Interest rates and share prices?

[milkshake]

hey guys

i heard that when banks have an interest rise the share prices go up...
anyway this month supposedly interest rise will occur. however, i was curious is there a specific date that it rises? or is it like first day of the month type of thing?
are there any info for the interest rise & how does interest rise effect shares prices?

 

[drsmith]

Re: interest rise

The RBA meets on the first Tuesday of every month (except Jan) to consider the target cash rate. If the RBA changes it the banks generally (but not always) adjust their home loan rates by the same amount.

Today the RBA has lifted the cash target by 0.25% to 3.75% so expect a similar rise in bank home loan rates.

Economically interest rate rises are negative as they increase the cost of credit and hence reduce the availability of money in the economy. The relationship between share prices to changes in interest rates however is far more complex.

 

[jono1887]

Theres no definite correlation between share prices and interest rate movements.

 

[drsmith]

Theres no definite correlation between share prices and interest rate movements.

I wouldn't go so far as to say that.

Longer term if interest rates are high then share valuations will be low.

 

[Julia]

Theres no definite correlation between share prices and interest rate movements.

That may be rather an overstatement, jono. It wouldn't be hard for investors to consider that if companies' borrowing costs are higher, their profitability will be reduced, thus the shares become less attractive.

 

[condog]

That may be rather an overstatement, jono. It wouldn't be hard for investors to consider that if companies' borrowing costs are higher, their profitability will be reduced, thus the shares become less attractive.

Julia one could also argue that if interest rates are rising , its because the economy is overheated and thus profits are rising.....

I agree- theres no direct correlation.....its dependent on far too many variables to say there is any correlation one way or the other.....

Perhaps the only generalization that could be made without too much danger is that, early in the rate rise cycle shares would be more inclined to rise then later in the rate rise cycle, when the economic brakes are working.... but again this is company dependent......debt levels, creditors, debtors, customer demographics etc etc etc...

A classic example of a company that may become substantially more profitable with higher rates would be a company that does debt consolidation, debt litigation....but again that presumes this company itself is not too leveraged......see FSA or IMF as possible examples....