Interest rate rise effect?

[fma007]

Just wondering, what effect, if any does an interest rate rise have on the stock market? Does it just affect certain stocks, eg banking? Or does it have an effect on the market as a whole?

 

[markrmau]

In theory it has the following effects:

1. All shares go down because the return from 'risky' share investment is lowered compared to risk free return from banks.

2. Consumer stocks drop because consumers with mortgages have less money to spend on consumables.

3. Stocks who produce products in the international market drop because the aussie dollar increases with the interest rate rise, reducing profit.

In practice, the market wobbles a bit then continues on its merry way. (No guarantees this time of course).

 

[Young Gun]

Further to what markmau has said , the Australia doller apperciates as higher interest rates attract foreign investment. As central banks will often look for high interest rate ( & safe) environments to park their money.

Generally increased interest rates slow down the economy on a number of levels , lower buisness expansion, less money for individuals to invest with, exports less internationally competitive . . .

 

[Uncle Festivus]

So for those with investment properties, do they pass on interest rises to their tenants? Even more "rent rage" to come?. Consumers may have to bunker down for a while, reduce spending, economy slows down, & dare I say it - recession??

 

[theasxgorilla]

Further to what markmau has said , the Australia doller apperciates as higher interest rates attract foreign investment. As central banks will often look for high interest rate ( & safe) environments to park their money.

This is the case, however BoE, ECB, Fed and others are also in tightening mode. Currency markets seem to be quite forward looking. If a central bank sounds hawkish then 1 x .25% rate rise can lead to rapid currency shifts of many percent.

 

[Broadside]

Further to what markmau has said , the Australia doller apperciates as higher interest rates attract foreign investment. As central banks will often look for high interest rate ( & safe) environments to park their money.

Generally increased interest rates slow down the economy on a number of levels , lower buisness expansion, less money for individuals to invest with, exports less internationally competitive . . .

New Zealand is a classic example, has had very high interest rate settings for some time in an effort to cool the housing sector, but it has kept the NZ$ artificially high and really hurt the export sector...house prices are still high but NZ has significant current account problems.

 

[The Red Baron]

I'm not too clued up how the RBA decides on interest rates.

So there are Consumer Price Index figures out on Wednesday and that should give us an idea if there will be a increase?

 

[Broadside]

RBA has a target band for inflation, if inflation looks likely to break above it they will tighten monetary settings....but from memory they also have an employment brief ie to minimise unemployment....the 2 roles are not always consistent...whereas the NZ central bank only concerns itself with targeting inflation

the RBA will be wary but easing of oil prices will give them some comfort

 

[theasxgorilla]

With unemployment and workforce participation at 30 year lows and highs respectively it's probably appropriate to look most closely at the CPI figures due out on Wednesday.

This article suggests the "experts" are at 50/50 for rate rise.

http://www.news.com.au/heraldsun/story/0,21985,21094283-664,00.html

 

[The Red Baron]

Will be interesting to see what happens.

All the articles i've read also seem to indicate its 50/50.

 

[ozambersand]

I'm still learning so would be interested in knowing the following....

1. Was yesterday's big dip and then partial recovery a good example of the market's reaction to the Reserve Banks' interest rate announcements ie down in fear that they will go up and up when they don't?

2. If it is, can we expect a similar thing to happen next month? (ie big dip on the day or a couple of days preceding in anticipation and then a rise if it doesn't?)?

3. I know the Reserve Bank is independent and not swayed by the political wishes of the party in power , but what are the chances that there will be no rise before October (likely Federal election date) unless there are some dramatic changes in growth and unemployment figures?

4. Is it possible that if Labor does win the election, the rates will rise in November (as they are predicting now) and it will all be blamed on Labor?

5. Do bank stocks typically go down or up when interest rates rise?

 

[CFD]

I'm still learning so would be interested in knowing the following....
~~
4. Is it possible that if Labor does win the election, the rates will rise in November (as they are predicting now) and it will all be blamed on Labor?

5. Do bank stocks typically go down or up when interest rates rise?

4/. If you wanted to be cynical you could well think it would not be in a governments interests to have a rate rise in a lead up to an election. You could also be forgiven for thinking the present overpricing of petrol could be in order to drop the price (lower than would have otherwise been the case) in the lead up to said election. No doubt with similar warnings that it will rise under labour.

5/. Bank stocks typically fall in response to interest rate rises, although I've never understood why.

 

[alphman]

5/. Bank stocks typically fall in response to interest rate rises, although I've never understood why.

It's a ripple effect that stems from the RBA (aka "central bank"). All consumer banks (CBA, NAB, ANZ, WBC, STG etc) borrow their money from the RBA in order to operate. Therefore, an increase in the interest rate would affect the banking sector in a negative way as it would mean more to pay back.

Consumer banks need to maintain their profits so they adjust the interest rates for their products accordingly. As a result, most of the burden is passed on to the end users (or consumers).

Of course, the ripple doesn't stop there. We are left with less money in our pockets, therefore spending less, therefore retail companies stuggle. Property sales drop; rental prices go up...yada yada yada.

This is why we often see or hear of the "official cash rate". It is the rate set by the Reserve Bank.

Ever wondered why our high-interest savings account never offer more than the official cash rate? Ever wondered why our homeloans are always higher than the official cash rate? Ever wondered why we never see the official cash rate on any of our documents? It because the consumer banks are the middlemen between us and the Reserve, and they make their money through interest clips and fees.

 

[CFD]

Thanks for the reply alphman, my confusion comes from the following;

As I understand it the Banks make their profits in three main areas:
1/. Fees and charges on banking type transactions, borrowings, margins on Bank Bills etc.
2/. None core banking activities, such as insurance, online brokers, funds managers etc.
3/. The interest rate margin on lending. However the funds raised for this lending comes largely from funds deposited, both collectively from various types of customers operating/savings accounts and term deposits. The balance is from the money market.

An increase in the Reserve Bank's overnight cash rate does not unfavourably impact on any of the above.

In relation to 3/. above, term deposit rates are fixed for up to 5 years, rate increases are not passed on to savings accounts which pay next to nothing in interest and money market borrowing have up to 6 months before increasing further. On the other hand, all variable loans are increased, and fixed loans are hedged.

Borrowings from the RB at the overnight cash rate are minor in comparison and are only used to finance daily settlements in exchanges between banks.

No doubt I will be wrong somewhere along the line because banks' always dip on rate rises, but I fail to see how the flow on effect from the RB interest rate rises impacts on the banks profits.