Fixed rate

[rabidz]

About a couple months ago, I still remember people talking about interest hike, but now it seems more likely the interest rate will stay low.

It looks like a lot of lenders reducing it's fixed rate (ranging 3-5 years) at the moment.

If the financial institutions drop its long fixed rate (a.k.a 3-5 years), does it mean that the australian economy is not going to grow a lot in the next (say) 5 years time? Is it more likely we will have this level of cash rate in the future?

 

[Peter_Tersteeg]

Fixed rates aren't tied to the RBA rate, nor are they actually a prediction by the lenders. Fixed rates are funded by other money sources, such as bonds, both domestically and internationally. In many cases the money can be traced back to investment institutions and super funds for example.

As a result, fixed rates are an economic indicator, so it would be fair to say that the market expects rates to remain low for the foreseeable future. This is of course no guarantee and to analyse it you'd need to look both to Australian and international market conditions.

It's best to simply look at the rate, decide if you're comfortable with them. Factor in how you'll feel if rates increase or decreased, then make your decision and be happy with it.

 

[Mick C]

THere's a chance fix rate "may" be going down again esp the 3-5 years one....as WBC, NAB, CBA, Maquaire, ING, Citibank, AMP and HSBC just flipped over Billions of dollar in RBS ( residential backed securities) into the euro market tied to a min 3 years bond.

+ 5 days ago europe reduced their cash rate!!! so this will have a flow on effect on our fix rate rather than variable.

 

[D.T.]

Some places reduced their cash rate so much that its now negative

 

[Michael_X]

How does a negative cash rate work?

 

[Kinnon Bell]

How does a negative cash rate work?

Here's a link to a SMH article that explains it.

"Negative interest rates

Negative interest rates are exactly what they sound like – depositing money actually attracts a charge rather than earning interest. In this case, the negative rate is applied when Europe's commercial banks deposit with the ECB.

The idea of this is that the banks will not deposit any more than necessary with ECB and instead will lend the money, or invest in more profitable activities with a higher return."

 

[euro73]

The strategy is a deliberate one by the European Central Bank to almost "force" the big European Banks to employ that capital elsewhere - i.e By making it unattractive to them to park that money with the ECB and essentially earn diddly squat, the ECB hopes it will prompt those banks to lend it out to people , small businesses, etc - to try and generate some economic activity . Some commentators think that the big Euro Banks may not wish to lend into Europe and instead choose to purchase foreign currency reserves such as the AUD, or Canadian dollar etc... save havens , or "perceived" safe havens at least. This would only serve to drive up our dollar again.

 

[Paul@PFI]

I used to manage a money market operation for a major aussie bank. I can explain the fixed rate interest rate process.

The cash rate is set by the RBA as an interbank exchange settlement rate. Its the "offical rate" for risk free daily returns. The financial markets then base their rates on this...ie a margin generates a profit. The bank will offer 7 day, 30 day rates etc. One bank may need cash for the 7 days and another have excess cash.

The bank bill market is a very high volume market for setting rates of 30 days and beyond usually up to around 6 months. It is actively traded through natural bank bills (10-4pm) and futures (24hrs). Any variance between the "spot" market for bills and the futures is called arbitrage and it does occur but infrequently and is smoothed by the natural market.

Demand and supply forced set the actual 90 day bank bill and futures markets and economic data, exchange rates and interest rates in other economies influence the market. Longer term rates are synthetically generated by a "bank bill swap market" that creates a yield curve for longer term rates over 12ths, 2, 3, 5, etc years. It combines futures contracts of longer terms with phyisical settlement of bank bills. Short dated bonds also set the rates and variances between respective product markets is called arbitrage. The market fills those variances quickly so a consistency is created by other demand and supply forces. A margin is applied to this and thats where fixed term rates come from.

What occurs to the cash rate doesnt really influence term rates. However general direction of interest rates will. The shape of the long term yield curve constantly changes as does individual bank requirements over that term. eg A bank doing a 5 year lend may have less demand for more 5 year loans and so be less aggressive in its 5 year rate v's a nother bank that wants to fill its 5 year lending book.

 

[rabidz]

THere's a chance fix rate "may" be going down again esp the 3-5 years one....as WBC, NAB, CBA, Maquaire, ING, Citibank, AMP and HSBC just flipped over Billions of dollar in RBS ( residential backed securities) into the euro market tied to a min 3 years bond.

+ 5 days ago europe reduced their cash rate!!! so this will have a flow on effect on our fix rate rather than variable.

I know that ING and Advantege already reduced these fixed rate. Maybe the Big 4 will follow?

I used to manage a money market operation for a major aussie bank. I can explain the fixed rate interest rate process.

The cash rate is set by the RBA as an interbank exchange settlement rate. Its the "offical rate" for risk free daily returns. The financial markets then base their rates on this...ie a margin generates a profit. The bank will offer 7 day, 30 day rates etc. One bank may need cash for the 7 days and another have excess cash.

The bank bill market is a very high volume market for setting rates of 30 days and beyond usually up to around 6 months. It is actively traded through natural bank bills (10-4pm) and futures (24hrs). Any variance between the "spot" market for bills and the futures is called arbitrage and it does occur but infrequently and is smoothed by the natural market.

Demand and supply forced set the actual 90 day bank bill and futures markets and economic data, exchange rates and interest rates in other economies influence the market. Longer term rates are synthetically generated by a "bank bill swap market" that creates a yield curve for longer term rates over 12ths, 2, 3, 5, etc years. It combines futures contracts of longer terms with phyisical settlement of bank bills. Short dated bonds also set the rates and variances between respective product markets is called arbitrage. The market fills those variances quickly so a consistency is created by other demand and supply forces. A margin is applied to this and thats where fixed term rates come from.

What occurs to the cash rate doesnt really influence term rates. However general direction of interest rates will. The shape of the long term yield curve constantly changes as does individual bank requirements over that term. eg A bank doing a 5 year lend may have less demand for more 5 year loans and so be less aggressive in its 5 year rate v's a nother bank that wants to fill its 5 year lending book.

A very informative process. Thanks.