Interest Rates

[sinner]

I found the attached article a good read, so thought I would share with ASF.

http://aswathdamodaran.blogspot.co.uk/2015/04/dealing-with-low-interest-rates.html

Not really anything we can do about low interest rates other than accept "it is what it is" and make the appropriate modifications to any valuations. I think we will be in a low growth economic environment for many years...

Excellent stuff here. I want to see the "interest rate room" too!

Even if you take issue with my proxies for expected inflation (the actual inflation rate in the US each year, as measured by the CPI), real growth (the real growth rate in US GDP and the interest rate on a guaranteed investment, the graph sends a powerful message that risk free rates are driven by inflation and real growth expectations. If expected inflation is low and real growth is anemic, as has been the case since 2008, interest rates will be low as well and they would have been low, with or without central bank intervention.

This message is even more amplified when you consider that in a credit based monetary system, Gov bonds are essentially claims on the future productivity of the tax base of a given country, hence the expected return to be tightly coupled with forecasts on the productivity (e.g. inflation and growth) of that tax base.

 

[McLovin]

It seems symptomatic to me of the chase for yield by people who in most cases have no idea of the extra risks they are taking to get that yield. When risk gets under-priced things become more risky. Financial suppression across the entire capital market line is pushing the risk adverse and uneducated in particular niches to inadvertently become the ultimate risk takers and that makes things risky for all of us.

This here!

When people talk about "relative" value it should set off warning bells. Just because yields have fallen doesn't mean CCV have reinvented the sub-prime wheel. The first question should be am I being adequately compensated for the risk, not what are term deposits currently paying. SLV has a ytm of 7.4%. How does owning a few hundred million in catering equipment go when a recession hits and your borrowers are going out of business?

Even in regards to SYD (and I don't think they're going broke anytime soon!) EBIT of $600m and an interest bill of $500m. Half their revenue comes from retail/parking/property. Calling them a regulated asset is true but its not the full picture and they're not the same as a utility, there is a fair bit of discretionary spending. You only need to look at what happened to passenger numbers in Europe when the GFC hit.

 

[Bill M]

From The Australian
===
RBA slashes interest rates

Fear of a job-destroying deflationary spiral has compelled the Reserve Bank to cut interest rates to a new historic low of 1.75 per cent today, risking another politically charged spike in house prices and bounce in household debt.

http://www.theaustralian.com.au/bus...s/news-story/76e63b05d5c8d8a549ec2c6aa1ddeb83
===

Never ever seen it that low. Interesting times ahead.

 

[CanOz]

The Fin Review tipped it well last week after the inflation number came out...well done...

In thier statement it seems they're more worries about a strong AUD...

 

[pixel]

From The Australian
===
RBA slashes interest rates

Fear of a job-destroying deflationary spiral has compelled the Reserve Bank to cut interest rates to a new historic low of 1.75 per cent today, risking another politically charged spike in house prices and bounce in household debt.

http://www.theaustralian.com.au/bus...s/news-story/76e63b05d5c8d8a549ec2c6aa1ddeb83
===

Never ever seen it that low. Interesting times ahead.

Spend now, folks! No use saving for later - it won't be worth it.
Saving is a Mugs' game.

... as long as you don't plan to go an Overseas Holiday or buy imported goods. And pity the companies with debt denominated in USD. The tanking AUD will force them to pay back lots more. Of which our Banks will take their cut, of course. No wonder ANZ swung up from $22.78 Low to $25.11 High.

 

[Wysiwyg]

Harvey Norman and JB HiFi could benefit more from this.

 

[qldfrog]

interesting article
http://www.brisbanetimes.com.au/business/the-economy/miracle-needed-to-save-the-world-because-central-banks-cant-says-btims-gor-20160510-goqv3k.html
not sure where to put it, interest rate indeed but also markets, etc etc

 

[sptrawler]

interesting article
http://www.brisbanetimes.com.au/business/the-economy/miracle-needed-to-save-the-world-because-central-banks-cant-says-btims-gor-20160510-goqv3k.html
not sure where to put it, interest rate indeed but also markets, etc etc

Yes frog, I was reading that article today, pretty well sums up the problem.
Not an easy fix, people need to buy junk, so China can sell junk, so they need to buy more of our stuff.

At the moment, everyone is up to their neck in debt, and want to spend any excess money on junk food. lol

 

[greggles]

Interest rates unchanged this month. Here's the full text of the announcement:

Statement by Philip Lowe, Governor:

Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy is continuing to grow, at a lower than average pace. Labour market conditions in the advanced economies have improved over the past year, but growth in global industrial production and trade remains subdued. Economic conditions in China have steadied recently, supported by growth in infrastructure and property construction, although medium-term risks to growth remain. Inflation remains below most central banks' targets.

Commodity prices have risen over recent months, following the very substantial declines over the past few years. The higher commodity prices have supported a rise in Australia's terms of trade, although they remain much lower than they have been in recent years.

Financial markets are functioning effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative. Government bond yields have risen, but are still low by historical standards.

In Australia, the economy is growing at a moderate rate. The large decline in mining investment is being offset by growth in other areas, including residential construction, public demand and exports. Household consumption has been growing at a reasonable pace, but appears to have slowed a little recently. Measures of household and business sentiment remain above average.

Labour market indicators continue to be somewhat mixed. The unemployment rate has declined this year, although there is considerable variation in employment growth across the country. Part-time employment has been growing strongly, but employment growth overall has slowed. The forward-looking indicators point to continued expansion in employment in the near term.

Inflation remains quite low. The September quarter inflation data were broadly as expected, with underlying inflation continuing to run at around 1.5 per cent. Subdued growth in labour costs and very low cost pressures elsewhere in the world mean that inflation is expected to remain low for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 has been helping the traded sector. Financial institutions are in a position to lend for worthwhile purposes. These factors are assisting the economy to make the necessary adjustments, though an appreciating exchange rate could complicate this.

The Bank's forecasts for output growth and inflation are little changed from those of three months ago. Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.

In the housing market, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments. Turnover in the housing market and growth in lending for housing have slowed over the past year. The rate of increase in housing prices is also lower than it was a year ago, although prices in some markets have been rising briskly over the past few months. Considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities. Growth in rents is the slowest for some decades.

Taking account of the available information, and having eased monetary policy at its May and August meetings, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

 

[BarneyChambers]

Westpac and NAB have just increased their interest rates, putting a lump of coal in the sock of many families this Christmas!

 

[orr]

Westpac and NAB have just increased their interest rates, putting a lump of coal in the sock of many families this Christmas!

Many families...but some more than others; take a moments thought for real estate spivs, speculators and adjunct parasites. Make a change from bentleys, yachts, and the weekly coked up debauch...

 

[greggles]

Interest rates on hold at 1.5%... again.

The full statement by the Reserve Bank of Australia

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.

Financial markets have been affected by political developments in the eurozone, particularly in Italy. There are also concerns about the direction of international trade policy in the United States and economic developments in a few emerging market economies. Long-term bond yields in most major economies have declined recently and there has been some widening of corporate credit spreads. Overall, though, financial conditions remain expansionary. Conditions in US dollar short-term money markets have eased recently, although they are tighter than earlier in the year, with US dollar short-term interest rates having increased for reasons other than the increase in the federal funds rate. The higher rates in the United States have flowed through to higher short-term interest rates in a few other countries, including Australia.

The price of oil has increased over recent months, as have the prices of some base metals. Australia's terms of trade are expected to decline over the next few years, but remain at a relatively high level.

The recent data on the Australian economy have been consistent with the Bank's central forecast for GDP growth to pick up, to average a bit above 3 per cent in 2018 and 2019. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Stronger growth in exports is expected. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.

Employment has grown strongly over the past year, although growth has slowed over recent months. The strong growth in employment has been accompanied by a significant rise in labour force participation, particularly by women and older Australians. The unemployment rate has been little changed at around 5½ per cent for much of the past year. The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a gradual reduction in the unemployment rate expected. Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. Housing credit growth has slowed over the past year, especially to investors. APRA's supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high. While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

 

[Junior]

Interest rates on hold at 1.5%... again.

I think they should have raised them around 18-24 months ago, maybe 0.5% - 1.0% and stopped property prices in their tracks at that point. They won't raise now that prices are stagnating/falling in Sydney and Melbourne, and will have very little room to drop rates the next time stimulus/rate-cuts are required. The likely scenario at this stage is that mortgage rates rise of their own accord, due to IR hikes overseas, and the RBA will have very little ammunition to offset that with any further cuts.

What are others thoughts on IR policy over the past few years?

 

[luutzu]

I think they should have raised them around 18-24 months ago, maybe 0.5% - 1.0% and stopped property prices in their tracks at that point. They won't raise now that prices are stagnating/falling in Sydney and Melbourne, and will have very little room to drop rates the next time stimulus/rate-cuts are required. The likely scenario at this stage is that mortgage rates rise of their own accord, due to IR hikes overseas, and the RBA will have very little ammunition to offset that with any further cuts.

What are others thoughts on IR policy over the past few years?

The ABC citedt reports showing consumption in Aus. have been higher than wage increases. With increase property value, that mortgage line of credit, easy financing... massive amount of mortgage and personal debt, stagnant wages... Great policy.

 

[Toyota Lexcen]

they should be cutting, unemployment going up, inflation low, wage growth low, property prices down

in a corner now with no way out and will sit on the sidelines for probably 2-3years minimum

 

[Toyota Lexcen]

the chorus slowly building for an interest rate cut. It's an interesting situation.

The RBA cut to offset mining downturn, data released about inflation, wages, GDP indicates our economy average at best yet they wont cut because of debt levels.

i think the hint of QE by a RBA official was interesting.

 

[sptrawler]

I think they will wait to see, the outcome of the election, before moving either way.

 

[greggles]

Interest rates are expected to be cut this month for the first time since August 2016 as a result of inflation grinding to a halt in the March quarter with the consumer price index recording 0.0%, dragging the annualised rate down to 1.3%.

Those mortgaged to the hilt in an environment of declining real estate prices are probably breathing a sigh of relief. Those relying on interest rates to generate an income are probably groaning.

Is a rate of 1.25% a given this month or are there some who think the RBA will keep rates steady in spite of the inflation figures?

 

[Smurf1976]

Is a rate of 1.25% a given this month or are there some who think the RBA will keep rates steady in spite of the inflation figures?

Given they've made no change for almost 3 years I'm thinking they might wait until after the election to avoid any perception that it's a political statement of sorts?

 

[willy1111]

There are a number of lenders offering 5 year fixed rates at 3.99% and 3 year below that again . . . thus I don't see much upward movement in rates over the next 5 years.