Why should interest rates increase anyway?

[Aceyducey]

There's always plenty of speculation on the forum about when & by how much interest rates will move & plenty of justification about why they will move in this way.

How about looking at the issue from another angle - Why should interest rates increase anyway?

The primary rationale given on this forum for interest rate increases has been to limit the property bubble.

Well with property Cg rises softening, increasing vacancy rates, falling rental returns & tighter bank regulations on lending for OTP and in other areas, the property 'bubble' seems to be well under control and certainly not to be a real issue anymore.

Rental affordability is improving - so there's not the problem of lots of people being thrown onto the street.

In other sectors, small business failure rates are stable if not declining, bankrupcy rates are also reasonably stable (though I haven't seen the latest figures).

Bank profits are at record levels & unemployment rates are stable, while inflation is firmly in check.

Internationally the world situation is still uncertain and more prone to a downturn than an upturn.

The US central bank has indicated that long-term low interest rates are cool, and continues to maintain the 1% level.


So where's the rationale for increasing interest rates?

Market sentiment? I don't think the RB will simply raise rates because the media expects it to.

Runaway property bubble? No longer exists & was resolved by the RB LOWERING rates (just think about that a little - the market self-regulated)

So can anyone supply a strong economic reality as to why there is any need for the RB to actually raise rates?

Cheers,

Aceyducey

 

[MarkB]

As usual, everything I say here is IMHO (saves me from saying it over and over).

Acey, a very nice twist on things.

A few ramblings in reply:

1. I don't believe the RBA listens to media hype, nor to what even the major trading banks are saying. Most of the RBA's considerable intellectual resources are spent researching a variety of economic factors - as far as they are concerned they know what is happening and don't need lessor economic beings to tell them.

(Treasury would be an economic being of equal standing).


2. As I have said in numerous posts before, where it not for the "asset price boom" (to use RBA terminology) then we would have seen a 25-50 basis points cut in interest rates over the past year. As it is the cash rate of 4.75% has remained unchanged since 5 June 2002.

Originally posted by Aceyducey
So can anyone supply a strong economic reality as to why there is any need for the RB to actually raise rates?

3. The $64,000 question!

*If* (and note the asterisks!) the "asset price boom" has reached it's peak and the "property market" (in general terms) does stabilise then alot of the domestic pressure to increase interest rates is relieved.

As is the case *if* CPI remains in check.

International factors appear to be the biggest worry - and could be the reasons behind the forecasts that BIS continue to make (and which I continue to have trouble believing).

Many of you would have seen this before, it is from this thread:

Is the US Deficit going to have an influence on our markets?

http://www.somersoft.com/forums/showthread.php?s=&threadid=12396

Originally posted by Pitt St
Billvals

An excellent question and one on which I have already deferred to higher economic authorities on.

On August 14 I sent the following e-mail to a friend who is, lets just say, Chief Economist somewhere decent.

* * *

Hi Steven

I have a small favour to ask (for personal interest). I was wondering if you had any long term interest rate forecasts that you were able to share with me.

I've read that BIS Shrapnel is forecasting interest rates at 10.5% in 2006. Personally I think that is laughable, but any perspective you might have would be most appreciated.

Kind regards

Mark

* * *

His reply was:


* * *

Mark

We don't do such forecasts but the worry is that the American deficits might mean anything, including a very steep rise in inflation across the world to right the balance. In the meantime, though, such rates do look pretty farfetched but they are not in my view off the planet.

* * *

So, the short answer is - yes, US deficits do have the capacity to affect our interest rates.

As to when and what extent, if at all?

(get your crystal ball out)

MB

Just in relation to that - it is an area of economics that I have had no need to delve into for years.

If the forum were to permit me, I would be happy to take it as a "question on notice" as to the causative effects of US Deficits and their precise relationship to Australian interest rates.




Now..... to return, for a moment, to the domestic economy.


If the RBA senses that the messages (it's jawboning) aren't being heard and understood then it has little to lose by rattling it's sabre and, say, increasing rates by 25 basis points. The financial effect of such a small rate rise would likely be small, but the mental effect could be massive and meet the needs of the bank.

Personally I still believe that rates will increase in the coming months - in previous posts I have even gone so far as to say that it was a certainty.

But there is one thing that seems MORE certain - and that is that interest rates will not fall at any time in the foreseeable future.

MB

 

[paulzag]

Not to mention the argument that the time for rate rises has now passed as we are already offering significant interest premiums to our major trading partners.

So until the next round of international rate rises, we are at risk of getting out of step.

Further rises in rates relative to other stable developed economies will drive the AUD further up, making our exports less competitive and threatening our Current Account deficit.

But remember "Nobody knows anything"

Regards

Paulzag
Dreamspinner

 

[Michael Croft]

And we are entering into a US election phase which means it is unlikely that;

a) there will be a rate rise in the US (so the pressure will be of the RBA) and
b) there will be a free trade deal between Oz and USA (unless it has many provisos and exemptions to placate the folk back home)

When economic rationalism meets political expediency which do you think prevails?

regards, MC

 

[MarkB]

Michael

I must confess that I hadn't really give much thought to the US election as it is, after all, still a year away.

I agree with your point about political expediency (having worked in the Commonwealth Government I know all about it).

But with the US Fed sitting on a 1% interest rate I'd have to say that while a 50 or 100 basis points rise is a 50 or 100% increase in rates, they still are very low and have plenty of room to move.

Re: Free Trade. I wish!

When I think of the possible gains to Australia (and other nations) from true free trade the mind boggles. IMHO, this is where political expediency will play the greatest role. The US may give us what appears, at least at one level, to be free-trade, but the corn belt (and others) will undoubtedly protect their uncompetitive arses and extract some economic rent from a President who will need votes in 2004.

I'll say it now.

- If a strong Democrat canditate emerges, and

- if the Greens can exercise some political common sense and not run their own candidate but get behind the Democrats instead, then

- Bush will be a one-term President.

(And that is way off topic.)

MB

 

[Peter_Tersteeg]

Iteresting rational. It tends to justify why fixed rates are so low given that the media is sure that rates will rise.