Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Double rate rise: RBA's shock plan

February 20, 2008


FINANCIAL markets have marked down another interest rate rise next month as a virtual certainty, after the Reserve Bank revealed it came close this month to delivering two rate rises at once.

The minutes of the Reserve's board meeting two weeks ago show it seriously debated lifting rates by half a percentage point in one hit - adding $100 a month to the cost of servicing the average new mortgage - to send Australians a signal about the seriousness of rising inflation.

In the end, the Reserve board decided on the usual rate rise of 25 basis points, or a quarter of a percentage point.

But the minutes added: "The judgement was finely balanced, and the board would continue to review whether policy was sufficiently restrictive to return inflation to the 2% to 3% target within a reasonable period."

Among the reasons it held back was that "additional tightening could be implemented at the March and/or subsequent meetings as judged necessary".

The Reserve has lifted its cash rate from 5.25% at the start of 2005 to 7% now. Another rise would add $50 a month to the cost of servicing a $250,000 mortgage, on top of rises of almost $400 a month from earlier rate hikes and higher bank margins.

Yesterday, Reserve assistant governor Malcolm Edey warned that the official inflation rate was likely to rise to 4% in the current quarter. He predicted that even without further interest rate rises, the economy would slow rapidly, with growth excluding the farm and mining sectors falling to 2.5% by December this year and to 2.25% by mid-2009.

Further rate rises would imply an even sharper slowdown, with rising unemployment and business failures.

Markets yesterday took the Reserve at its word, lifting the odds of another rate rise on Tuesday week to 90%. One bank warning there could be a series of rises ahead, pushing the standard mortgage rate close to 10%.

ABN Amro bank economists Felicity Emmett and Kieran Davies argued the Reserve could deliver another three interest rate rises, unless a financial market meltdown got in the way. They also predicted that banks would lift their interest margins again - putting rates up independently of any action by the Reserve - following big write-offs of bad loans by ANZ and others.

Analysts agreed that the minutes, released under the Reserve's new openness policy, underlined that the bank now saw itself at war with inflation, and it was prepared to impose a lot of pain to get it back under control.

Dr Edey yesterday cited national accounts figures as evidence that wage growth has accelerated to a trend level of more than 5%. But more authoritative figures today will test that view, when the Bureau of Statistics releases its wage price index.

Conflicting evidence on wage growth emerged yesterday. The Melbourne Institute released a survey reporting that hourly wages rose just 2.9% in the year to February, in line with their average since 2000.

But a small business survey for the Australian Chamber of Commerce and Industry reported wage growth at the highest levels in 12 years of the survey.

Australia's interest rates are already the highest in any developed country other than Iceland and New Zealand.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Hmm... with the RBA and BOE heading in opposite directions you might see 2 to 1 rather more quickly than you thought...

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Well March's rise is 95% certain and is now priced in at $2.12. What would really cause the A$ to appreciate further is if they decided to go +0.5% in March...even if they don't do that, they will probably go again in May.

The risks for A$ are all on the upside...so as per the other 2 exchange rate threads you have going (why not keep em all in one??)...there's no fundamental reason to expect the exchange rate to improve in your favour.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Guys I dont understand why the $ is strong when the economy starts to suffer. In UK we have repossesions up and inflation rising so why does the £ weaken and yet with simular situation in Oz the $ gets stronger?

Please help I dont understand

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

It is basically down to interest rates.

They are dropping in the UK and rising in Australia.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

As Gray says its down to interest rates. The Aus$ has a high interest rate, so overseas investors want to buy the Aus$ to invest as they will get a higher rate of return. Because there are more people wanting to buy the Aus$ it is more attractive, so you get less bucks for your pound (or whatever currency you're exchanging).

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

It's because the economy here has not started suffering yet. A prediction that it will start to suffer is just a prediction. People are still spending and driving inflation.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Do investors not worry about stability then? why did we not benefit when the exchange rate stayed level by BOE they did not put rate down as expected the last time but we saw no increase in the exchange rate in fact it still dropped. I thought that we suffered due to instability in the economy (Northan bloody Rock!!! etc and house reposessions) seemed to be a major factor in the instability of the £.

The US dropped rates to stabalise the $, so they would have been better to put them up!!!

Confused, give up
Although the exchange rate has just gon up to $2.13 up from $2.10 OMG cannot belive thats exciting:blink:

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

The thing is the situation is not similar. In Oz there is rapid economic growth (4%+), unemployment at generational lows, still rapidly increasing consumer spending (something like +8% year on year), housing market which in many locations is very much on the rise again.

Its not perfect....the growth isn't well balanced between the states, but as a big picture the country is booming....probably too much so and consequently inflation is very much on the rise. I actually think, the way things are going that there is a real danger of bust following boom here but I wouldn't expect it to come off the rails in the next 12 months or so.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Thank you , will just sit it out in my rented home as my house wont sell because UK is stagnant, and exchange rate pants.

I will stop this now as I realise my panic is annoying those who have already moved and its only those sitting on the edge of the cliff who really understand the major wobbles that come at this time. Those who have already jumped and are living the life probably cannot think back to those last few weeks when everything is questioned everything is magnified and the fear prevents normal thinking and rational behaviour.

I will stop bugging everyone sorry but this forum is my agony aunt and without you all I probably would not get through all this.

Again thanks for being tolerant of the mad woman.

Cheryl

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

The UK has been hit by the subprime market harder than Aus (so far), and Australia had still been raising their rates, even though the UK's hadn't dropped, which still makes it more attractive to investors. The long term forecast is a factor in exchange rates (ie what the markets expect to happen with interest rates) and at the moment the one year spot forward is $2.18, so they're not expecting much improvement for a while. That can always change (and frequently does) but it gives you an idea.

And no, stability isn't that much of a factor for major currency investors - have you ever heard of George Soros? He's decribed as the man who broke the Bank of England in 1992 from currency speculation.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Nothing wrong with wanting to understand why a major factor affecting your life going forwards is doing what it is doing :D

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I wonder how long the RBA can continue putting up rates whilst the rest of the world is reducing theirs? Somewhere along the line the gap is going to get so big it's going to be an issue and the Aussie gov. is going to have to look at other ways of keeping inflation in check.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

And if you understand enough then you can actually make some money out of it ... me, I've got more chance at the TAB.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Thank you so much for calmly and clearly explaining things to me, I have taken this info onboard and now understand that I have to watch intrest rate rises in Oz and rates in UK to understand which way the market may reflect the situation. Whilst inflation is rising in Oz even though they are seeing reposessions inflation is so important to control that they will raise intrest to encourage saving not spending and to control spending due to increased living costs. Once they slow the intrest rates can come down but will take time I suppose otherwise spending will kick off again!.

Uk is a few steps ahead and so we have slowed so rates may rise to incourage savings (Northan Rock needs searious savers to get it out of debt soon as possible, lets hope the government encourage rate rises to get out of that hole)

Anyway,

Thanks so much and Karma to you for explaining things to me.

Cheryl

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Interest rates rose to 15% when the Thatcher govt. tried the same thing.....that ended in disaster for many people.

There is some way for Australian interest rates to go yet but I fear the same end result.

G

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I think another 2% in Australia will have the same effect.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Fasten seat belts and hang on to your hats!:ohmy:

G

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I agree with Grayling here - I certainly wouldn't want to have a hefty mortgage on a variable rate at the moment - 10% (and beyond) here we come !!

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I think the biggest problem is that costs everywhere, particularly the cost of food production are rising astronomically, and thats having a massive impact on global inflation. It was the very real risk of a major housing crash that stopped Mervyn & co increasing interest rates more in the UK - inflation is still galloping away, in particular if you look at the real rate of inflation rather than the manipulated figures that get released by the government. The factors affecting inflation in the UK are the same across the western world, it will just depend on how each country addresses them, and yes, it is entirely possible that Australia is heading for the same situation as the UK was in during the early 90's. If it does, in a way it makes it a good time to emigrate, keep the house proceeds in a high earning interest account, rent and wait to capitalise on the moment.

Its frustrating in a way, I have to understand economics to do what I do, I just wish I had the funds to be able to make the most of it! (OH's CSA puts paid to that :curse:)

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

There is a little-used handy index to gauge the public mood at 'grass roots' level ... count the number of Plasmas for sale in the classifieds.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Don't be daft. Everyone here has been there, and everyone there is going through it as well. It's a major upheaval in your lives and if you don't panic about at least one thing everyday, you'd be weird. Some of us stressed about the money side but then stopped because it was outside our control, others knew exactly what they were doing, and others still didn't have enough money to bring to even begin to stress about exchange rates.

If questions like yours aren't asked, other people won't get the advice either, so please don't apologise oh and don't assume you know what other people are thinking;) . It's still an interesting subject, even if you're not actually involved.:D

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I had a mortgage on a variable rate when they went to 15% in the UK.:ohmy:

We survived it but I am so glad I was not overcomitted.

G

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Ouch!!

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I do not remember it as too horrendous but, as I said, I was not overcommitted.

Everybody else was in the same boat and the worst thing I remember was that it was completely out of our control......it just happened.

In those days you could not borrow more than about 3 times your income. If the same thing happened now then there would really be a bloodbath.....that won't stop it though:unsure:

We were told (by Thatcher) that it was for our own good:confused:

So were the mass redundancies apparently:rolleyes:

G

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I think the difference these days is the proportion of take home pay that goes to service today's mortgages is much greater that was the case then. Meaning that every little rise in the rate hurts more this time and potentially sending more people to the wall than last time.

There was a thread on this forum about it a few weeks back, many people were spending over 30% of their income on their mortgage, the official definition of "mortgage stress".

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

We had that, as you say providing you don't overreach yourself, it's a struggle but not impossible. It was our first home and when I look back I wonder how we did cope but we just cut back on the luxuries. It's sounds a bit of a 'well in my day' story but when I see young couples starting out and getting a 100% mortgage and then stressing because the rate has gone up to 7% or whatever, I do wonder. We would have been way to scared to borrow that percentage. But then my husband considers a mortgage as bad debt and there's no changing his mind.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Totally agree.

I think the 'old' system whereby you could only borrow a particular multiple of your income was a much more sensible and sustainable system.

Let's face it.....most of the financial problems we are seeing today (in any country) are down to letting people borrow more than they can afford and hoping house price inflation will sort it out.

We may be having problems in the UK and the US but, make no mistake, Australia in nowhere near immune.

G

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Thats precisely why I believe that The BoE didn't put rates up and started dropping them - there are so many overstretched now that it would indeed cause a bloodbath. The Bank may have become independent but political pressures can still be a factor!

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Spot on Cheryl.

Sometimes its good to think of these things graphically. The situation at the moment is a bit like two roller coasters travelling along the same track. As you say, the UK is a little further ahead of Oz, its tipped over the highest point and is descending (in terms of an economic cycle). Oz on the other hand is still climbing, however it will in time start to descend. The relative location and height of the two rollercoasters determine their (exchange rate) value.

The steeper the rate of climb, the more likely is the steeper rate of descent, which is what every economy and government want to avoid; recession. Interest rates are generally adjusted up to slow a steep ascent, and down to prevent a steep descent.

The tricky bit is however, that this is all played out in the dark. Few people know for sure where the top or bottom of those slopes might be, and I don't think any of them spend much time on BE.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

That was our experience as well.

We simply 'cut back'.....but then we had a lot more slack to play with.

G

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I always thought the biggest issue with this situation would be foreign earnings dumping like no tomorrow... but with the commodities people having negotiated simply stunning increases in the price of their raw materials it seems to have completely taken that out of the equation...

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I had a small property that I had reno'd and sold just as the first increases came in... I can still remember sitting with my mates in the pub and deciding we'd wait a couple of months for the rate to come back down before ploughing all our profits into 2 houses this time... We were very very lucky...

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

Commodities are not a problem - we have and they want it. On the other hand, whatever is left of Aussie manufacturing is f**ked.

Re: Double rate rise RBA shock announcement, what does this mean to exchange rates?
 

I think this is very true, particularly here in Australia. Though I have already been slated for suggesting this, but when I was looking to buy last year, my Aussie friend was keen for me to borrow far more than I wanted to. His reasoning was that house price inflation would eventually outstrip the extra money that I had to borrow. He was pretty much of the opinion that you should mortgage yourself to the very limit of what you can afford.

I'm glad I stuck to my guns now though, as prices still seem to be pretty stable, and interest rates are rising quickly. I think I would have already been in trouble by now had I followed his advice.

Another friend bought a house in Sydney last year and took a huge mortgage for it. IIRC, she only had about $5k for a deposit. I have lost touch with her now, but I know she was worried about being over-extended when she finished the purchase, so I dread to think what's happening now.


S