Commentary of RBA Interest rate rise

The Reserve Bank of Australia (RBA) decided to raise its money market rate by 25 basis (0.25%) to 5.75%. It also released a media statement injunction with the announcement.

A quick summary (although you should go and read it)

1. International growth is driving strong growth in business profits, which is enabling business to invest and borrow on the strength of those increased cashflows.
2. Domestic consumers are able to borrow more as wage growth increases borrowing capacity.
3. Wage growth is driven by business expansion.
4. The RBA thinks the current borrowing is too much and/or too quick and wants to dampen the demand for credit by increasing the rate.
   

As much as the RBA would like to reduce the demand for credit, given it is backed by strong increases in cashflows for both businesses and consumers (on the back of business demand for workers) how far will it go?
If the business growth is coming a stronger export sector that sector will be getting its demand signals and its increasing cash flows from overseas consumers.
If those consumers are intermediate producers or producers of consumer goods for export, those producers will be taking their demand signals, stronger cashflows and the ability to borrow more from their overseas customers.

The RBA can't win, it can't set the Chinese interest rate or US interest rate or Japanese rate or EU rate, or stop individuals or companies fulfilling demand either domestically or internationally.
Instead it acts like a overbearing nanny, scolding businesses for borrowing to invest (in capital) so they can expand production, so they can produce and spend more.

The headlines have all been about poor old Australian consumer who has the massive mortgage and how the rate hike will make things harder and it will be for highly leverage consumers.
The consumer is collateral damage, this rate rise is aimed directly at reducing business borrowings for investment. When businesses cough, consumers catch a cold.

What the RBA has done is make it harder for Australian businesses to expand their production in the face of increased demands. This will limit the ability of those businesses to supply both domestic and international customers, therefore limiting their ability to spend but also limiting their ability to increase profits and most likely productivity.
The RBA is worried about price inflation, however by restricting the ability to increase supply, when demand is increasing, it's decision will cause prices to rise. That is what PRICE increases are signaling to businesses, INCREASE supply, INVEST in production.

The RBA like any other public institution needs to be seen to act otherwise its reason for existing risks being questioned. In increasing or decreasing the rate, the RBA changes the whole production structure within Australia, the structure it most likely can't fully comprehend.
It would be better leaving the rate stable, never again changing it. This would allow businesses to quit worrying about the affect of changes in interest rates on their profits and ability to expand and allow those businesses to make decisions based on price signals. Businesses try to achieve some stability by hedging the interest rates however most hedges are relatively short term.

If the RBA said that the rate was not going to change in 30 years, that stability would allow businesses to make much longer range decisions, enabling longer chains of production to emerge. Instead it plays around with the rate, decreasing it to increase the attractiveness of borrowing, then having remorse two or three years later and deciding to increase it again.

The joys of having a single Command and Control institution controlling the most important price signal of all i.e. the price of money.

Have Fun