RBA to judge down the track whether things are going to plan or not.

I think this has potentially torpedoed the Morrison government's chances at the election - it undermines their claim to better economic management, although some might make the nuanced claim that 0.1% rates were obviously an emergency situation and that rates are being hiked shows the economy is in generally good shape.

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Yep there we go. Quite happy with our decison to sell the investment* and pay down our mortgage a month ago. Now we just need the settlement to come through....

Yeah think that scupper's Morrison's chances. People need big wage increases over the next couple years or lots are going to be in a world of pain. Many first home buyers are currently mortgaged to the hilt.

*My wife's first home. Really wanted to sell it when we moved. Happy she put her foot down on that one.

 

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