RBA must go harder on interest rates: Gotti

The Australian’s Robert Gottliebsen says the US Federal Reserve has shown it is prepared to ‘go hard and fast’ by its recent decision to lift rates by 0.75%, along with foreshadowing that a similar rise is likely in the near future.

The Reserve Bank of Australia (RBA), by contrast, is more likely to adopt a strategy of smaller rate rises and is more likely to cause a recession, with it being more long-lasting and more severe:

Americans believe that the only way to tackle any crisis is to take strong and decisive action. Australians, particularly our central bank, are often more tentative…

The thought of Australia following the US and prescribing a further 1.5 per cent interest rate rise delivered quickly will send shivers down the Reserve Bank’s spine.

But we can learn from the Americans that slow drip tortures do not work and in the end cause longer and more severe downturns…

US style rate rises need consideration…

The comparison with the US Federal Reserve is daft.

Unlike in Australia, most mortgages in the US have a fixed-interest rate, locked in for 30 years. A US 30-year fixed mortgage at 2.5% will still have the same monthly repayment — even after a series of rate rises. This means that a huge chunk of existing borrowers in the US are insulated from Fed rate hikes. It also means that the Fed needs to be more aggressive on rates to curb demand (other things equal).

The situation is the polar opposite in Australia. Australia is unique in that the overwhelming bulk of mortgage holders are on variable rates. This means that any change in the official cash rate from the RBA is quickly transmitted into mortgage repayments and the economy. Therefore, the RBA can suppress demand through rate hikes far more quickly than most other jurisdictions.

Following Gotti’s prescription and going harder and faster on rate hikes would very likely cause the sharp recession he says he wants to avoid.

Unconventional Economist

Comments

    • Jumping jack flash

      Agree.
      It is the demand that will be destroyed. Everyone is too focused on house prices. Houses were just a usefully-sized bucket to place the debt into.
      If you want to fill a tank with water, you use the largest container you can.
      Same principle with filling an economy with debt – use a large debt container. Houses can hold a lot of debt and fill an economy quicker.

      The real issue is the entire economy is floating on a sea of fake demand caused by the debt.
      Taking away the debt may be very noble, but the result is a collapse in demand. In this kind of economy demand is everything. Demand creates the jobs and pays the wages which creates the debt, which services the debt and creates more demand.

      • It’s amazing how few people understand this. Only other person in the comment here that seems to get it is chuckmuscle. Our best choices are inflation via continued easing (or debt jubilee), no future easing ever equals the fall of the roman empire mark II.

        We probably need to run inflation until debt levels everywhere are half (yes speculation ending policies will need to be put in place to prevent increasing debt also) what they are now, only then can we tighten sustainably and reform the system. Of course, it’s debatable our leaders are up for understanding the reform part, but that is another issue.

        For all those calling on deflation and continued rate rises with no easing ever again. Well, enjoy the new dark ages. For those calling on deflation, but, reduced interest rates and continued easing when things get out of control. Enjoy the massively over the top easing response (like during covid) and house prices 100% higher in a few years.

        What we need is debt reduction through inflation and reform to prevent this happening again. Everything else is a disaster, deflation, being the biggest disaster.

        • No we understand this. We just there needs to be a better one.
          This one leads to a feudal system where only the rich get to have kids, lead a life worth living and makes the rest debt slaves. If you can refute that, go ahead. But a choice between poverty and slavery is a weird to then say “choose slavery because otherwise you will be poor”. Gaslighting.

        • pfh007.comMEMBER

          Mega65

          “..What we need is debt reduction through inflation ..”

          There is simply NO way the current system of independent central banks will tolerate inflation in the prices of day to day goods and services and that is because politically that type of inflation is not tolerated by the public.

          Calling for the RBA to ignore inflation is a fool’s errand. It is like howling at the moon.

          You (and others who should know better) are far too worried about deflation in housing asset prices. We used to run the economy perfectly well without housing bubbles and we can do so again….even as the prices of houses fall.

          Just let the privatised public money monetary policy ideology go.

          What the RBA is interested in is general economic activity, low inflation and employment and how to keep that moving. If they can keep economic activity happening they could not care less what the price of land might be.

          Sure the RBA has been lazy and was trying to manage the economy via credit creation into the housing market (monetary policy lunacy) but as the RBA has seen throughout the pandemic there is much easier and efficient way of getting money out and circulating through the economy and that is by giving people money directly.

          Jobkeeper was a big “Wow that worked well moment”

          As interest rates rise and drain money from the wallets from some households (keep in mind that only 33% have a mortgage anyway) the Federal Government can easily offset that with tax cuts financed by bond sales either to the banks or directly to the RBA (Phil said he would not do this but there are lots of things Phil has been wrong about lately).

          And if they don’t like tax cuts they can just come up with some sort of cash splash…..”Inflation protection payments” etc

          Will tax cuts or some other sort of cash splash cause the housing market to take off?

          Nope because the RBA will be cranking up interest rates to stop inflation and that will do nothing for the housing market.

          We used to run the economy perfectly well without housing bubbles and we can do so again.

          The depression was not about deflation in housing prices.

          It was about the destruction of the monetary system when the incompetent private banking system did its usual thing of curling up in a ball.

          We have come a long way since then.

          Central banks will always make sure that their banking cartel buddies don’t bring the house down.

          Providing of course that Albo doesn’t do something stupid like try and be an economic conservative just because the AFR clowns think it would be a good idea. Actually there is some risk of that.

        • @pfh007.com,
          Beautifully put. I always go back to that fact that our economy was in better shape without a property bubble prior to this century.

          “Let it run just a little longer or there will be chaos” is no excuse. The low rates stayed low for too long, and now that they have, the solution certainly isn’t to let them stay low with negative real rates for even longer either IMO.

          • pfh007.comMEMBER

            MCBoyah,

            Austrians have no time for a monetary system run as cartel between private banks and the state. Asset price bubble blowing just being one of their concerns.

            Having said that I don’t think a gold standard is the answer either…though I have no problems with private parties establishing gold backed money and finding a market for it.

            Allow a hundred monetary flowers to bloom – state money by the state competing with loads of foreign and other alternatives including bank credit (and all the other types of private paper money variants) and cryptos if they rock your world.

            https://theglass-pyramid.com/2020/08/13/myrba-letting-100-monetary-flowers-bloom/

        • Most likely thats what weimar, zimbabwe Venezuela argentina( more than once) were aiming for. I dont think hyperinflation was there starting goal.

  1. RatedAAAMEMBER

    Hi Leith, are there reasons as to why the US mortgage market and Australia’s are so different (in terms of ability to lock in long term)? I wish I could have taken a 15-30 year fixed rate this time last year! although i know the banks apply a much larger funding premium for these terms.

      • So basically, more volume and therefore they can afford to take less profit per customer?

        • I’d be more inclined say our prudential legislation doesn’t allow it.

          Bankers will bundle up any security they can get away with. Once the security is sold, they no longer have skin in the game

    • I’m probably wrong, but I think banks buy 30 year treasuries, call that tier 1 capital, and then lend it out at a spread above that.

      Can someone correct me?

  2. We’ve gone from 0.1% to 0.85% in 60 days…

    There is no way we can determine the impact of 0.75% has had yet, and it’s flow on effect to the economy. There is no feedback whether this is enough, or more is required….

    The is blind idiocy, platformed by credentialism ….

    “Experts”….

    • These government and government institution experts will most definitely be the destruction of us all. It is amazing how damn wrong they always are.

        • Strange EconomicsMEMBER

          Good money for looking at that ouija board once a month, then doing nothing.
          November 2024 – Low rates for next 2 years, go get a loan punters ..* (tiny asterisk – so I did say could be 4 %).
          ACCC rejects any case where the warning signs are in tiny print.

    • Jumping jack flash

      Nobody has any idea.

      Theyd be better off with a pack of tarot cards or a divining rod. Perhaps a ouiji board?
      Maybe Phil with shrooms and a loincloth, and a drum circle in the RBA boardroom?

  3. There is a communist revolution brewing amongst the young in the USA. https://www.reddit.com/r/LateStageCapitalism/
    The hard left are allowed to openly advocate violent revolution while the right get shut down by the owners of public discourse and arrested for organising. (not supporting or opposing, just an observation)

    Someone better Fking do something soon.

    • drsmithyMEMBER

      The hard left are allowed to openly advocate violent revolution while the right get shut down by the owners of public discourse and arrested for organising.

      lolwut?

        • drsmithyMEMBER

          And…?

          The claim here is that the right “get shut down by the owners of public discourse and arrested for organising” when in reality the right largely direct the public discourse.

  4. We. Need. A. Recession. All the RBA and most developed country central banks have done is delay the inevitable. Rates can’t stay low in Oz while the rest of the developed world is raising. It’s not politically popular but Keating had the balls to say it back in the 90s and this continually cutting for the past two decades to attempt to prevent one has come back to bite us.

    As to Leith’s theory that raising rates doesn’t address inflation, it does partly with the strength of our currency for our imports. If house prices have to drop as well as part of this cleanse (and to 2020/21 prices) and we enter a real recession, then so be it. There’s no getting around it by pussy-footing around with rate increases. Inflation of essentials hurts the poorest the most. I know both the big parties care about home owners (mortgaged and not mortgaged) above all else, but it’s taken blowing that bubble to epic proportions to bring about this insane inflation in everyday goods (and yes, some of it is supply-side).

      • The poorest don’t have a job to begin with or have a very low paying job, or are retired (not all pensioners are millionaires, even though there are many of them who are). Unfortunately, unemployment has to go up temporarily as part of the cleanse. And with official unemployment at near record lows, now is the time. The economy will be better for it in the long run. The over-reliance on consumption needs to be pared back somewhat. Again, better now than later.

        Wage growth at that end of the pay spectrum is at the mercy of our rampant immigration (as you’ve covered well).

        • The Aged Pension and JobSeeker are indexed to inflation. So your argument doesn’t hold with respect to these groups.

          Unemployment will smash those at the fringes of the labour market the hardest.

          • They’re belatedly indexed to inflation and are way behind reality. Lower prices of everyday items helps them more.

            Again, the increase in unemployment is inevitable at such levels. At least make things cheaper for them with higher rates until they get their next job.

          • It WILL lower whatever the terribly high price of oil is for the imported oil with a stronger currency, but the emphasis is obviously more on food, services and other common expenses. The recent general energy issues are obviously another matter.

    • Do you not see the greater situation here? if we clear out all the excess via deflation Japan, the EU (and China probably) will collapse, then everyone else with it. We will all be Sri Lanka. Last century we had a deflationary episode, which would be minor in comparison to this one, how did that work out for the poor? and the world in general.

      • Australia doesn’t have full control of that. We have to go along with the rest of the developed central banks. Are you championing negative rates? The currently low rates certainly aren’t right.

    • This cheering on of a recession and house price destruction by a number of commenters on this blog is ridiculous. No one has any idea how it plays out, however, if it occurs it certainly will cause a lot of pain for many people, even those who see the system for what it is. Why would you cheer that on? Most with a mortgage don’t have a detailed understanding of the financial system and are not exposed to this type of information via sources such as this blog, so cannot see the folly of the system. They believe they are doing the right thing. To wish them destruction to ‘teach them a lesson’ based on a theoretical argument is nasty….perhaps this is where our society is….House prices are way too high but is crashing them the right answer?

      • And therein lies the problem when a property bubble is allowed to run for 30+ years. Everyone gets hurt when it unwinds – doesn’t matter if you own outright, have a mortgage or are renting, the interconnectedness of everything ensures it hurts.
        Dirk Gently was right.

      • This cheering on of a recession and house price destruction by a number of commenters on this blog is ridiculous. No one has any idea how it plays out, however, if it occurs it certainly will cause a lot of pain for many people, even those who see the system for what it is

        Fact check: FALSE

        The cheer leading is because a property bubble has left a trail of suffering elsewhere. A different type of suffering, but suffering none the less. This type of suffering is more pernicious because these suffering are captive.

        Now there will be new suffering, by a class of people who already had a lot, but wanted more. And more came at the expensive of taking away from those who had a little.

        It may play out to be drastic for everybody… but at least everyone will be at the bottom together.

        • Thank you!
          This just sounds like rich people whining that they are in the same boat as everyone else.
          Welcome aboard!

          • Strange EconomicsMEMBER

            Gosh yeah.
            Why mansion renovations cost 30% more now theres import problems and no underpaid labourers.
            And it might go down 5% after 100% increase in last 5 years.
            And Mercs cost 20K more.
            And restaurant meals now they have to pay staff the minimum wage.
            Enough to make you cook at home.
            Think of their suffering too.
            Admittedly Not a lot compared to a low wage worker who can’t afford the increased rent on their investment apartments.
            Aaah the suffering of the landed gentry.

        • That last sentence bought back a comment a mate of mine made some time ago when talking about his immigrant parents and their siblings. He said they were the happiest when they all had nothing. As soon as a brother bought a car or a TV the jealously and discontent started.
          I came from the same background and I would say we were quite poor but never destitute or hungry and as a family very happy.

        • GonzificusMEMBER

          “Now there will be new suffering, by a class of people who already had a lot, but wanted more. And more came at the expensive of taking away from those who had a little.”

          Here here! Unfortunately getting ahead in this country requires stepping on someone less fortunate to get there.

      • Again, if “crashing” houses prices is a return to prices from 2-4 years ago and it causes a recession, then it’s long overdue. There is always going to be some suffering. Recessions are part of the business cycle. Perpetual growth is not possible. There are people suffering now as a result of the current environment.

        • Don’t disagree…..there are winners and losers in every scenario, Just don’t think we should cheer it on knowing what damage may be done.

          • Fair enough. I’m not cheer leading it either. We would all have friends and families affected, but I’m seeing the same thing right now. This is MB, so my language is a bit different when it comes to finance and economics than when talking to them.

          • BS mate.
            Everyone who signs the dotted line CHEERS on higher house prices and couldn’t give a stuff about the next family.
            What you say sounds like what I hear from BBs.

      • Housing is a gamble & plenty of looser / sic renters out there who lost out. Now compete in Housing Games against other desperate tributes trying to put a roof over their heads. Post covid rental process process akin to applying for a loan but treated with contempt by agents & land lords. Proof of 2-3 incomes to rent a clapped out AV Jenninings triple fronted brick veneer or fibro sh1t shack in tired regional suburbs.
        Folk continue to gamble against the odds & I for one will struggle to shed a tear for folk who cash out in negative equity & have to join the Housing Games:((
        The house (parliament, banks, temple) always wins so the narrative goes. Besides mainscream media permanent open season on folk not engaged in housing death grip

        • @TBag – for the record I am one of the younger ones that have been priced out of the market and @billygoat I am in that rental fight. Don’t get me started on real estate agents… @Tbag perhaps don’t make a judgement before you know the reality.
          Yes, the system is broken but do we really think a significant recession is going to yield sensible policy? Didn’t in 2008 so why would it be different this time.

      • Display NameMEMBER

        I am of the view that sensible policy is a recession away. Where the focus is on survival and not dividing the spoils. Whilst the stock market, housing, crypto,… are stupidly over valued the consensus is that there are spoils to be divided, the dip to be bought.

        Imagine a safe path back from the insanity we have in the financial markets and what would have to change to get there. Now put a punters bet on how likely that path would be and who would lose out to get there.

        It just is not going to happen without serious pain. It will take what will be a life changing event for many people I think. It has been a long long time since what I would call a real recession.

    • The Wizz of Ozz

      For the full parasitic cleansing enema you would have to Trace back to 2019 mortgage brokers and real easte spivs will be getting roostered hard get out while you can yea Har iam cowboy on misery I ride

  5. I am expecting Australian own version of mortgage bonds to help out all the distressed borrowers who were sucked into what is effectively subprime loans, with temporary rate cuts being treated by the banks as permanent. This could be achieved with a longer term TFF to fund a longer term reduced fixed mortgage rate.

    And shame on APRA for allowing the banks to treat temporary rate cuts as permanent. The serviceability buffers are there for that specific reason. APRA waiting until October to increase the buffers is negligence. An inquiry into APRA is a much more urgent requirement than an inquiry into the RBA.

    • happy valleyMEMBER

      Both of them are grossly overpaid sheltered workshops and APRA really only exists to dither around cleaning up the mess that the RBA creates.

  6. The Travelling PhantomMEMBER

    Well good on him for once,
    As they say even a broken clock would point to the correct time once a day!

  7. Ronin8317MEMBER

    It seems like Andrew Mellon is making a comeback? “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

    Raising interest rate will pop the asset bubble, however lowering interest rate afterward will not bring it back to normal. The only way the world got out of the Great Depression was massive government spending. With the war in Ukraine, the RBA can send interest rate to 20% and it won’t make any difference at the oil pumps, nor will it make lettuce cheaper.

  8. The housing situation is going to take years to complete, all the Big 4 fixed books are of similar duration…….June 2025 finish

    https://twitter.com/rabbit_wealth/status/1537401802194571266

    This is a policy failure by Treasury…….the TFF should have been used to fund the restarting of Australian manufacturing, not put into the housing market. Now we have nothing to show for about $ 150 billion of debt. The $ 20 billion touted by Mr Chalmers for manufacturing needs to be multiplied 10 times.

    • Strange EconomicsMEMBER

      Or the LNP Lite could just solve it with the stroke of a pen –
      How about reinstate the bank levy for future defaults ,
      and a future fund from excess gas profits.?

  9. Jumping jack flash

    Performing an economic debtectomy may be very noble but without anything to take its place we will be left with a smoking crater where an economy used to be. Even if an economy is just an enormous pile of debt, wouldnt it be better to have an economy than not have one?

    What we should be doing is instead of pulling it, we should be creating baseline demand in the form of export manufacturing to take the place of the debt. It will take several years to set up and it will probably need to be nationalised.

    Albo needs to invoke Hawke’s battlers. We’ve come full circle. The Thatcherism/Reaganomics experiment is finally over and it has failed spectacularly.

    (Re)Nationalisation of essential services is the first step so we can provide workers with what they need so they can get the jobs done without needing to worry about buying piles of debt to pay the gouging private companies with.

    • Agree with some of that but that only covers certain industries. Not that I agree with them, but cue the “you’re a damn socialist” in 3,2,1…

    • bolstroodMEMBER

      Nationalisation of essential industries will come.
      But there is another game playing out.
      Peak oil and runaway climate catastrophe are entwined in a dance macarbe, and the world has dithered and denied for 50 years,and now it is upon us. All that is happening around us is the death spiral of our society caused by our insane refusal to face reality over an extended time.

      • Yeah the long game playing out is YGL WHO WEF Trusted Digital Identity Legislation you say APRA I say AHPRA