Aussie Interest Rates vs the World

[redwynne]

I was reading http://business.smh.com.au/business/less-than-golden-run-for-dollar-20080808-3s0c.html and didnt realise that "A benchmark rate of 7.25% in Australia, compared with 0.5% in Japan and 2% in the US, has made the currency a favorite with investors looking to invest in higher-yielding assets." I always knew that US rates were a lot lower than Aussie rates but the Japanese rates are lower again which made me think...

Why are our rates so much higher compared to them?

Thanks in advance for killing my curiosity

PS I tried to find other related posts but couldnt so sorry if this has been posted before.

 

[ROE]

I was reading http://business.smh.com.au/business/less-than-golden-run-for-dollar-20080808-3s0c.html and didnt realise that "A benchmark rate of 7.25% in Australia, compared with 0.5% in Japan and 2% in the US, has made the currency a favorite with investors looking to invest in higher-yielding assets." I always knew that US rates were a lot lower than Aussie rates but the Japanese rates are lower again which made me think...

Why are our rates so much higher compared to them?

Thanks in advance for killing my curiosity

PS I tried to find other related posts but couldnt so sorry if this has been posted before.

We may have 0.5% like Japan soon when our properties bubble pop
Japan went down since the 80's property bubble pop ..
they have the same arguments as our wonderful property investors ... so little land so many people property must go up and

people keep borrowing and buying hoping some bigger fools will pay higher price and ignore yield.

then comes the big bang, people fear for generations on debt and slow their spending and wont buy any asset

 

[WinSum]

The USA have to keep at 2% or lower because their financial system is in trouble with bad loans from the housing bubble.

Keeping the Fed Fund rate low will allow the American Banks to recapitalized by borrowing at low rate and lending out at higher rates.

The Japanese Govt's Zero Interest Rate Policy is to keep its Export industry going. It's low interest rate keeps its currency down and allow Japan to exports its goods to the world at low prices.

 

[Timmy]

Good site for quick comparison of world interest rates:

http://www.interest.co.nz/news.asp

If you click on the horizontal bar representing the interest rate of a country you are linked to the central bank of the country, gives access to some info on the economic conditions and reasons for monetary policy setting etc.

 

[nioka]

Can I suggest that the REAL reason our rates are high is the need to continue to attract overseas currency into the country to fund the continuing deficit in the current account balance. As an individual the more you get into debt the harder it is to borrow. The harder it is, the more expensive it becomes. Think bankcard rates for those that resort to them. Same goes for the country and we have just about run out of "things" to sell as a country. We hardly own the farm any more if you have a close look.

 

[CanOz]

Can I suggest that the REAL reason our rates are high is the need to continue to attract overseas currency into the country to fund the continuing deficit in the current account balance. As an individual the more you get into debt the harder it is to borrow. The harder it is, the more expensive it becomes. Think bankcard rates for those that resort to them. Same goes for the country and we have just about run out of "things" to sell as a country. We hardly own the farm any more if you have a close look.

There is no question in my mind that attracting overseas investment is part of the reason Noika, but it cannot be the sole reason for higher rates. If that was the case the US should be cranking the rates up....they may yet need to. Higher rates are meant to slow the economy, stimulate savings, as well as protect the buying power of the currency....right?

I don't Australia has come close to running out of things to sell, like Nauru has.

Cheers,


CanOz

 

[Tysonboss1]

We may have 0.5% like Japan soon when our properties bubble pop
Japan went down since the 80's property bubble pop ..
they have the same arguments as our wonderful property investors ... so little land so many people property must go up and

people keep borrowing and buying hoping some bigger fools will pay higher price and ignore yield.

at the peak of japans property bubble property was returning about 0.5%pa rental return,.... Australias property has maintained yeilds of between 4-5% before, during and after our recent boom,.... so not really the same as Japan.

 

[OK2]

Is it legal to borrow money in Japan and invest it in Australia or is that considered money laundering?

 

[Timmy]

perfectly legal

 

[bvbfan]

The Japanese Govt's Zero Interest Rate Policy is to keep its Export industry going. It's low interest rate keeps its currency down and allow Japan to exports its goods to the world at low prices.

The Japanese were too slow to cut rates in the 1990's when property prices crashed, this lead to their banks being basket cases.
They led stupidly on projects.

Sound familiar at all to current situation?

US won't be raising rates any time soon, they may do 1 then have to reverse course like Japan did.

US Dollar will be a carry trade currency for a while yet IMO

Here what happened in Japan with their benchmark rate.

I think the US is perhaps half way through the cycle, at about 1993-4

 

[BradK]

Is it legal to borrow money in Japan and invest it in Australia or is that considered money laundering?

But very dangerous if the currency moves against you. In this case, youd have to worry about both interest rate movements AND currencies. Been there done that in the 1980s and lots of farmers lost their shirts.

 

[Aussiejeff]

Is it legal to borrow money in Japan and invest it in Australia or is that considered money laundering?

Ahem....isn't that what our banks are doing at present??

Anyway, I always thought "laundering" was considered a worthy procedure. You know, cleansing the "dirt" from a soiled item...

So, our banks borrow Japan's "dirty" currency at .5%, cleanse it by loaning out to smart Aussies at 7-8%, skim the cream off the top, and repay what remains of their borrowed, now shiny, clean Yen at a tidy profit!

Sounds like perfectly good capitalist economics to me....



aj

 

[nioka]

Ahem....isn't that what our banks are doing at present??

Anyway, I always thought "laundering" was considered a worthy procedure. You know, cleansing the "dirt" from a soiled item...

So, our banks borrow Japan's "dirty" currency at .5%, cleanse it by loaning out to smart Aussies at 7-8%, skim the cream off the top, and repay what remains of their borrowed, now shiny, clean Yen at a tidy profit!

Sounds like perfectly good capitalist economics to me....



aj

Except that it is not as simple as that. Exchange rates vary and what is borrowed can blow out faster than the interest saved allows. The loan and the interest has to be repaid in the foreign currency. I once had a foreign currency loan which blew out from $350,000 to over $900,000 with currency changes. Be very very careful if you dabble in these. The big banks get caught in these as well as the small folk.

 

[moXJO]

Except that it is not as simple as that. Exchange rates vary and what is borrowed can blow out faster than the interest saved allows. The loan and the interest has to be repaid in the foreign currency. I once had a foreign currency loan which blew out from $350,000 to over $900,000 with currency changes. Be very very careful if you dabble in these. The big banks get caught in these as well as the small folk.

Is there a way to hedge against the movements through forex? Or will that be just as costly?

 

[nioka]

Is there a way to hedge against the movements through forex? Or will that be just as costly?

There is but whatever way you go you are still taking a bet on the value of the Aussie dollar. The fact that we have such a large current account imbalance makes that very risky. Our interest rate variations also complicate the calculations. The best way to hedge is not to get involved.

 

[Julia]

Good site for quick comparison of world interest rates:

http://www.interest.co.nz/news.asp

If you click on the horizontal bar representing the interest rate of a country you are linked to the central bank of the country, gives access to some info on the economic conditions and reasons for monetary policy setting etc.

Really interesting link. Thanks, Timmy.

 

[juw177]

Note that those interest rates are what the that banks gets to borrow from the central bank. When it comes to consumers looking to get a home loan, interest rates are at a high in America.

 

[lasty]

There is but whatever way you go you are still taking a bet on the value of the Aussie dollar. The fact that we have such a large current account imbalance makes that very risky. Our interest rate variations also complicate the calculations. The best way to hedge is not to get involved.

Your risk is infact AUD/JPY cross rate not just the Aussie.
You are therefore exposed to two currency movements not just one.
We have seeen Japanese invest in our bond market only to be crucified by a strengthening yen.

If you put in hedging strategies you can play this PROVIDED you have experience in FX and understand the implications.
If in doubt .. STAY OUT !

 

[lasty]

Can I suggest that the REAL reason our rates are high is the need to continue to attract overseas currency into the country to fund the continuing deficit in the current account balance. As an individual the more you get into debt the harder it is to borrow. The harder it is, the more expensive it becomes. Think bankcard rates for those that resort to them. Same goes for the country and we have just about run out of "things" to sell as a country. We hardly own the farm any more if you have a close look.

Correct.
Australia and NZ have had higher interest rates to attract capital inflow.
Even still that is not enough and we have to borrow overseas to top up.
All our foreign borowing now is private sector debt.
Our market is too small to source funds locally.

 

[lasty]

There is no question in my mind that attracting overseas investment is part of the reason Noika, but it cannot be the sole reason for higher rates. If that was the case the US should be cranking the rates up....they may yet need to. Higher rates are meant to slow the economy, stimulate savings, as well as protect the buying power of the currency....right?

I don't Australia has come close to running out of things to sell, like Nauru has.

Cheers,


CanOz

The US money market is the most liquid of them all.
Most business transactions are done in US dollars.
They dont need to attract investors by raising rates. (well not yet anyway hehe)