Interest rates on the way down?

[Chantal]

Just attended a very interesting conference today where it was suggested by a leading financial commentator that Australian interest rates can't remain as far apart from American rates in the future.

The options are that American rates will rise (unlikely given that there is talk they may even decrease to 0%) or else Australian rates will decrease in the near future to reduce the gap. Does anyone have any opinion on this?

Chantal


P.S. We're very happy that we've just settled our purchase today for an investment property in Cooloongup - thanks again to all of those who offered advice on Perth suburbs a few months ago!

 

[Kanga]

Welcome to the neighbourhood! PM me if you ever want a local to do a drive-by. He He He.
No, really, just hello & welcome to P.I.'ing in "Rockingham, Your Aquatic Playground."


KANGA

 

[MarkB]

Chantal

My post on this thread may be of interest:

http://www.somersoft.com/forums/showthread.php?s=&threadid=9687

In regards to the difference between US and Australian rates, I am afraid that there is no simple answer.

It really depends on domestic factors in each nation, plus (for Australia) the deemed importance of the US economy for ours.

In recent years the US economy has been very important (as a major market for our exporters) - therefore, movements in US interest rates have often affected movements in our own interest rates.

MB

 

[MarkB]

Latest CPI figures

CPI for the 2002/03 FY came in at 2.7%.

This is within the RBA's target range (2-3%) and the lowest CPI reading for almost 2 years.

Will this precipitate a fall in interest rates?

Remains to be seen.

I'm not prepared to have even an educated guess.

The big unknown is the effect of the (hot) property market on the RBA's thinking.

A fall in interest rates, while justified otherwise, would only serve to turn the gas up even more on property. The RBA wants to avoid a "bust" which it, and some others, fear is coming.

The latest lending figures (Aust. Bureau of Stats) show there was a 12 per cent rise in borrowing by investors in rental properties in May, and 48 per cent of new finance for established housing was for investment.

MB

 

[Mondie]

It seems in this day of instant information the likliehood of a cut varies daily. this article was published in The Age today;

Rates cut hope as inflation falls

And last week a cut was unlikely according to an article they published!! Who knows

 

[Desto]

Mondie, your Age link doesn't work.

Here's another report by the ABC
http://www.abc.net.au/news/newsitems/s908249.htm


Desto.

 

[Mondie]

Fixed now

l liked this quote in the ABC article from Mark Latham....

Peter Costello and the Howard Government have been spectators to this particular problem. If they had policies to smooth out the housing cycle we could have downward pressure on interest rates.

l wonder what those policies would be??

 

[MarkB]

I like Latham - I think he is smart.

However, he does need one of those time delay devices between his brain and his mouth - in his case I would suggest at least 10 seconds.

Obviously Mondie you are referring to the Latham gaff in which he said that negative gearing would be looked at.

In addition to those sort of things, some of what he says, while arguably true, you just cannot say - like calling John Howard an "a*** licker"

In this particular case, I don't see what his beef his.

Sure, everyone likes lower interest rates (well, not quite everyone).

But lets face facts here - the interest rate (cash rate) is at 4.75%.

This is within 1/2 a percentage point of the lowest levels since the 60's.

It is an old argument, but it still holds. When it comes to macro (and micro) managing the economy, the Coalition has the runs on the board.

The ALP does not.

The "recession we had to have", interest rates pushing 19% and 10+% unemployment are all ALP legacies.

John Edwards (Chief Economist at HSBC) wrote Paul Keating's Biography (Edwards used to be Keating's economics adviser) - in it there are some fascinating insights into economic management during Keatings term as Treasurer (1983-1991).

Like this little gem. The book acknowledges (it actually names names) that certain people in Treasury and Keating himself were of the opinion that for interest rates to be falling in time for a particular federal election - they first had to rise (to about 17%).

This is completely reprehensible.

Interestingly, the book acknowledges that the RBA Governor of the time (Fraser) was happy with this arrangement (Fraser was appointed by Keating, first as Secretary to the Treasury, and then as Governor of the RBA).

But at least one senior RBA official - an Assistant Governor by the name of Ian McFarlane was not. He was of the opinion that rates should fall immediately.

In light of this (and a few other things I know about him) I would have to say that McFarlane is precisely the sort of person you want running the RBA.

His 7 year term ends in a couple of months and personally I believe he will be reappointed.

And rightly so.

MB

 

[XBenX]

Chantel,

I dont think that American rates have much impact on the RBA's interest rate decisions - this is due to the fact that the major assumption of perfect mobility of capital does not hold true in the real world.

Search for perfect mobility of capital - its been mentioned before

 

[MarkB]

re: effect of the US economy

True Perfect Mobility of Capital (PCM) only exists in textbooks, though events of the last 2 weeks do show what effect the US can have on our economy (Greenspan made some comments and as a result the $A took a dive).

I actually posed the question of a good friend (ex. RBA).

For those interested in the technical details, his answer follows:

* * *

The short answer is that its all dependent upon exchange rates.

If Australia has a significant interest rate differential to the US or Europe or Japan or wherever, then it impacts on how much money will pour into (or exit) a country and therefore the exchange rate.

So essentially the bigger the differential, the more MP can impact on the exchange rate. And if the exchange rate is being shifted because of MP then they may want to move interest rates.

Thats the theory, at the moment I'm not sure what they'd be thinking given that the differential has been in existance for a while now and the exchange rate appears reasonably stable. Its also the first time in about 18 months that commodity prices have moved back into the long term trend towards tracking the $A.

* * *

And what does all this mean?

At the moment, XBenX is very close to the mark.

MB

 

[lissie]

Is the economics of interest rates in Oz different from NZ (I know the figures are - but are the underlying drivers different). Yesterday the RB cut the cash rate by 0.25% and its widely expected that this will happen again in Sept. Floating rates are now speculated to drop to about 6.7% (current 7.3% for the high street banks ) In fact we are already paying only 6.75% floating with a high street bank.....

BUT the long term fixed rates are on the way up - I saw speculation on this last week - got a guarantee of 6.5% for 5 years last Monday - on Thurs the rate went to 6.8% - the speculations seems to be that it will go higher e.g. http://www.leveragefinance.co.nz/ The arguement is that banks usethe US bond rates to borrow $$ to fund the longer term fixed loans. The US is expected to recover therefore the 3yr + bond yields are going up...

 

[MarkB]

Lissie

I don't know much about the RBNZ.

At one time the Governor of the RBNZ had it written in his contract that CPI would not increase past x%, else he would get his pay cut!

Though I actually think they did change that.

As NZ also has a floating dollar (like Aus) much of the economics of the interest rate would be the same (in terms of how it is set, the limitations of the policy, etc).

In Australia a similiar thing is happening with our yield curve - a slight fall in interest rates, followed by a rise.

MB

 

[Mr Turkey]

Longer term rates in the US are going up because of a risk in the currency, the $US. If the $US is going down gold will go up. Other countries seem to be lowering short term rates to lower their exchange rates.

There have been three peaks in the gold/dow ratio http://www.sharelynx.net/Charts/dowgold1900.gif After the first peak the US defaulted on its gold standard internally (Roosevelt 1933). After the second peak the US defaulted on its obligations internationally (Nixon 1971). After the third peak the US invaded Iraq. What luck to be sitting on so much oil as your currency collapses.

What a coincidence that the countries with the three biggest housing bubbles invaded Iraq.

If everybody keeps trying to lower their currencies I guess we will get inflation that could support property prices. But interest rates could go up before your rents and wages.

The whole thing is unstable and all roads lead to gold and commodities.

 

[MarkB]

Ian McFarlane has been re-appointed RBA Governor

Absolutely no surprises there......

http://www.treasurer.gov.au/tsr/content/pressreleases/2003/063.asp

"I am pleased to announce the reappointment of Mr Ian J Macfarlane to the position of Governor of the Reserve Bank of Australia for a term of three years, from 18 September 2003 to 17 September 2006."