RBA April '09 Interest rate decision

[Amor_Fati]

Probably .25% (whats all the basis points BS?) just to keep the ball rolling it seems imterest rates globally are almost nil so we will head thesame way.

What I'd like to know is what do people do in theUS and particularly Japan do to get income from cash ? rate in Japan is 1/10th of 1% ? ????????????????

Basis points are just a different measure, 100 points = 1%

Re cash income, that is one of the goals of expansionary monetary policy (cutting rates). People will either spend their income or save it, by making saving unattractive hopefully they will spend more boosting consumption. It would not be much fun to be managing funds near or at retirement age though, stuck with a choice between miniscule interest or the volatility of equity markets at the moment. (Even though it may be a great time to invest in those markets in the longer term)

 

[MrBurns]

Basis points are just a different measure, 100 points = 1%

Re cash income, that is one of the goals of expansionary monetary policy (cutting rates). People will either spend their income or save it, by making saving unattractive hopefully they will spend more boosting consumption. It would not be much fun to be managing funds near or at retirement age though, stuck with a choice between miniscule interest or the volatility of equity markets at the moment. (Even though it may be a great time to invest in those markets in the longer term)

I was being facetious about the basis points comment it just seems to be a wankers way of expressing it, I think most people undersand percentage points.

Yes its a real problem for those with cash and it looks like it will get worse before it gets better.

 

[MACCA350]

AAARRRRGGGHHH cr@p

 

[YOUNG_TRADER]

AAARRRRGGGHHH cr@p

lol me to mate me too

 

[MRC & Co]

lol, well we were both wrong Sir O with our final conclusion.

Rate cut was as expected,

 

[Timmy]

lol, well we were both wrong Sir O with our final conclusion.

Rate cut was as expected,

You two are not alone ... I missed it by that much

 

[kitehigh]

lol, well we were both wrong Sir O with our final conclusion.

Rate cut was as expected,

Yep and as expected the banks have not cut or cut only .10, so the banks are the only winners out of this latest RBA cut.

 

[MACCA350]

Yep and as expected the banks have not cut or cut only .10, so the banks are the only winners out of this latest RBA cut.

Yet they will hit savings accounts with the whole .25 cut if not more

 

[Aussiejeff]

I wonder what the bwanks will do when the reverse process eventually and inevitably hits the markets.

If the ride down in interest rates has been any guide, it will likely be a case of "RBA ups rates by 0.5%" and "banks up mortgage rates by 1.5%, up savings rates by only 0.25%".

 

[MRC & Co]

Re cash income, that is one of the goals of expansionary monetary policy (cutting rates). People will either spend their income or save it, by making saving unattractive hopefully they will spend more boosting consumption. It would not be much fun to be managing funds near or at retirement age though, stuck with a choice between miniscule interest or the volatility of equity markets at the moment. (Even though it may be a great time to invest in those markets in the longer term)

Actually the main reason rates are cut for these theorists, is to encourage lending and investment.

 

[kitehigh]

I wonder what the bwanks will do when the reverse process eventually and inevitably hits the markets.

If the ride down in interest rates has been any guide, it will likely be a case of "RBA ups rates by 0.5%" and "banks up mortgage rates by 1.5%, up savings rates by only 0.25%".

Yes I reckon they will do exactly that and use the same excuse, overseas borrowing costs are high... blah blah lie lie blah. In reality CEO needs his 20 million bonus to fund the lifestyle that he is accustomed to.

 

[MrBurns]

Yet they will hit savings accounts with the whole .25 cut if not more

If they do I'll take the lot out and put it with the Bendigo Building Society just to spite them.

 

[Gundini]

It was expected.

We are lucky to have the flexibility to cut rates at all, even though so minor.

Where to from here?

Didn't seem to much affect the dollar, but there was a noticible effect on the Gold index (AUD)

Anyway, going to Fiji for 10 days next week, don't really give a rats...

 

[MrBurns]

It was expected.

We are lucky to have the flexibility to cut rates at all, even though so minor.

Where to from here?

Didn't seem to much affect the dollar, but there was a noticible effect on the Gold index (AUD)

Anyway, going to Fiji for 10 days next week, don't really give a rats...

Be sure to take a DVD of 10 of Rudds speeches.

For $10 more you only get 5

Have a great time

 

[MACCA350]

If they do I'll take the lot out and put it with the Bendigo Building Society just to spite them.

just be sure to make them hand it all over to you in cash......just to pour salt in the wound

I wonder if the banks would topple over if everyone with cash in them took it all out.........actually they probably would allow that to happen and start freezing accounts

cheers

 

[kitehigh]

I wonder if the banks would topple over if everyone with cash in them took it all out.........actually they probably would allow that to happen and start freezing accounts

cheers

Not the big 4 as they have the Govt Guarantee (read tax payer Guarantee), and yes they would freeze everyone's account and pull down the shutters if there was a run on the banks. Than we would be back to food stamps.

 

[sinner]

Hi guys,

I just spotted this rather insightful comment at the very bottom of an ABC News article about banks resisting pressure to pass on the rate cut (except CBA passed on a portion of the cut, probably gaining them more customers in the meantime).

http://www.abc.net.au/news/stories/2009/04/07/2537624.htm

Andrew:

07 Apr 2009 8:26:21pm

At the risk of being electronically lynched, the reason the banks have not lowered rates are probably sound even if they are not innocent. Since being given a government guarantee, our dear banks have borrowed massively from international sources of credit. It is the cost of these loans which is determining the price of credit in Australia, and it remains fairly tight. BS about the government surplus aside, this country has to continue borrowing every month to finance its collective debts or face a current accounts crisis and it is the banks which have to secure a lot of these loans. So I suspect they are being cautious because, really, the availability of credit to them is not improving. Not good, I know, but thats what you get when you outsource your economy so you can buy giant televisions for ten years.

Commenter Andrew raises an interesting perspective, it has been reported that the gov guaranteed banks have attracted capital but his perspective is they have borrowed massively to continue funding the shenanigans.

This raises a rather uninviting question. Just how big is the demand for debt?
There is still USD2.5 trillion of debt issuance to come from the Fed and UST just this year, with forecast USD13tr for the decade, and our own comparatively puny debt market will have to deal with what is still a proportionally large debt issuance to fund the cash splash and insulation bats.

Mish has posted an article pointing out how ineffective the Feds efforts to monetise debt are, as the bond vigilantes are clearly aware the Feds purchases are a "drop in the bucket" compared to the huge issuances still to come.

http://globaleconomicanalysis.blogspot.com/2009/04/feds-effort-to-roll-snowball-uphill-is.html

In the end you can't disagree with Andrew, banks are borrowing hugely on the basis of a guarantee which can only be upheld through currency debasement. They are loaning the money to us and we use it for credit cards and home loans and whatever else at rates above most everything else on the wholesale debt market.
The international wholesale debt markets are the only place the banks can get these huge infusions of capital, and currently they are. If they get muscled out by a tidal wave of government debt hitting the markets, what happens?

All I can think of is that then the government will simply have to issue more debt in place of the banks?

My brain feels like this thinking about it:

 

[Aussiejeff]

Yep and as expected the banks have not cut or cut only .10, so the banks are the only winners out of this latest RBA cut.

The Big4 Bwanks are claiming that the interest cost of financing their ongoing "programs" is actually GOING UP. So, if that is true they are becoming caught between a rock and a hard place and will not reduce mortgage rates any further, no matter how far the RBA wants to push them.

So, does this mean this last rate cut by the RBA was the last bullet left?

If so (and I think that is what the Big4 are saying in effect) things could be about to get a lot worse here in the finance / banking sector than we think. Rather than the RBA "keeping some powder dry" for more rate cuts, the Big4 are hastily pouring cold water on what powder remains.

Hmm. If the banks claim they are so hard pressed at this early stage, it also raises the spectre of a series of "unexpectedly sharp" mortgage rate rises when the massive wads of World M3 start to puff up the dreaded inflation bubbles all over the shop.

We are staring at one Mutha of a rickety rollercoaster, but some just can't see it yet.

 

[Amor_Fati]

Actually the main reason rates are cut for these theorists, is to encourage lending and investment.

True, although cuts of 0 to 10 basis points won't excite many. The extra 30% depreciation claimable in the first year has the same aim, and will probably be much more effective. (But at the cost of an increased deficit).

The other major effect is the cashflow effect, from all those with variable rate mortgages having an extra $50 a month to spend. Also I guess in the current climate with many businesses struggling, the reduction in interest payments might allow them to struggle a bit longer, which would benefit employment a little. Although again this rate cut has not had much traction on the "real" interest rates Australians borrow money at.

Just for completeness the other two effects are a lowering of the exchange rate, theoretically improving international competitiveness. And an increase in asset prices due to the decreased cost of finance, theoretically encouraging people to spend, known as the wealth effect. Of course we never see these things in isolation, but that's the beauty of economics.