I locked in four TDs in December at 6.81, 6.81, 6.80 & 6.80% for 12 months. I did this in belief that rates will rise a little towards the start of the year and then they will come tumbling down.
Shortly after the banks dropped their TD rates to around 6.20 - 6.30% despite big competition for domestic deposits.
Interest rates in isolation doesn't mean much. The crunch is serviceability.
Back in 1989, the OCR may have hit 17% but household debt was about 40 cents for every $1 of household disposable income.
Today household debt is $1.60 or four times as much for every $1 of household disposable income.
This also means a 0.25% increase in rates due to the sheer amount of debt we have today is like rising rates a whole 100 basis points in the 90s.
Today's OCR is 3.75% or about 15% in 1980's terms. Next week's rate rise of 25 basis points will push it to 16% assuming the average household is carrying four times for debt.
The economy today is in much worse state that 20 months ago when the OCR hit 7.25%. While the unemployment rate has held up, many people are on less hours. Many households are draining savings and selling assets to stay afloat, and businesses (productive assets) have seen credit freeze up. Without access to credit, expansion plans are put on hold. Many businesses are also in arrears with tax and the ATO for one are too scared to go running after those business as many are practically insolvent and doing so will result in large job losses.
The current phase we are in is the Great Illusion. The Illusion that everything is A. O.k.
Meanwhile credit to fund unproductive housing is expanding . . . .
