Where to for Australian Interest Rates in 2010?
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Interest Rates have risen dramatically in recent months on the back of the RBA increasing rates by 0.75% upon stronger economic conditions in Australia.
What does 2010 have in store for the home owner and the average investor dependant on interest rates? Well one thing would appear certain, we are headed for higher interest rates again in 2010 as the economy looks set to continue the miracle of the last 20 years.
With the RBA rate set at 3.75% and the focus on moving towards a non-inflationary rate (around 5.00% at least as conditions improve) then we can expect to test 4.25-4.50% in the first six months of the year. A big early year trigger will be holiday consumption and Christmas sales figures that will influence any decision by the RBA in February.
Meanwhile, the banks appear hungry to increase rates in excess of the RBA rate as evidenced in the November rate increase. With banks keen to maintain or even increase margins to offset increased funding costs this will be another clear trend in 2010.
Expect interest rates to tick higher early in the year and as the world economy rebounds, the UK and US will be pivotal, the RBA will have little option to increase rates. All this means that 2010 will be tough year for homeowners and will give pensioners and those dependant on fixed interest rates some solace after the last few years of low savings account interest rates.
It is hard to see home prices showing any real growth in 2010, at the top end expect decent rises as the wealthy once again impose themselves on the top end of the property market after a restrained period in recent years.
What do you think 2010 has in store for interest rates and the Australian economy, share your thoughts?
RBA decision to keep rates stable raises questions
The RBA this week announced that interest rates to stay on hold this was met in some circles with applause and others questioning the logic of RBA governor Glenn Stevens.
Despite the economic performance of Australia faltering it is still comparing very well against fellow OECD countries and has arguably stood up as one of the best in the current downturn.
It is this performance while still a contraction in economic growth that helped determine the RBA board decision to keep rates the same at 3.25%, a 45 year low. Interest rates have been forecast to fall to around 2% this financial year but we are unlikely to see any big cuts like 0.75% and 1.00% as the RBA expects the stimulus to support the market in due course.
Do you think the RBA made the correct decision in not cutting rates in March? Share your thoughts by adding a comment.
What will the RBA do in March?
Well March is just around the corner and the next RBA meeting will decide on monetary policy for another month. Since September 2008 the RBA have cut rates by 400 basis points, what does March have in order for home owners, investors and the economy?
Glenn Stevens perhaps has one of the hardest jobs in Australia. Stevens has to decide if enough liquidity has been pumped into the local economy with recent interest rate cuts or if more is required to stimulate domestic demand.
The result by Harvey Norman and the halving of profit is an omen for the consumer hed Australian economy and an indication that things are likely to get much worse before they get better.
Consumer demand despite government stimulation before Christmas has failed to bounce post Christmas as households tighten belts with increasing job losses and negative sentiment affecting the economy.
The RBA boss has already indicated that he would like to sit back and assess the economy in light of all the recent economic stimulants announced by the government and any future rate cuts are unlikely to be as big as recent cuts.
I suspect we will see a cut of 50 basis points in March that will take us to a cash rate of 2.75%. Future cuts will likely continue to occur and could take us down to 2.00% in the coming months but Stevens will be monitoring the economy for worsening economic news before he pulls the trigger for big future cuts.
Is Deflation set to rise?
Inflation seems dead in the leading world economies with the US announcing that inflation grew at it’s slowest price since 1954. The falling inflation rate leads to fears that deflation, one of the most feared concerns for financial watchers is set to re-appear.
Japan have been struck with deflation on and off for the best part of 20 years and the Japanese market has not reached anywhere near it’s highs of the late 1980s. With consumer prices falling heavily along with the price of oil driving the price of goods and services lower the leading world economies could soon be looking over their shoulder at the rise of deflation.
Deflation is an economy destroyer and not only destroys confidence but can lead an economy into a very deep recession or even a depression with the price of goods tomoorow being cheaper than today. This flows through into job cuts and lack of wage increases. It slowly tears out the heart of the economy.
If your looking at the impact of deflation in the economy then closely look at the impact it has had on Japan in the last 20 years. On the surface Japan may not look to be that bad but the damage deflation has done to the psyche of the economy is stark.
Let’s hope we are not seeing the signs of deflation emerging in the global economy.
Macquarie deliver better than expected profit
The Macquarie Group delivered a better than expected profit today amid the continuing economic gloom unveiling a net profit of $604 million for the xic months to 30 September 2008.
Macquarie’s profit fell by 43%, however profits where ahead of analyst expectations.
What had pleased the market and pushed the Macquarie Group share price up immediately was news that the bank had surplus capital of $3.3 billion and had no plans to access capital markets for funding.
Macquarie’s statement of considering acquisitions was also a major positive for the share price. The CEO Nicholas Brown confirmed the bank was planning job cuts and expected profits to grow although at a lower level amid difficult trading conditions.
To read the announcement click Macquarie Bank.
Australian interbank lending crisis eases
Australian interbank lending rates have fallen faster than those same rates overseas in recent weeks as interbank lending rate have moderated considerably in Australia.
The rate between the three month bank bill swap rate and the overnight index swap dropped to 32 basis points from 45 basis points last week. This is down from 140 basis points at the peak of the credit crisis in October and directly reflects the cost of interbank lending.
In the US the equilivant rate has fallen from 3.60% to 1.70% at the end of last week. A considerable drop from the peak but it also reflects the fear that is still evident in the US.
Poll - How low with the Reserve Bank of Australia rate go in 2009?
The Australian Bank Watch site has created a new webpoll to see where our visitors think the Reserve Bank of Australia’s interest rate will be at the end of 2009?
The RBA has acted swiftly in recent months in response to the growing global credit crisis and in October cut rates by a surprise 100 basis points.
The RBA followed suit again on Melbourne Cup day, the 4th November, delivering another 75 basis point cut to take the rate cut in the last two months to a massive 175 basis points.
This sizable cut reflects the genuine concern the RBA shares with regard to not only the health of the global economy but it’s effect on the domestic economy and domestic consumption.
Already unemployment has shown signs of rising, consumer spending has slumped, the AUD had been smashed and the the previously unstobbable commodity boom has slowed considerably.
The RBA have indicated a likelyhood of further cuts but are also tempered by inflation and any interest rate cuts will be impacted upon by the inflation rate that with be high on the Glenn Stevens mind come future rate cuts.
I am tipping an RBA rate of 3.75% by the end of 2009. It’s a bold prediction of 1.5% below current levels but I suspect this is where it will need to fall before it can stimulate the domestic economy.
What do you think? Take our poll and share your prediction or comments on the RBA rates outlook.
RBA cut rate by 0.75%
The RBA announced yesterday a cut of 75 basis points to the Reserve Bank Rate to 0.75% effective from 5th November 2008.
The RBA rate has not been at this level since December 2003.
Citing the weakness in the domestic economy and the ongoing fall in the Australian dollar the decision to cut the rate by a greater than expected amount was seen to be prudent to support the faltering domestic economy.
The RBA Media Release can be viewed on here.
Mortgage Funds block redemptions
The Australian Mortgage Funds are in a stay of disarray at the moment as a host of major funds have blocked redemptions of mortgage funds to prevent a run on funds that will not only destroy the funds but also seriously damage the long term results of the funds.
Earlier in the week the Challenger Howard Mortgage Fund worth $2.8 billion suspended redemptions. They have now been joined by Australian Unity, AXA Asia Pacific Holdings and Perpetual
The suspension of redemptions has sent fear through the economy as pensioners and long term investors had recently been withdrawing funds in some cases in excess of ten fold on normal levels due to the government guarantee on bank deposits.
The Australian Governement recently announced a plan to guarantee all bank deposits but mortgage funds were not included. This has caused people to run for the doors drawing investments from such funds and transferring into the safety of bank deposits.
No doubt in coming days these mortgage funds will be joined by others as the fear spreading through the economy will continue for a while to come as people see dollars in the bank as the only safe investment.
Have you had your funds suspended for redemption by the mortgage funds? Share your thoughts in our comments section.
AUD Currency continues to struggle
The Australian dollar continues to struggle today currently selling for 67c against the USD at the time of writing. The fall in the AUD has been dramatic after peaking around 97c in late July the AUD hit a low around 63c on last week.
The AUD fall has been dramatic and was not something envisaged in June or July when the USD was heavily under pressure and the AUD was looking like meeting parity to the USD.
How quick times change as the world economic crisis took hold and investors started heading for the exits the AUD was smashed. The Australian dollar has risen in recent years on the back the growing economic prosperity of Asia, in particular China which Australia has been a recipient of their amazing economic growth.
The mineral boom was a huge driver in what was seen as a miracle economy and the high interest rates on offer drove inflows into the AUD.
The question for most Australian’s is how far can the AUD go? This is not an easy question to answer as investors have become very negative towards the Australian economy and funds have flown into the safety of the USD.
The ongoing expectation of further rate cuts by the RBA continue to put pressure on the currency as further rate cuts over the remainder of 2008 have been built into money markets.
While a falling AUD is not good for Australian’s travelling overseas it could be seen as a boom for international tourists to our shores and also exporters. The only problem with this is travel is dramatically down around the world due to the economic crisis and consumers have cut back spending.
Next to rise will be consumer goods such as electrical equipment that has become as much as 30-40% cheaper due to the previously high AUD. With imports like to rise dramatically this will all put pressure on inflation.
The double whammy in 2009 could be rising inflation due to the falling AUD at the same time as falling domestic and global growth pushes the RBA to cut interest rates further which exacerbates the AUD fall as funds flow out of Australia.
It should be noted the RBA expect the inflation rate to fall but if it does not and inflation still hovers around 5% or even increases then Australia could be heading to a disastrous situation.
What do you think will happen in 2009? Share your thoughts through our comments section.