Interest rates to go up: true of false?

Special Forces · 30th Oct, 2007

Interest rates to go up: true or false?

Hi all,

There are speculations the interest rate may go up three times in the nearest future (within half a year or something) due to inflation, etc. Have heard a few opinions from different sources confirming that recently (end of October 2007).

It is claimed even the lenders themselves may increase the rate independently of the reserve bank.

What do you think? Do you really believe it? Any trends?

Thanks.

alexlee · 30th Oct, 2007

Special Forces said:
Hi all,

There are speculations the interest rate may go up three times in the nearest future (within half a year or something) due to inflation, etc. Have heard a few opinions from different sources confirming that recently (end of October 2007).

It is claimed even the lenders themselves may increase the rate independently of the reserve bank.

What do you think? Do you really believe it? Any trends?

Thanks.

The bond market is basically assuming a 0.25% increase next week. The big banks (ANZ, I think) have said rates will increase independent of RBA rises because of increased funding issues. We've seen evidence of this amongst the fully securitised lenders. News from the US isn't encouraging: big writedowns by banks on subprime holdings, rumours of a super SIV to be funded by banks (why would they need one if markets are recovering?), property markets falling in major markets. There's no sign that the credit crisis is resolving itself. As long as the credit crisis continues, banks will be unable to finance as cheaply as before.

I don't know about 0.75% increase in the official rate in the next 6 months, but it wouldn't surprise me at all if we had 0.25% increase in Nov, 0.25% in Feb and another 0.25% just from the banks increasing their rates. Remember these days the variable rate we get is at a DISCOUNT to past 'standard variable rates'. So really, we've not only had historically low official rates but the smallest spread between the official rate and the variable rate as well.

No big deal. Your risk management should have allowed for this. I'm keeping an eye out on areas that I think will be affected by rate rises: time to open the wallet.
Alex

Peter 14.7 · 30th Oct, 2007

80% of my debt is fixed. That how much I believe we have rises to come.

If (when) the Aussie $ drops, inflation will go up big time.

Peter 14.7

Ausprop · 30th Oct, 2007

if the rates go up .75 as suggested here then the AUD will continue to surge ahead. I saw $1.12 being suggested today somewhere.

we need to remember that high interest rates are a symptom of a strong economy. If we want low interest rates just sack everyone and go on the dole.

Prakman · 30th Oct, 2007

If I sack everyone, then who is gonna fix my leaking tap, collect my rents while I am in Waikiki sipping my beverage?

Have a great day!

BV · 30th Oct, 2007

Special Forces,

I can believe that we will have 1 x0.2% raise and no more.
Remember that non bank lenders have already started increasing their rates so there is no urgent need for the RBA to intervene and to increase rates.

I personally don't believe that we will have a rate increase before the elections.
After the elections the inflation figure should come back a bit so there should be no case for a raise.
The banks ofcource know this.
We should be skeptical when the banks are trying to encourage us to fix our loans by offering lower fixed rates than the current variable ones.
This means that their long term predictions are for a lower average variable rate than the fixed rate they are offering.

It's nearly impossible to know what rates will do next year because there are too many unknowns.
I am worried that early in 2008 the peak of the subprime loans in the US will trigger a massive US stock market correction and it will also affect our stock market and our finance system. How exactly would these events affect us?
None really knows, I am guessing that a big stock market correction this time around will be different than any other time and that it will affect other sectors of our economy as well.

Cheers

FHB · 31st Oct, 2007

I think the reason some forecasters are seeing multiple rate rises is because the very low core inflation readings from December 06 and March 07 are expected to be replaced by numbers closer to 1% per qtr. So the RBA are likely to be seeing inflation jump outside its target range between now and mid next year.

I think the RBA will take every opportunity to raise rates, the economy is hot and unemployment is low, but they will only do it when they have the CPI number to cover their rear ends.

TJamesX · 31st Oct, 2007

Steve McKnights latest news mailout is calling for loan rates of 10%+ in the medium term....

I think there will be at least 2, maybe 3 25bp rises in the next 12 months, on the back of inflation. But I really do believe there is a hard ceiling not far off, you can't just compare historic cash rates with today's rates and say we are historically low..... of course we're historically low - but the debt burden is historically high (very high!!!). Each basis point rise has much more impact today and brings us much closer to the tipping point (where people just shut the wallet and stop spending).

I don't think we're too far away from that tipping point (chart from steve keens debtwatch blog)

BV · 31st Oct, 2007

FHB said:
I think the RBA will take every opportunity to raise rates, the economy is hot and unemployment is low, but they will only do it when they have the CPI number to cover their rear ends.

Could do but I don't believe they will have the guts to increase rates during election time..

Cheers

mmmggg · 31st Oct, 2007

Having a shot.

I am truly a beginner to all of this so correct me if I'm wrong. Firstly BV the RBA is independent to the Govt and therefore can if it wants to increase the rates prior to election will do so. Secondly don't we beat the up and down of interest rates by fixing them. Finally can't the bank do whatever they want like I say fixed rates which is what I have my investment loans in but I don't really at the end of the day believe their fixed. It just gives another dimension as to variable rates. In other words the fine print in the contract with the bank says they can do what they like. Harsh as it is that's life.

FHB · 31st Oct, 2007

BV said:
Could do but I don't believe they will have the guts to increase rates during election time..
Cheers

If the RBA don't raise without a good explanation they will lose credibility and be accused of bias, not to mention the markets will be surprised, and they don't like that.

They really cannot afford to hold off, unless something big happens between now and Melbourne Cup....

equitymate · 31st Oct, 2007

FHB said:
If the RBA don't raise without a good explanation they will lose credibility and be accused of bias, not to mention the markets will be surprised, and they don't like that.

They really cannot afford to hold off, unless something big happens between now and Melbourne Cup....

Bias surely not, considering most are appointed by the treasurer. That is Treasurer Costello.

FHB · 31st Oct, 2007

TJamesX said:
Steve McKnights latest news mailout is calling for loan rates of 10%+ in the medium term....

I think there will be at least 2, maybe 3 25bp rises in the next 12 months, on the back of inflation. But I really do believe there is a hard ceiling not far off, you can't just compare historic cash rates with today's rates and say we are historically low..... of course we're historically low - but the debt burden is historically high (very high!!!). Each basis point rise has much more impact today and brings us much closer to the tipping point (where people just shut the wallet and stop spending).

I don't think we're too far away from that tipping point (chart from steve keens debtwatch blog)

I don't know what the ceiling would be based on, the RBA are chasing inflation, if people get themselves burnt in the process, I'm not sure the RBA will be able to stop for their sakes. Of course if spending drops too much, then the economy will suffer. But 2.5 points of increases hasn't slowed it, will another 2.5?

Also even though inflation is running at <3%, money growth is 15%, the RBA may find they have to play catchup late in the tightening cycle. I don't know.

BV · 31st Oct, 2007

equitymate said:
Bias surely not, considering most are appointed by the treasurer. That is Treasurer Costello.

Everyone is assuming that the RBA is 100% independent but it can't be, there are people on the board who have reason not to want to affect the election outcome.
The economy surely can wait a few weeks till the elections are over.
If the RBA increase rates now IMHO it would be seen as that they are forcing a change of government and none wants that.
Cheers

equitymate · 31st Oct, 2007

BV said:
Everyone is assuming that the RBA is 100% independent but it can't be, there are people on the board who have reason not to want to affect the election outcome.
The economy surely can wait a few weeks till the elections are over.
If the RBA increase rates now IMHO it would be seen as that they are forcing a change of government and none wants that.
Cheers

Definately agree. Here is an interesting read about vested intrests over at the RBA ...http://www.theaustralian.news.com.au/story/0,25197,22650589-5013946,00.html

"The six others, including Mr Corbett, are external board members and most have links to big corporations that do not want an interest rate hike. Most, too, have links to business organisations that have been running a scare campaign against tossing out the Coalition in favour of Labor"

FHB · 31st Oct, 2007

The Howard govt has hung its economic credentials on the RBA independence, if this is seen to not exist, does this help or hurt their election hopes?

FHB · 31st Oct, 2007

equitymate said:
Definately agree. Here is an interesting read about vested intrests over at the RBA ...http://www.theaustralian.news.com.au/story/0,25197,22650589-5013946,00.html

"The six others, including Mr Corbett, are external board members and most have links to big corporations that do not want an interest rate hike. Most, too, have links to business organisations that have been running a scare campaign against tossing out the Coalition in favour of Labor"

I find this a really strange article. Big business bosses aren't stupid, they know that a rate rise now means longer sustainable growth for the economy over the long term. This is in their interests.

Here's another article from the Australian:

http://www.theaustralian.news.com.au/story/0,25197,22655068-7583,00.html

Former governor Ian Macfarlane has said the 2001 federal election "did have some small weight" in the timing of interest rate decisions by the bank. But Macfarlane told author Stephen Bell in his book Australia's Money Mandarins that when there was a "really strong case" then "we would always do it regardless of the election campaign".

Decoded, this means the bank would not move rates in an election campaign if the case were marginal. The trouble for Howard and Costello is that the case now looks far stronger than marginal. Moreover, Macfarlane's successor, Glenn Stevens, seems distinctly uncompromising.

Giving evidence to parliament on August 17 in response to a question from shadow minister Craig Emerson about whether the bank would move on rates in an election campaign, Stevens said: "I think that the only answer I can give is: if it is clear that something needs to be done, I do not know what explanation we could offer the Australian public for not doing it, regardless of when the election might be due. I do not think that there is any case for the Reserve Bank board to cease doing its work for a month, in the month that the election is going to be. I doubt very much that members of the public would regard that as appropriate. So, should that data, or other data for that matter, make a clear case, I feel we have no choice; nor should we have any choice."

A .95% inflation reading is not marginal, and considering the revised March reading, Stevens is already behind the game.

Ausprop · 31st Oct, 2007

just read Steve McKnights email... he is calling it doom and gloom and tipping rates to be thru 10% by mid 2009.

FHB · 31st Oct, 2007

I guess a drop in the AUD, which could be triggered by slowing growth, could see interest rates continue to rise following inflation, while the economy stagnates. Interesting times ahead, lots of inbalances emerging....

equitymate · 31st Oct, 2007

FHB said:
I find this a really strange article. Big business bosses aren't stupid, they know that a rate rise now means longer sustainable growth for the economy over the long term. This is in their interests.

Another 30 days reprieve wont matter if vested interests are at work. "Uncertainty surrounding the sub prime crisis " would be the likely reason given by commentators. Saying that, I heard 32 out of 33 senior economists are tipping a rate rise next week. I am sure they are more quallified than most of us.
I am always a fan of conspiracy theories though....

Interest rates to go up: true of false?

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