The Reserve Bank finally raised the official cash rate by 0.25% to 2.75% as has been already anticipated for many months.
You would think, by the reaction from some quarters, that the end of the world was coming and round two of the GFC was upon us.
Already the ANZ and the ASB have announced an 0.25% increase in lending rates and no doubt the other banks will follow as they have been “instructed” to do by the RB.
Don’t be fooled folks.
This is all window dressing and a little calm logic will reveal it to be so.
Firstly investors need not take fright as any increase in costs ( interest being one if them) will give investors a small tax benefit. But more importantly any increase in costs will be passed on in rents as it inevitably must do.
It won’t be over night but it will happen.
Then, as must happen, the renters will pass their increased costs onto their employers who will pass the extra cost back onto the public and so, over time, we have the beginnings of the wage/price spiral which is not only corrosive but also inflationary to the economy.
Most borrowers will hardly notice anything even of rates rise by 1 or 2% as one way or the other the costs will get passed on and it will be business as usual.
As evidence if that go for a walk or drive and witness the restaurants and cafes bursting at the seams with people who will spend the equivalent of three months interest rate rises on wine and food within 2 hours without blinking an eyelid in the process.
Likewise in electronic and appliance stores, car yards, jewellery shops and art sales etc, the cash being spent in a single hour makes the few dollars week extra in interest look like kids pocket money.
And here’s another thing: If interest rate rises really work as the RB wants them to, then logic dictates that more people will leave their money in the banks, while more people will borrow less from the same banks.
As banks must lend or go broke there can only be one outcome as a result.
A nasty squeeze on bank’s margins between what they pay to depositors and what they lend that money out at.
After all, banks are merely wholesale and retailers of money and the difference between the two is their profit.
It is therefore highly likely that there will be a break out of a further round of “mortgage wars” as banks vie with each other to attract borrowers.
For the next little while there will be some huffing and puffing but I am sure that “specials” will soon appear that will cut lending rates to close to what they were yesterday.
One more thing. If interest rates rise because of inflation, guess what the first thing will be that will inflate?
You guessed it: House prices.
Rising interest rates feed directly into the cost of building materials, labour and the possibility of making the housing shortage even more severe than ever.
You only need to look at history for proof.
Interest rates were well over 10% during the 1971-75 boom and house prices more than doubled despite that.
Rates reached 20% plus for mortgages during the boom of 1981-87 and indeed carried on just as high for several years after the ‘87 share market crash.
Even in recent times from 2001 –2007 rates were around the 10% mark and house prices still continued to rise.
Rising rates will curtail building, especially of affordable homes, exacerbating the shortage and opening the door even wider to the vast number off shore buyers and syndicates who have access to endless amounts of cheap money.
Give it a few weeks, and the interest rate rise news will be fish and chip paper, of that I am sure.