What will boost rates ?

[see_change]

This might seem contradictory to my other post ( changing expectation ) but at the moment the on of the main thing that's driving the current take off in Sydney is historically low interest rates .

There seems no immediate expectation that interest rates are going too rise soon , but having lived through interest rates go up to 18 % after buying our first house and up to 10 % not to long ago I'm wary . We currently have one loan locked at 6.8 because it seemed a bargain at the time .

I don't normally involved in economic debates , I'm more a chartist , watching the market respond to fundaments and acting accordingly and that's what I'm doing now. Seeing the market react and buying , but I'd like to hear what those with great understanding see as possible senario's as to what fundament changes could lead to interest rate increases further down the line.


Cliff

 

[HotRod]

Inflation increasing.

Business increasing, employment down.

But whilst the world economy is in the basket case it is it will be some time until rate get way up high again.

They might go back to 3.5% but not much more.

 

[Deltaberry]

We'd have to see unemployment dropping to start.

 

[MarkB]

I've had to dust of the brain to write this.... and there is more dust than brain atm.

All imho, of course...

It's quite feasible to imagine a situation where (for example) with a falling AUD and rising oil prices (among other things, I'm just picking on two simple metrics) that the RBA Board sees inflationary pressures and starts to raise rates - even if unemployment remains at levels most objective people might find objectionable.

‘It is the duty of the Reserve Bank Board, within the limits of its powers, to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia and that the powers of the Bank ... are exercised in such a manner as, in the opinion of the Reserve Bank Board, will best contribute to:
a. the stability of the currency of Australia;
b. the maintenance of full employment in Australia; and
c. the economic prosperity and welfare of the people of Australia.’

See: RBA - Our Role

Central bankers love their target bands and get very attached to them - principally (I believe) because they honestly believe that a low CPI (in this case an average of 2-3% over the medium term / business cycle) is the best way they can fulfil points a, b, and c, above.

Example -> I was invited to hear Don Brash* (I'll tell you who he is in a moment) speak at the Auckland University of Technology by a friend of mine (AUT econ PhD grad) a few years ago and I asked him about the appropriateness of inflation targets (this was when the GFC was really starting to bite) and he was very adamant that the costs of even a few percentage points of inflation more than justified the use of cpi targeting as a MP regime (the costs he as referring to were things like uncertainty and the impact this can have on investment / falling real incomes, etc).

So unemployment figures alone could give you a false signal.

Like I said, I believe most objective people** would think that unemployment is a major factor, but it could just be white noise (the irony being that - for those households affected - nothing impacts upon real incomes quite as much as unemployment does).

*Don Brash was the Governor of the Reserve Bank of NZ from 1988 to 2002. The RBNZ pioneered the use of inflation targeting in 1990, and we saw fit to follow suit in 1994.

**I don't consider the RBA Board to be objective. I'm sure the world always looks pretty effing rosey when you're being served tea and biscuits on silver platters in the Boardroom of Martin Place.

but I'd like to hear what those with great understanding see as possible senario's as to what fundament changes could lead to interest rate increases further down the line.

Domestic factors (a resurgence in the resources sector chief among them) aside, imho, the elephant in the room is the US Federal Reserve (and this is old news, btw...)

By running the printing presses Bernanke has flooded the market with USD. If you stop the presses, you stem the flood. At some point the Fed will stop or cut back on printing money. And when that happens, our dollar will fall (that's just supply and demand 101). There is some talk it could start to happen soon, but who knows until it actually does happen...

I got into trouble a few years back for saying this... I suspect 70 - 80c is where most economists would estimate the fair value of the $AUD to be. So I won't go down that path....

But (and you all would have seen this) the RBA said this on 2 July:

The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy

There's nothing at all cryptic about that statement -> the RBA thinks the AUD is HIGH at ~90c US.

But what's going to happen first...

Will the Fed stop printing monopoly money?

Will the dollar continue to drift down?

Or will the RBA decide to bring the dollar down by cutting rates? Or will they bring the dollar down (or try to) by talking about cutting rates? (more likely)

No-one has all the information, so it's all guestimation atm.

 

[plusnq]

Thanks Mark. Well covered and insightful as usual.

Cheers

Shane

 

[Deltaberry]

On that point, right now we are at risk of falling below the 2-3% CPI band, which would imply rates are more likely to fall than rise.

 

[MarkB]

What follows is the full text of the Statement by Glenn Stevens on 2 July.

Fwiw and imo,

• where I see a comment that indicates interest rates could go up, I will have red text
• where I see a comment that indicates interest rates could go up, I will have green text
• where I see a niether up or down comment, I will have orange text
• And background information / guff will be in black.

At its meeting today, the Board decided to leave the cash rate unchanged at 2.75 per cent.

Recent information is consistent with global growth running a bit below average this year, with reasonable prospects of a pick-up next year. [the RBA looking medium term and seeing both good and bad points = overall steady as she goes] Commodity prices have declined further but, overall, remain at high levels by historical standards. Inflation has moderated over recent months in a number of countries. [remember, not every central bank uses inflation targeting]

Globally, financial conditions remain very accommodative. However, a reassessment by the market of the outlook for monetary policy in the United States has seen a noticeable rise in sovereign bond yields from exceptionally low levels. Volatility in financial markets has increased and there has been some widening of credit spreads [this last paragraph is a red for some countries, like the US].

In Australia, the recent national accounts confirmed that the economy has been growing a bit below trend over the recent period. This is expected to continue in the near term as the economy adjusts to lower levels of mining investment. The unemployment rate has edged higher over the past year and growth in labour costs has moderated. Inflation has been consistent with the medium-term target and is expected to remain so over the next one to two years, notwithstanding the effects of the recent depreciation of the exchange rate.

The easing in monetary policy over the past 18 months has supported interest-sensitive spending and asset values and further effects can be expected over time. The pace of borrowing has remained relatively subdued, though recently there are signs of increased demand for finance by households.

The Australian dollar has depreciated by around 10 per cent since early April, although it remains at a high level. It is possible that the exchange rate will depreciate further over time, which would help to foster a rebalancing of growth in the economy.

At today's meeting the Board judged that the easier financial conditions now in place will contribute to a strengthening of growth over time consistent with achieving the inflation target. It decided that the stance of monetary policy remained appropriate for the time being. The Board also judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand


* * * end of statement / start of my semi educated bulldust * * *

The danger with these things (this approach) of course, is that these things are not really designed to be read line by line (though I confess that when I read this the other day I went specifically looking for a comment on the $AUD). Instead they are meant to be read in whole because they tell an overall picture (even if the artist is more a monkey than a Monet).

Note also that economists are famous for their inability / unwillingness to give a straight answer, indeed my personal favourite economist joke is:

I met a female economist in a bar the other day and I asked for her number.

She gave me an estimate.

Taking a step back from the line by line approach, for me the message is pretty clear.

To me, it seems that the RBA is actually pretty happy with the OCR @ 2.75%. They make a couple of references to the medium term outlook and how the CPI would appear to be in check (based on what they can see going forward), and they think the global economy should pick up a bit, etc. Yes they think the $AUD is high but they seem to be thinking that increasing pressure on interest rates in the US will take some heat out of our dollar (save them from doing it, perhaps?).

Note also -> the nominal OCR is lower now than it was during the GFC, and the real OCR is lower than it has ever been (notwithstanding the GFC, though that event may yet not be over).

But they also say (just to keep us all guessing) that if they need to they will act to boost domestic demand.

So who the hell knows!

See: RBA Chart Pack

 

[Deltaberry]

The green bit is meant to be going down yea, not up, yea?

Scope for further easing?

 

[MarkB]

The green bit is meant to be going down yea, not up, yea?

Yes, Green = down (or from an economy wide perspective, the ability to accelerate under lower rates).

Scope for further easing?

Yes, there is scope for further easing (they still have 275 bps up their sleeve, and a preparedness to use some of it if they need to.)

Is there desire to ease interest rates further at this moment?

No, because it seems they'd rather settle at 2.75% based on all of what they say.

 

[willair]

I don't normally involved in economic debates , I'm more a chartist , watching the market respond to fundaments and acting accordingly and that's what I'm doing now. Seeing the market react and buying , but I'd like to hear what those with great understanding see as possible senario's as to what fundament changes could lead to interest rate increases further down the line.


Cliff

You only have too look into the words of Max-Beck,,I can't control the market,,nobody can,,just those few words from a Man with that experience..

As far as the rates going up I don't know how you would cover the downside,you can only bang up the rents so far then default,,i like you started at 18% at the time it seemed normal,that's what everyone else was paying business people were in the 20-28% range
but it's a different world now,i'm more into the asx ,,any sideshow sell side analyst in equities markets have only one way to fill up the bmw,and from what I read there seems too be a lot of high end managements teams that know what happening long before the coal face investors do..
imho..

 

[atti]

there is no boosting, the only way is down, kevin young said rates will be at 2.0% interest by 2014 april. and house prices will increase 15% in 2 years (assuming rates will head further south and investors will rack up more debt). thats the article i got from KY himself and somehow looks that way as investors already starting to purchase again rest of the heard will usually follow soon after.

 

[BayView]

This might seem contradictory to my other post ( changing expectation ) but at the moment the on of the main thing that's driving the current take off in Sydney is historically low interest rates .

There seems no immediate expectation that interest rates are going too rise soon , but having lived through interest rates go up to 18 % after buying our first house and up to 10 % not to long ago I'm wary . We currently have one loan locked at 6.8 because it seemed a bargain at the time .

I don't normally involved in economic debates , I'm more a chartist , watching the market respond to fundaments and acting accordingly and that's what I'm doing now. Seeing the market react and buying , but I'd like to hear what those with great understanding see as possible senario's as to what fundament changes could lead to interest rate increases further down the line.


Cliff

The opposite of now.

Now - we have:
No business growth,
Rising unemployment,
No consumer or business confidence,
Lack of finance availability,

 

[Sheryn]

Underemployment needs to be considered.

I think the rates have to stay down for a few years to try and stimulate the economy as residential new builds are required to boost spending and increase employment.

Normally I would say when unemployment decreases but there is also a large portion of underemployment that needs to be considered as well.


Sheryn

 

[Deltaberry]

The opposite of now.

Now - we have:
No business growth,
Rising unemployment,
No consumer or business confidence,
Lack of finance availability,

In the east coast, I'd say many sectors are holding up pretty well.

As always, Perth a la is very cyclical.

 

[Graemsay]

There was an article in the Independent today about the US, which concluded:

The bottom line in all this is that if the US recovery is sustained, as now seems pretty certain, a much tighter monetary policy will follow. I suspect that policy will be tightened somewhat more swiftly than the markets currently expect.

I suspect too that [the British] economy will grow more quickly than the current consensus expects, though it may take a while for the official figures to catch up with what is really happening.

So on both sides of the Atlantic, normal growth and normal interest rates might be only two years away. About time too.

My expectation had been that rates would remain low for another four or five years. If they rise sooner then there's going to be a lot of pain here in the UK due to over-leveraged households and zombie businesses.

 

[Intrinsic_Value]

The opposite of now.

Now - we have:
No business growth,
Rising unemployment,
No consumer or business confidence,
Lack of finance availability,

As Bayview intelligently pointed out, together with a much lower AU$. The currency is really adding a drag to growth.

 

[hobo-jo]

In the east coast, I'd say many sectors are holding up pretty well.

As always, Perth a la is very cyclical.

Things are always different where Deltaberry is prices booming, economy soaring, unicorns flying, rainbows shining. Living on a planet of your own are you?

http://www.aigroup.com.au/economicindicators

Note these are national indices, not Perth based.

Unemployment trending higher in all states (WA increasing at faster rate, but their UE still well below that of others):

http://www.macrobusiness.com.au/2013/07/unemployment-in-detail-2/

Stevens (RBA) worried about business confidence (doesn't specify that it's Perth only):

http://au.finance.yahoo.com/news/stevens-worried-business-confidence-085523854.html

Also: http://www.tradingeconomics.com/australia/business-confidence

All BayView's points are valid and not state specific.

 

[BayView]

In the east coast, I'd say many sectors are holding up pretty well.

As always, Perth a la is very cyclical.

Which industries might these be?

 

[MTR]

Mining in Perth, job losses at the moment.

 

[willair]

http://www.youtube.com/watch?feature=player_embedded&v=rEeYYcVrnz0