Finding tomorrow’s hot property, TODAY

Rising Interest Rates: The Unconventional Solution to Inflation

Rising Interest Rates: The Unconventional Solution to Inflation

Somehow, according to the logic of the major economists, including those who work for the Reserve Bank, we may need to put up interest rates again to quell key inflationary pressures like residential rents and petrol prices.

As most of you will know, the Reserve Bank is obsessed with bringing down the rate of inflation. 

And they’ve searched through their list of policies and possibilities – and come up with the brilliant concept that, if you increase the interest rates of one third of Australian households – the ones that have mortgages – somehow inflation will miraculously come down.

So, Plan A is to put up interest rates.

If Plan A doesn’t work, they move to Plan B – which is to put up interest rates.

And if Plan B fails, they try Plan C, which is to put up interest rates.

Meanwhile, the Federal Government has been working hard on its plan to deal with the individual components of high inflation, which is … to do absolutely nothing, just leave it to the Reserve Bank.

So the RBA has a new Governor, Michele Bullock, whose strategy sounds amazingly similar to her predecessor’s – which is, if inflation doesn’t come down fast enough, we’ll put up interest rates.

Bullock has stated that she’s concerned about stubbornly high inflation, particularly fuelled by rising petrol prices and high residential rents.

How would she deal with those issues?

She’s hinting about moving to Plan D, which is to put up interest rates.

No one has explained how putting up the cost of mortgages will bring down oil prices, which apparently are under pressure because the explosive situation in the Middle East.

Nor has anyone come up with the rationale about how putting up interest rates – and therefore the biggest single cost of the owners of rental properties – will ease pressure on rents.

Anyone who understands how real estate works, and in particular the current dynamics in the housing market, would expect that increasing the costs of investors will cause rents to rise further.

Naturally landlords faced with ever-rising costs – and it’s not just higher interest rates – will seek to increase the income of the properties that are costing them more and more to own.

The market can sustain rental increases because there continues to be a chronic shortage of rental properties and vacancies are at historic lows.

So putting up interest rates is highly likely to cause rents to rise even further.

And there’s no obvious reason why putting up interest rates will cause petrol prices to drop, given that the overseas billionaires who control oil prices are not greatly affected by the level of Australian interest rates.

But don’t expect that to have any impact on the thinking of the RBA board and the new Governor. The bureaucratic mentality is the only constant in the Universe.


Subscribe to our newsletter today and receive a FREE copy of How To Identify Hotspots