# RBA and Interest rates 3May2006



## jkool (2 May 2006)

Is the RB of A going to move the interest rates tomorrow?
If yes than:
- how much and why? 
- what will be the immediate affect for share investors? 
- what will be immediate affect for property investors?


----------



## ctp6360 (2 May 2006)

hey jcool you've read The Richest Man in Babylon, I love that book!!!

I don't think they'll raise it, just a hunch...I bet all the news/current affair programmes hope they do so they can go on able it for months and month!

I think if they do raise it then all the shares I hold will instantly double in value!


----------



## jkool (2 May 2006)

To kick this thread off:
- IMHO the official interest rates will go up by .25% tomorrow due to increased oil prices and general effort to keep the inflation low (within anticipated 2-3%pa)
- shares/stock market & property:
Being no economy expert myself i cant really figure this one out all that well (that's why I started this thread but generaly (if rates rises) it seems obvious that with less money in the investors hands both markets are perhaps going to decline from their current levels.

Since ASX is at record levels I can easily see some slowdown here.
However with property being pretty flat in most areas perhaps the rents may be due for increase and the yields from investment properties should therefore also rise.

What's your thoughts?

jkool


----------



## nizar (2 May 2006)

jkool said:
			
		

> Is the RB of A going to move the interest rates tomorrow?
> If yes than:
> - how much and why?
> - what will be the immediate affect for share investors?
> - what will be immediate affect for property investors?




share investors: today will be a RED day due to caution about 2mrw... if 2mrw rates go do up, then RED again... but if stay, then a 50pt+ rally carried by banks and financials

property investors: have to pay more mortgage repayments

Im with ctp6360, its more likely to stay than go up, because the oil price increase has already had the effect of an interest rate increase, ie. the prices of everything have gone up eg. petrol + grocery shopping + especially banana's because of cyclone Larry, lol

http://www.theage.com.au/news/natio...ared-rates-hike/2006/05/01/1146335671086.html


----------



## nizar (2 May 2006)

http://www.theaustralian.news.com.au/story/0,20867,18995708-643,00.html


----------



## ctp6360 (2 May 2006)

I hope its not a red day today, although my new policy is that when everything is red I just go mental buying everything!


----------



## jkool (2 May 2006)

ctp6360 said:
			
		

> hey jcool you've read The Richest Man in Babylon, I love that book!!!




Yes, great book and an essential reading for everybody I would say. And its not all that thick either.



> I don't think they'll raise it, just a hunch...I bet all the news/current affair programmes hope they do so they can go on able it for months and month!




I hope, for my own selfish and greedy reasons, that you are right.



> I think if they do raise it then all the shares I hold will instantly double in value!




Well this is what I dont understand. How can your shares double in value with an interest rise? The real value will remain same, the market (speculative) value remains uncertain to me...I would incline to stick with my original conclusion that interest raise would have rather negative effect. 

jkool


----------



## ctp6360 (2 May 2006)

I must emphasise that my last point was a joke, I don't really think they'll double  But wouldn't it be nice!


----------



## nizar (2 May 2006)

Market holding well today considering gold and DOW werent really firing and oil was up...

Maybe investors confident no rate rise 2mrw?


----------



## Smurf1976 (2 May 2006)

jkool said:
			
		

> However with property being pretty flat in most areas perhaps the rents may be due for increase and the yields from investment properties should therefore also rise.



I am expecting a rise of 0.25% and another one (also 0.25%) later this year. 

We are now firmly in a global tightening (raising interest rates) period so it's only a matter of time before the RBA goes along with the trend. The markets seem to have already priced in an interest rate rise. Bond yields have in many cases broken out recently so the signs are certainly there for ongoing global rate rises. Also the comments from Japan about raising rates.

As for the effect on shares, a big rise isn't good but I'm not at all convinced that 0.25 or 0.5% will have any real effect.

Property is, however, another matter. Markets are made at the margin and it's no secret that we had record levels of house reposession _before_ the recent surge in petrol prices. Add in the effects of rising interest rates and I do think we'll see a substantial increase in forced sales. Add in the effects of a lower "how much can we borrow?" amount and that's not conducive to rising real estate prices. 

IMO yield on property is cyclical and will at some point recover from the present very low levels with the questions being how and when. As for the how, either rising rents or falling house prices in real terms are the only possibilities. The former implies a serious wages breakout which isn't good for business or stocks. The latter is what has already been happening in some areas and I see no reason why it shouldn't continue, especially with another "push" from rising interest rates. Some of both is a distinct possibility also. If drawn out over a sufficiently long period then a serious decline in _real_ value can be completely hidden in terms of nominal prices (which would stay roughly flat) due to the effects of inflation. Locally (Hobart) and also in Sydney that process seems to be already underway.


----------



## wayneL (2 May 2006)

It will be interesting to see if they have any backbone, or whether they follow the jellyfish model like the Bank o England.

I hope they raise.....and keep going.


----------



## tech/a (2 May 2006)

+.025% will be a good thing.



> it's no secret that we had record levels of house reposession before the recent surge in petrol prices.




Smurf where did you get this well known fact.

I cant find it anywhere.
Can you point it out to me.


----------



## markrmau (2 May 2006)

Just like to suggest they will keep them steady because:

a) high petrol prices are behaving like an interest rate rise.
b) the treasury and most economists see current metals prices as a bit of a bubble and will fall off next year. Dont want to crunch other industries right now when things may get difficult next year.
c) housing buble has deflated gently so far. The treasury has as much to loose as everyone else if they bankrupt all the mums and dads.

However, the tight labor market is a real concern.


----------



## Smurf1976 (2 May 2006)

tech/a said:
			
		

> Smurf where did you get this well known fact.
> 
> I cant find it anywhere.
> Can you point it out to me.



Short answer is mainstream media. Was the Sydney Morning Herald or the Age from memory. I'll post a link if I can find one. Headline was along the lines of "Repossessions hit all time high" with the story itself mentioning that it was worse now than during the last recession.


----------



## mrfirkin (2 May 2006)

Interest rates will remain on hold.

Petrol prices are enough to keep interest rates in check for now, but there will definitely be a 1/4 of a percent rise later in the year.

Cheers,

Paul.


----------



## krisbarry (2 May 2006)

99% certain of a rate rise tomorrow, if not, June (100%)

All factors point to a rate rise!


----------



## krisbarry (2 May 2006)

Petrol prices also fuel inflation as all other costs go up such as transport, food etc


----------



## Smurf1976 (2 May 2006)

Here's a link which says that repossessions have risen and explains, albeit briefly, how it acts to lower house prices because lenders will accept a sale for any amount which recovers the debt plus costs of selling. So, for example (my example, not in the link) if the debt is $300K on a house worth $400K then they would be happy to accept an offer for $300K plus the real estate agent's commission for selling the property. It also mentions in a matter of fact way that house prices are falling. http://www.smh.com.au/news/national...ges-boom/2006/02/10/1139542402615.html?page=2

Here's another link which says that repossessions in NSW are at all time highs. http://www.infochoice.com.au/banking/news/homeloans/06/01/article14383.asp

For the benefit of property bulls who may think otherwise I will state (again) that I am NOT against property investors, or any other investors for that matter. But IMO if the market doesn't look good for a particular asset class, stock or whatever then it's sensible to acknowledge that and act accordingly. 

Of course rates can be fixed and many sensible house buyers and investors have presumably done just that or have relatively low debts and need not worry. But markets are made by the marginal sellers and buyers and IMO there are likely to be enough sellers with high debts and variable rate loans to justify my concern that there will be more forced sales on the way. With the "how much can I borrow?" amount falling as rates rise I don't see how that would result in anything but falling house prices at least in real terms if not in nominal terms. People can not spend what they do not have or can not borrow.


----------



## tech/a (2 May 2006)

Smurf.

There is a small minority (relative to buyers in the "Boom") who will be adversely affected by rate rises.
When I first started in 1996 I was 90% geared and just kept gearing to 90% as equity in those I had increased. In 2000 every 6 mths was giving me a new ability to purchase 2 more. I stopped in late 2001. Sure at that point had there been a sharp rise it would have been difficult to service,however I had factored in 9.5% as maximum risk ability to service without fire selling one or two.

Today I have sold some property and with funds freeholded some and increased equity dramatically in others.Gearing is now 37%.Gearing is positive to 9.5% so up to that rate Tennents pay the interest.

Most have Mortgage insurance.If they default and the house in fire sold then the insurance picks up the difference to what is owed.Chances of bankruptcy for these people who would have to have had mortgage insurance due to gearing (like myself) is pretty slim.

Rises to 8.5% in my veiw will have little bearing on "Boom" investors generally.
Some of them will simply now be geared well into this bullish boom.Frankly any interest rate will only be a pain for most due to a slowing of their portfolio. Some are making $10,000 + a week with reasonable portfolios.So a 1% rise on a million is only $10000 a year!

Those investors with multiple properties will generally take rate rises as a cost of business.


----------



## kerosam (2 May 2006)

mmm... what type of investment is attractive during interest rates rise then? Gold or gold shares? or other investment options?


----------



## Smurf1976 (3 May 2006)

Agreed there tech. Your gearing level at present seems quite reasonable so my comments don't really apply to your personal situation.  

It's the marginal "how much can I borrow?" buyers that I see ending up in trouble. The ones who didn't fix rates because they were counting on them falling and think that "they" will protect over stretched home buyers and thus an interest rate rise is off limits no matter what.

I have no idea how many such people there are. My concern is simply that with the weight of media, real estate industry and lenders' marketing largely pushing "borrow as much as you can get" I do think that some people will have done exactly that. Given the large income multiples that banks have been willing to lend in recent times, if those loans are at variable rates then that's going to lead to trouble if rates rise.

Whether or not many people have actually borrowed as much as they can get I really do not know. But I just don't see how young couples have been buying houses worth 6 or so times their annual income without going into massive debt. Likewise those who have "withdrawn equity" to fund renovations, pools, new cars, holidays and all the rest.

Whilst it is certainly not all or even most people, I do think that there must be quite a few with truly massive debt relative to their income. Many people have no debt at all and yet the "average" Australian has quite a lot according to official stats. By definition some must be quite a bit above the average. _Something_ isn't right for repossessions to be soaring.


----------



## wayneL (3 May 2006)

Was watching Insight on SBS tonight. It was about a bunch of ex labour voters virtually telling the pollies present to change their style, change their leader, and become relevant, whilst the pollies in typical doublespeak denying there is any problem...

...but I digress.

I was interested in a comment from Bob McMullin(spelling?) that went "....*when* interest rates rise in a couple days time..."

It will be interesting to see if this little prophecy plays out, and if so... How the %$#@ did he know?


----------



## tech/a (3 May 2006)

Just wish to point out that I'm claiming the 50/50/90 rule.

That with a 50% chance of being correct I have a 90% chance of being wrong.
I have now managed to eliminate all risk either way I'll be 100% correct!


----------



## money tree (3 May 2006)

forex loves rate rises!


----------



## ghotib (3 May 2006)

tech/a said:
			
		

> Just wish to point out that I'm claiming the 50/50/90 rule.
> 
> That with a 50% chance of being correct I have a 90% chance of being wrong.
> I have now managed to eliminate all risk either way I'll be 100% correct!



Beautiful Tech!!!  The technical trader's version of "good outcomes are miracles / bad outcomes are God's will". Thank goodness you're joking


----------



## krisbarry (3 May 2006)

Rates up 0.25% wooo hooo!


----------



## clowboy (3 May 2006)

Not that it is open yet, but the market doesn't seem to phased.

Thought I'd check EOP prior to the announcement(after announce was made) and looking at EOP of stocks I originally thought they decided against a rate hike

Hope it stays that way throughout the day


----------



## krisbarry (3 May 2006)

*RBA halts inflation rise: analysts*

03may06

THE Reserve Bank of Australia's (RBA) decision to lift interest rates today showed the central bank was keen to take out insurance against rising inflation, economists said.

The RBA raised the official cash rate by 25 basis points to 5.75 per cent, in its first move since March 2005. The move takes rates to their highest level in five years.

RBC Capital Markets senior economist Su-Lin Ong said the central bank was seeking to head off inflation sooner rather than later.

"Clearly the Reserve Bank perceives a greater risk to the inflation outlook than was the case a month or two ago and they've taken some pre-emptive action there," Ms Ong said.

"I think the upbeat news that we've seen globally as well has added to the statement today and they've also noted the increases in lending and credit growth. 

"That appears to have been a key reason as well for them moving."

Commonwealth Bank of Australia chief economist Michael Blythe said the decision to hike would have been a tough call.

"(The RBA) could see a case there for inflation risks to the high side and, as you would expect the central bank to do, they have taken out some insurance against that," he said.

Most economists had expected interest rates to remain unchanged today, although four out of 13 economists surveyed by AAP had predicted an upward move.

The RBA said in its statement today that inflationary risks had increased sufficiently to warrant a rate rise.

"Taking all of these developments into account, the board judged at its May meeting that inflationary risks had increased sufficiently to warrant an increase in the cash rate," it said.

UBS chief economist Scott Haslem said the hike was not entirely unexpected, given the recent run of stronger global and domestic data.

"With interest rates around neutral, and consumers facing higher petrol prices, the earlier timing of the rate hike reduces the likelihood that the recent two months of stronger domestic data develop into a period of materially above-trend growth, stretching the economy's limited spare capacity," Mr Haslem said.

"It should also, thereby, limit the extent to which any emerging inflation pressures are passed through to actual inflation."

UBS expects this will be the RBA's last rate move for the year.

ANZ head of Australian economics Tony Pearson said while the rate rise had occurred sooner than he had expected, it was necessary to contain inflation.

Mr Pearson said recent economic developments had increased the likelihood of price pressures breaching the RBA two to three per cent inflation comfort zone.

"Global growth has remained stronger and commodity prices have continued to rise, delivering further income gains to Australia," he said.

Westpac senior economist Anthony Thompson said the risk of further rate rises by the RBA was limited.

"The next move comes down to the trend in the global economy – if the global economy continues to remain robust then the bank could press on with further increases," Mr Thompson said.

"However, our view is that the global economy will start to see signs of a slowdown towards the end of this year and into the first half of next year.

"We think that will allow them to leave rates on hold for an extended period."

Mr Blythe said the RBA might bump up its inflation forecasts when it releases its quarterly statement on monetary policy on Friday.

"(The statement) will be explaining what's happened, rather than explaining a road map to the future," he said.


----------



## bullmarket (3 May 2006)

Hi Wayne



			
				wayneL said:
			
		

> Was watching Insight on SBS tonight. It was about a bunch of ex labour voters virtually telling the pollies present to change their style, change their leader, and become relevant, whilst the pollies in typical doublespeak denying there is any problem...
> 
> ...but I digress.
> 
> ...




I don't know if he definitely knew rates would go up today or whether he ws simply expressing his view that a rate rise is a certainty.

But given the RBA has made it blatantly obvious over at least the last 6 months that the direction of the next rate move will be *up* and that inflation is currently at the upper limit of the RBA's target 2-3% range and that oil prices are very likely to remain high and even go significantly higher my   was on a rate rise at some stage over the next 3 months at the most - so I'm not surprised the RBA decided to move this month.

I see the rate hike as a pre-emptive strike atm.  Sure, high fuel prices will change the way people in general spend but the nett effect of high oil prices will be inflationary imo especially when transport and other sectors which are heavy users of oil products start to pass on their cost increases to customers.

Anyway, just food for thought.

cheers

bullmarket


----------



## RichKid (3 May 2006)

clowboy said:
			
		

> Not that it is open yet, but the market doesn't seem to phased.
> 
> Thought I'd check EOP prior to the announcement(after announce was made) and looking at EOP of stocks I originally thought they decided against a rate hike
> 
> Hope it stays that way throughout the day




What's eop? thanks.


----------



## RichKid (3 May 2006)

Smurf1976 said:
			
		

> Here's a link which says that repossessions have risen and explains, .............http://www.smh.com.au/news/national...ges-boom/2006/02/10/1139542402615.html?page=2
> 
> Here's another link which says that repossessions in NSW are at all time highs. http://www.infochoice.com.au/banking/news/homeloans/06/01/article14383.asp
> .........




Thanks for the links Smurf, I found it very interesting, it's always good to have some stats to compare the emotional claims and media beat-ups with. Gives us a better picture of things.


----------



## sails (3 May 2006)

RichKid said:
			
		

> What's eop? thanks.



Richkid, I'm guessing "estimated opening price".  Iress has a "match price" function which is active on pre-open and again at the closing auction.  I have found it's not always reliable as these indicative prices sometimes fluctuate with wide swings.


----------



## TheAnalyst (3 May 2006)

The rate rise is easily absorbed by the market........it was like a stone from a sling shot fired over the bow of a ship illegally inside anothers territorial waters; trying to flee a pursuing navy vessel.

It would take at least 8 to 10 of those at .25% to halt the market........more likely to sent a housing market back to sleep. If bank earning are growing at an average of 18-20% per annum;how could a rate rise like that kink the market or a bank stocks share price,remembering that banks are not just a residential house lending one geography entity any more.


----------



## bullmarket (3 May 2006)

Hi TheAnalyst

:iagree: if just looking at the rate rise as a standalone rise - but imo what affects market sentiment, especially since markets are forward looking, is the perception of how many more rates rises there is likely to be and in what time frame as you implied as well.

Personally, I think there might be only 1 or 2 more before the end of calendar 2006.  Although high oil prices is inflationary it will also affect negatively on consumer spending to some extent although the nett affect will still be higher inflation imo.

cheers

bullmarket 

ps......prison break starts in 5 mins for anyone interested


----------



## wayneL (3 May 2006)

TheAnalyst said:
			
		

> The rate rise is easily absorbed by the market........it was like a stone from a sling shot fired over the bow of a ship illegally inside anothers territorial waters; trying to flee a pursuing navy vessel.




But which market are you talking about?

Don't forget the principles of chaos theory.. the flutter of a butterfly's wings in China could, in fact, actually effect weather patterns in New York City, thousands of miles away. In other words, it is possible that a very small occurance can produce unpredictable and sometimes drastic results by triggering a series of increasingly significant events.

So the few overcommited muppets who get foreclosed on next month, could trigger a series of calamatous financial circumstances that end up as a worldwide cantagion.

Don't underestimate the potential significance of this  

Cheers


----------



## TheAnalyst (3 May 2006)

wayneL said:
			
		

> But which market are you talking about?
> 
> Don't forget the principles of chaos theory.. the flutter of a butterfly's wings in China could, in fact, actually effect weather patterns in New York City, thousands of miles away. In other words, it is possible that a very small occurance can produce unpredictable and sometimes drastic results by triggering a series of increasingly significant events.
> 
> ...




Elementary wayne Elementary......such can and has happened...but the probabilities of a 0.25% rate rise increase doing such at this time would seem to inflict very minimal damage. The market i was refering to was our very own Aussie market.

The market that would feel it the most is the housing market...the first downfall for the market was the demand from investors wained and the price of property became out of reach for many...this caused its retraction and slowdown and a little interest rate hike directed at it...what had not happened was the higher interest rate enviroment as the triggers had not reared their head yet such as higher oil prices and INFLATION but low unemployemnt was already with us and the economy has been using up it excess supply of skilled workers and increased wages.

We see the beginnings of a recession in formation.......there are now multiple factors in the making of one and the reserve bank knows it......so RBA decides to start nailing it it before it goes any further.

Just at this point of time believe it would take a few more interest rate hikes to dampen the stock market.


----------



## phoenixrising (4 May 2006)

On the repossession issue, being a Sydney resident I am not suprised.
I think the city is groaning under the weight of $500k average house price.
May look good in statistics, but those mortages combined with more and more work demands, traffic issues, etc maks the mood very tough.

Don't like how it looks from here.


----------

