Official interest rates unlikely to move for a while

According to this link, there are plenty of reasons why Australian official interest rates won't move for a while. That's not to say the banks won't do their own thing though.

Cheap money set to stay as RBA settles in [Infographic]

One thing I don't understand - if inflation is high, then the RBA looks to move interest rates up. Why is that? I can't see how moving interest rates up in that scenario can help - won't that just put a lot more people into pain? Suppose people relying on bank interest will be happy, but interest rates at a bank are quite pitful and a bank interest investment for anything longer than short term is just stupid. No apologies here.

 

If inflation rate is outside the goldilocks range (2-3%) rates need to move up or down to either boost it or control it. High inflation is much worse for economy than low inflation (look at Venezuela and Zimbabwe as extreme examples).

Moving the rate up usually means a lot of money is absorbed from the market (higher mortgage payments or more people save for bank deposits instead of spending). This higher rates usually, but not always, result in downward pressure on inflation.

 

Wages growth --> higher business operating expenses --> higher inflation (if the market can bear it).

But higher interest rates will also increase business operating expenses (assuming the businesses carry some debt), leading to some inflation.

More competition brings inflation down. But you'll get more competition in a low interest environment - more new entrants able to have a chance? Market for business (at least in Sydney) feels just about right - its not running too hot, nor is it running too cold. If I was inclined to start a business, I wouldn't hesitate to start now. But if I had to start it with high interest rates... no way.
If that was the case then it gives existing business the chance to retain their monopoly/duopoly etc. Prices will rise?

Ps. Venezuela... that's a government corruption problem. It's not letting businesses do business, and it's sent the country into the mess.

 

I am not an economist but I believe it is best to start a business in a growing economy. Bit like the best time to buy property is in a rising market.

Our economy is stagnant - it is actually quite risky to start a business at the moment. That is why the RBA is leaving interest rates at low levels. They are trying to get the economy to move.

Once the economy starts to grow, interest rates will increase so that inflation doesn’t get out of control.

BTW businesses need sales to be successful. Sales are far more important than costs and, as long as sales are greater than costs, they will survive and might even grow.

In my life-time, I have seen some really badly run business that were successful. It is only when their sales drop, did they find themselves in trouble.

 

Hi Kierank,

I heard that quite a few the very long running companies (Eg. Amex) were started in economically bad times.
But if you can actually start a business in a bad time, and you are able to prosper, its a sound business. When times get good, it's a sound business. When times are bad, it's a sound business. If people still want to buy your goods or services in bad times, that's a solid business.

If you start in good times, you aren't forced to necessarily have a solid business. When the tide goes it, it's those swimming naked that get caught out. And it's businesses that started in bad times that are more likely to do well. Bad times sort the wheat from the chaff.

It's like if you go to a public school or private school... private school students tend to get better high school results than their equivalent at a government school. But the private school students get spoon fed so when they are on their own without the same support at uni, public school students tend to do better.

But... yes, if you can start a sound business in economically good times, absolutely go for it. Just the processes need to be solid. And... I think Sydney's economy is solid. Maybe Brisbane's and Perth's are not quite so much....

 

All you have to do is look at fixed rates. 5 year fixed rates are barely higher than what they are now, tells you a lot. I said it back on Somersoft, with the amount of debt out there you won't see 8% rates again as long as I have a hole in my a55.

 

I did say “it is best to start a business in a growing economy” .

That doesn’t mean that it is impossible to start one in tough economic times. It is just tougher - one will need to put in more effort, more time, more working capital, be more stressful, ...

Bit like buying property at the top of the market. It is riskier, tougher to be successful, etc but one can get there if one puts in the effort, has the time, the working capital, lots of stress tablets, ...

 

I agree with @kierank

It is best to start a company in growing economy. Easier to get clients and grow bottom line. That said it is not impossible to start a successful company during eve recession. But why work harder when you can work smarter? If given a choice would you start a company in US now or in Venezuela?

All things being equal, two different economies, one growing another spiraling into hyperinflation. I know where I would go.

 

More articles on Interest Rates and not moving up maybe even down.
Westpac: Interest rates on hold forever - MacroBusiness

 

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Really low inflation will bring more competition because everyone starts to close their wallets or purses and business will have to fight for consumer spending.
Margins get tightened and pay rises go out the window.
Its a bit like watching a dog chase its tail.
Consumer spending is pretty shocking at the moment , especially when you consider interest rates are at the lowest they have been in living history for the entire country.
Its normally a good sign of an economy with some serious underlying issues.

 

Not sure of the exact reasons why , or if its related to the increased cost of offshore funding , but term deposits are on the increase ,with a number of smaller institutions raising there term deposit rates.