Interest Rates

[Punchy]

I believe that interest rates will increase by more than people expect. These are my reasons

1) despite repeated warnings about our current account deficit (importing more than we export) as a country we still import value added consumer goods. People just haven't got the message that we can't keep buying shiney doo-dads without there being some check/balance.

2) Repeated warnings on personal debt - yet we continue to borrow. The "what" we borrow for isn't as important as people think. The "borrowed" money has come in from overseas and has to be repaid with interest.

3) Pressure on the government to cut taxes especially for lower income earners. This will increase the money circulating in the economy and would add to the first point.

4) Wage pressures - with all the hype about skills shortages employee's may start asking (and getting with any luck) more pay which add's to all three of the previous points.

I can't see the hoWARd gov't being able to manage not to give a tax cut. It would take great courage to resist that pressure. Catch 22 for them. If they cut taxes interest rates will have to increase.

These are just my thoughts. The idea of increasing Interest rates is to decrease the amount of money being spent in the economy. Either by increasing the repayments for those in the RED or encourage saving by those of us in the BLACK. All comments by those in the know say we are spending to much. People aren't saving so the big stick will have to be used. OH PLEASE

What are your thoughts

 

[topcropper]

I'm not too worried about the current account deficit in the short term, the massive increase in prices recieved for our energy and resource assets in the coming years should fix things for the short term. The big question though is how long the boom will last?

An article I found to explain what I'm trying to say....

http://www.theaustralian.news.com.au/common/story_page/0,5744,12546187%5E643,00.html

See ya's

 

[Aceyducey]

Punchy,

My response is that you have just said that you expect interest rates to increase more than people expect...

Therefore logically we can expect infinite interest rates at some point in the near future.

After all you qualify as a person and rates will therefore rise more than you expect....infinite regressive loop.



The government has no need for a large stick right now...in fact it looks like tax cuts coming which should boost consumer spending. A little more inflation is OK right now provided there's also that extra growth in GDP.

Cheers,

Aceyducey

 

[House_Keeper]

I believe that interest rates will increase by more than people expect.

What do you mean by this exactly? 2% , 4%?

I don't feel I have a particular skill at guessing interest rates. I prefer to look at 3 year bond interest rates. People setting theses rates bet their money on it, so they better have put some thought into it. The rates are at 5.7%, which seems to indicate a minor rise over the next few years. Based on that I would be surprised if we saw an increase of more than 1% over the next year.

my 2% worth.

Cheers,

 

[quiggles]

Aprat from Acey's remarkably trivial point , most people expect another raise of 0.25% or nothing at all for quite a while. 1% over the next year would (I feel) prove Punchy correct.

And I think that post nailed it, frankly. We congratulate ourselves that we are borrowing to invest but the RBA doesn't see it the same way - it is not, to them, a productive investment (does not add to GDP) and the more so since most are buying second hand homes and therefore not stimulating the building industry.

If you are borrowing to invest in shares, same argument applies - only IPOs are pushing money towards new investment in productive capital (yes, I'm simplifying, but the principle is true).

Interest rates will go up .25% next month, then there'll be a wait and see period. That's my call, anyway.

 

[Peter 14.7]

I agree with Quiggles. The last rise has bitten into confidence seriously for the first time.

The first two were a shock but people half expected them and it was from a very low base. Most people felt stung but the pain quickly went away when the realised the sky was not falling.

This time it is not a sting but a whack because many said there was no reason. Economists even thing they RBA got it wrong.

So they probably will go again for maiximum impact and then hold. I mean why wait another month or two unless in doubt.

Part of carrying a big stick is swinging it every now and then.

Regarding the comment re economy and impact I agree totally. No-one can predict the future and history doesnot help that much in todays world or massive change.

I can list a number of example where economists, business analysts etc. got it wrong.

Home Movies Via VCR will be the death of Cinemas.

Prediction That no-one will go to q movie for $14 when you can rent Video ( now DVD) for $5!

Reality: the boom in video rental provided a second earning string for movies somuch that more movies were made as they can recover costs over a longer time.

More movies has resulted in better moves which has encouraged more people to go to the movies.

As as a bonus... Whilst Vidoes were popular to rent they failed as a buy option because of lifecycle issues.

DVD experiences little wear and hence has boomed as Buy for Home Option. Demand is such that old Classics can be re-released with huge profits ($39 each ) all over again for the price of a CD disk.

And... Boom In Home Movies and Pay TV has encouraged the upgrade to Plasma and Wide Screen TVs to suit movie format. Another consumer growth point into what was previously a mature market (TV's)


So you can see no-one can see the future effect of anew product ( DVD), change in society ( baby boom) will have.

On the comment re tax cuts IMHO the reality is this. You give tax cuts of 5% and people go out and spend on items with 10% GST . It moves the tax from smaller base ( wage earners) to a larger base ( consumers).

Who wins?

That is why wages are steady and not skyrocketing because we all think with each year or so's tax cuts we have more cash but the tax take is still increasing via bracket creep and gst. We just dont feel it.

But if tax was going up each year without the GST I bet all would be crying for increased wages.

Peter 147

 

[quoll]

Part of carrying a big stick is swinging it every now and then.

I agree Peter.

I've never been able to understand the logic behind economic intervention, so I've just accepted that it is part of the game. Same as a referee in AFL who has to impose new rules each season. They have the power to increase or decrease interest rates so they weild their stick.

I don't seem a problem with a high level of consumer debt, it's their choice if they want the big TV, new car and are happy to rent why should I try and teach them any different.

I see the RBA as the teacher trying to educate the population that consumer debt is bad, and to teach you this we will increase the interest rate so it makes it more costly to buy your doodads on credit. If they want to increase savings they need to teach kids (brainwash) at school, most of the population isn't going to save more money just because they can get another .25% interest on it.

So just accept the RBA as a part of the game and keep playing by the rules that are current.

Have fun.

cheers
quoll

PS enjoy yourself, this is a game and it's fun.

 

[Punchy]

What do you mean by this exactly? 2% , 4%?

I don't feel I have a particular skill at guessing interest rates. I prefer to look at 3 year bond interest rates. People setting theses rates bet their money on it, so they better have put some thought into it. The rates are at 5.7%, which seems to indicate a minor rise over the next few years. Based on that I would be surprised if we saw an increase of more than 1% over the next year.

my 2% worth.

Cheers,

My thoughts are up around the 10% mark before they start coming down. I have no idea on a time frame.

I am thinking that people will want their cake and eat it as well . They'll want low interest rates and low taxes in a booming economy. Howard can influence IR through economic management but that will make him unpopular as he cuts services and raises taxes. So I reckon he will do bugger all. Maybe even cave in to popular opinion *again* and cut taxes. That will leave the ball in the Reserve Banks court and the only tool they have is Interest Rates. Finally some elected politician will make the tough decisions and reverse the trend.

I say 10% because it is a real bogey man of a figure. It will be WHOA double digits! Up until then people will be saying "but under Keating rates were 18%"

10% will look like a return to the bad days. Personally I welcome higher Interest Rates. Something has to give sooner or later and I'd prefer that someone in public office had some plan (even a bad one would be nice for a change)

my 10%

 

[aussierogue]

Yep

I agree with most comments. i think we give ourselves (australian govt/reserve bank) etc too much credit for actually being able to determine the trend in interest rates. Our economy, economic success is based mostly on what the rest of our larger trading partners are doing.

Our current growth is due in the main to china...

In the main we 'react' to global influences rather than create them.

Follow the world trend in interest rates and Australia's will be thereabts. Notice i said trend not LEVEL - as this is anyones guess..

cheers

 

[pete_w]

one thing all investors (except maybe speculators) hate is uncertainty. the rba knows this and seeks to warn people about things that may have a material impact on their circumstances. the quarterly statements on monetary policy are worth a read, even just the introduction chapter is enough to get a good view on the rba's thinking.

http://www.rba.gov.au/PublicationsAndResearch/StatementsOnMonetaryPolicy/index.html

another thing to look at is the TWI http://www.rba.gov.au/MediaReleases/2004/mr_04_12.html Japan, Europe and the US are our 3 most important trading partners (hence their higher weightings). the australian interest rate is higher than those countries, which gives a bit of relative comparison. that said and done, i still think rates will rise. its too hard to second guess the rba, but i do believe it will give prior warning. i dont think it will be next month, as its too soon to guage the effects of the previous rate rise, but i still think another 0.25% before the end of the financial year is likely. the may statement on monetary policy should be an interesting one.

if you have some time theres lots of interesting stuff to read at http://www.rba.gov.au/PublicationsAndResearch/

 

[TomL]

Thank you all for an interesting topic with some good observations.

I'll be the first to admit I know NOTHING about monetary policy, and the 'proper' use of the 'big stick'.

Thus, I fix some of my rates in a managed fashion - I may pay slightly more than the variable at any given time but I sleep sounder knowing interest rate shocks wont ever affect me enough to send me bankrupt.

Now - I have a question on the following point, and it may be beneficial to ther as well .. it may help clear something up for people that use 5 and 10 year fixed rates as indicators.

I don't feel I have a particular skill at guessing interest rates. I prefer to look at 3 year bond interest rates. People setting theses rates bet their money on it, so they better have put some thought into it. The rates are at 5.7%, which seems to indicate a minor rise over the next few years. Based on that I would be surprised if we saw an increase of more than 1% over the next year.

Dont the institutions lending at this rate also lock in their own borrowing rate for that exact same timeframe? That way they cant lose - they wouldnt be affected by any movement, they make a fixed profit. Borrow at a lower fixed rate for Xyears, and on-sell it at a higher markup to us the consumers.

Thats the way I assumed it worked, so I never looked at the longer term rates as a reliable indicator of which way rates are likely to go.

I mean - why would financial institutions open themselves up in such a risky way if they couldnt lock in their rates and their profit margins as well?

Confused (again)

Anyone?

 

[Andrew_A]

Hedging

The more I learn about economics (from this forum mainly) the less confident I am predicting where interest rates will end up. One thing I am learning is that there are plenty of smart ways to go about managing your risk.

For those who have a larger portfolio of borrowed money is anyone using a different method of hedging risk other than fixing rates? I'm aware of a loan product that lets you juggle money between fixed and variable with no costs (must have a lot of equity spare though).

Does anyone on SS hedge against market rates using the interest rate financial markets? I think if you had exposure measured in the millions and high LVR then this would be a real option to consider.

 

[Andrew_A]

Thats the way I assumed it worked, so I never looked at the longer term rates as a reliable indicator of which way rates are likely to go.

I mean - why would financial institutions open themselves up in such a risky way if they couldnt lock in their rates and their profit margins as well?

Confused (again)

Anyone?

Hi Tom, This subject was very well covered by Pitt_St. Seems the bank lock their profits on both the fixed and variable loans, so perhaps they aren't even that concerned about forecasting accurately where rates will go.

 

[Jamie]

My thoughts are up around the 10% mark before they start coming down. I have no idea on a time frame

Why?

I say 10% because it is a real bogey man of a figure. It will be WHOA double digits! Up until then people will be saying "but under Keating rates were 18%"

Inflation was also in double digits at the time (around 13%). Can you really see the current Government allowing inflation to run in double digits (which would be a necessary precursor to double digit interest rates)?

Where is Pitt St when you want him

 

[Punchy]

I can't see the current Government doing anything meaningful (unless W tells him to)

Official inflation figures are rather suspect. How many widescreen Plasma's do people buy? So what if they are cheaper now than they have ever been? When they base the rates on the staples I think we would see a truer reflection.

 

[Andrew_A]

I can't see the current Government doing anything meaningful (unless W tells him to)

Official inflation figures are rather suspect. How many widescreen Plasma's do people buy? So what if they are cheaper now than they have ever been? When they base the rates on the staples I think we would see a truer reflection.

Suspect? How so? I thought inflation was very closely related to the staples (CPI)?

2000 125.2 126.2 130.9 131.3
2001 132.7 133.8 134.2 135.4
2002 136.6 137.6 138.5 139.5
2003 141.3 141.3 142.1 142.8
2004 144.1 144.8 145.4 146.5

CPI figures for each quarter since 00. Very low inflation, and as Jamie points out an important figure is "Interest rates - Inflation rate" rather than the catchry of (rates were x% under Keating)..

Yep I miss Pitt_St as well, where did he go?

 

[quiggles]

Wouldn't you consider housing a staple? It's NOT included at the instruction of Malcom Fraser when he was PM. You need to look at what is and is not included and what weighting they are given.

I suspect for many plasma screens are becoming a staple

 

[quiggles]

My thoughts are up around the 10% mark before they start coming down. I have no idea on a time frame.

No, I don't agree, or at least not within anything less than a seven year time frame (i.e. 2 elections out). Government doesn't set the interest rate, but it can influence it.

Essentially doubling the interest rate would cause massive bankrupticies across the nation.People would have moved from 30 to 60 percent of gross income on debt. Couldn't be done without large inflation and bigf wage campaigns.

 

[Sunfish]

as Jamie points out an important figure is "Interest rates - Inflation rate"

If this is true, why are interest rates important from the point of view of leveraged investments?

Interest rates go up then so does inflation and your cap gains (which are what you are chasing).

Stress test and be sure you can survive a bad year and you'll come out the other end smiling.

Thommo

 

[House_Keeper]

Dont the institutions lending at this rate also lock in their own borrowing rate for that exact same timeframe? That way they cant lose - they wouldnt be affected by any movement, they make a fixed profit. Borrow at a lower fixed rate for Xyears, and on-sell it at a higher markup to us the consumers.

Thats the way I assumed it worked, so I never looked at the longer term rates as a reliable indicator of which way rates are likely to go.

I mean - why would financial institutions open themselves up in such a risky way if they couldnt lock in their rates and their profit margins as well?

Confused (again)

Anyone?

I wasn't talking about fixed interest rates as offered by the banks. I was talking about the bond market as set by the financial markets. Yes, the banks buy bonds and sell fixed rates, effectively locking in a nice margin. But That's not what I was referring to. I was saying that if long-term interest rates are about the same as current rates, the financial markets are not expecting a large increase in interest rates. They can be wrong, like you and me, but they are betting their money on it.

Cheers,