eli5: who or what is profiting from the MASSIVE interest rate rises in Australia? Is it the banks holding your mortgage? The Government?!.. basically, who is loving life right now?
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When you borrow money from the bank to buy a house, you have to pay back the money plus extra money called “interest”. This extra money is what makes the bank happy because they make money from it.
When interest rates go up, the bank gets more extra money from people who have borrowed money from them, like people who have a mortgage. So the banks might be happy because they are making more money.
First, when interest rates go up, it can make it more expensive for people to borrow money, which can reduce their spending. When people spend less money, it can slow down the economy. If the economy slows down too much, it can lead to lower tax revenue for the government, which can make it harder for them to fund public services and programs.
However, when interest rates are high, banks and other financial institutions can earn more money from the interest they charge on loans and mortgages. As a result, these institutions may have more money to lend, which can help businesses and individuals invest in projects or assets that could drive economic growth. If the economy grows, the government can benefit from higher tax revenues, which it can then use to fund public services and programs.
Finally, the government may indirectly benefit from higher interest rates because it can use monetary policy to control inflation. When interest rates are low, it can encourage people to borrow and spend more money, which can cause prices to go up. By raising interest rates, the government can encourage people to save more and spend less, which can help keep inflation under control. This can help to ensure that the value of money remains stable, which can benefit the overall economy and the government’s ability to provide public services.
However, higher interest rates can also make it harder for people to pay back their loans or borrow money, which can be bad for some people. So while some people might be happy with higher interest rates, other people might not be.
Well, it’s hard to say for sure, man. But it’s definitely possible that the banks holding your mortgage are benefiting from the rate hikes. They’re making more money off of the interest you’re paying, after all. And the government could also be benefiting in some way, since they might be able to use the increased revenue to fund other projects. But at the end of the day, it’s really hard to know for sure who is loving life right now. It could be a lot of different parties, or nobody at all. The world is a mysterious place, my friend.
Just on a side note, this is not an exclusive Australian phenomenon.
As far as the US goes, most banks are making less off mortgages right now. The vast majority of mortgages are sold off, usually to Fannie or Freddie or other gse and the banks make money off of origination and servicing. That activity is suppressed right now.
On the other hand, most US banks are currently making more off of new loans they hold on their books. However, they are paying more for their deposits, and a lot more if they operate heavily with “fed funds” which is the rate you hear about in the news. There are some commercial banks in the US that have a low deposit base and simply use overnight borrowing from the fed to fund their loans, and this is a lot expensive now.
Anyway, the higher “net interest margin” is balanced against lower demand and potential higher charge offs from reduced economic activity.
If the rate rises successfully curb inflation, then the beneficiaries are the general consuming public.
Businesses, broadly speaking, don’t like high interest rates. It increases borrowing costs and reduce investments. Investors don’t like interest rate increases because it generally reduces share prices.
Banks are in the middle. They might make more on loans but it is offset by reduced lending. On balance, it probably hurts them as well.
Interest rate hikes are unpopular so it is rather unlikely the government or politicians are doing this for their immediate political benefit. On the other hand, high inflation is worse in the medium term for the government, the economy and the general welfare of the citizens.
Bottom line, interest rate hikes are a bit like a bitter medicine that no one really likes but is probably necessary to stem inflation.