RBA and Interest rates 3May2006

[Smurf1976]

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 Likewise those who have "withdrawn equity" to fund renovations, pools, new cars, holidays and all the rest.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]

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]

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]

forex loves rate rises!

 

[ghotib]

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]

Rates up 0.25% wooo hooo!

 

[clowboy]

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]

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]

Hi Wayne

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?

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]

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]

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]

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]

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]

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]

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]

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

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]

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.