The central bank is raising rates to fight inflation. No one else seems willing to help

  • PenguinTD@lemmy.caEnglish
    17·
    1 year ago

    yo, that’s not how the policy work. The increase is to stop extra money pumping into market because if you try to borrow and do stuff, then the cost is higher, ANY borrowing. (so business, house, car, etc. )

    ie. if you are selling apple using borrowed money because the revenue-cost is positive enough to do it, interest rate increase will help stop you buying more apple(for resale) down the road. “but I can just offset the cost to consumer that buys my apple, right?” Yes you could but for merchant that does not need to borrow money to do it they have an edge over you. So while short term you will see people jack up price of apple to cover their bottom line, eventually, there is a point they can’t get price up anymore to cover cause people will switch to buy orange instead. So people will do less risky business that involves borrowing money. And consumer just pick whatever they can afford. So if there is a trend that apple is too expensive, it will stick and lag behind, it affects all the way to produce as well and some apple selling business will close, and farm would cut production if people are not buying, then if this goes on longer, they will have to lower the price to recoup the money compare to losing everything. And people that originally think borrowing money to invest in apple will think hard(if they have good advisor), thus not much money in this “apple” market. Interest rate increase affects almost all industry, but the price coming down, to historical trend of inflation, will lag behind and are not immediately visible.

    That’s also why too few competition in grocery is bad cause you have to eat, for business that people have no choice but had to buy/use to survive, they should be regulated. ( Just imagine if your provincial water supply is a public traded company. )

    • EhForumUser@lemmy.caEnglish
      17·
      1 year ago

      Best to make sure you press the right reply button. Comments are easier to read when they stay within the same thread they are meant to pertain to.

      • PenguinTD@lemmy.caEnglish
        3·
        1 year ago

        Inflation is high specifically because of high interest rates pushing people to spend more on mortgages.

        I am replying to you specifically in response to this sentence. I just use a apple selling business as example. No one has to buy mortgage to buy house, raising interest rate actually will fail the stress test for some people about to buy.(Thus they can’t even start borrowing process.) Thus pull potential money out of that market. Then somewhere down the road, the price will fall back to historical trend. So what if people already bought and can’t affordable to renew? They would try to sell, pay the penalty if any, compare to go default. Which also pull money out of housing market, eventually.

        • EhForumUser@lemmy.caEnglish
          21·
          1 year ago

          No one has to buy mortgage to buy house

          People don’t have to buy anything. But they are buying mortgages, and the rising cost of mortgages is what is causing high inflation. If the mortgage vendors dropped their prices, inflation would be within the target range.

          And because mortgages are debt, it’s a funny situation as debt shrinks with inflation. The higher the inflation, the more compelling debt becomes – hence why rates rise to try and scare people away.

          But with interest costs being the driver inflation this time around, we’re entering an interesting feedback loop. The higher the interest rates go, the higher the inflation goes, the more compelling taking on debt becomes, the higher inflation goes, the higher the interest rates go, …

          raising interest rate actually will fail the stress test

          1. The stress test only applies to federally-regulated banks. That is hardly the only source of mortgages.
          2. Wage growth is accelerating. Last year we were looking at 2.5% growth per annum, and now we’re at 5%. The capacity to take on more and more mortgage expense is there even with the stress test in force.
            • EhForumUser@lemmy.caEnglish
              1·
              1 year ago

              Your apple business example is fine, and if apples were driving inflation then higher interest rates would quash things pretty quickly. But we’re in a situation where it is interest costs themselves which are driving inflation. I’m not sure that has ever happened before. Certainly not in any recent memory.

              As before, debt becomes more appealing when inflation is high. If we, for argument’s sake, had 100% inflation YoY, a $100,000 loan today will have a principal balance of just $50,000 (constant dollars) next year. That is one hell of a steal! As such, demand for loans increases with inflation, and the cost of acquiring loans (interest) begins to rise to find equilibrium – basic supply and demand.

              The trouble we’re in is that each time the rates go higher, so too does the cost of borrowing, which in turn sees inflation go higher with borrowing costs being the thing causing inflation this time, which makes debt more appealing and able to burden higher rates – later, rinse, repeat.