1. Most Discussed
  2. Gainers & Losers

RBA ANALYSIS AND REACTIONS

  1. Grant62

    4,705 posts.
    Some observations flowing on from this mroning's rise in interest rates.

    NATIONAL RAISES RATES:

    Already, the Banks have started responding to the RBA's move on rates this morning, with the NAB increasing its standard variable rate by 25bp to 6.31% (previously, 6.06%).

    At the same time, the National has raised its base variable rate to 5.81% (previously, 5.56%, up 25bp), effective next Monday (13/5/02).

    The NAB has also lowered its 3 and 5 year P&I fixed rates to 6.39% (previously, 6.79%, down 40bp), and 6.79% (previously, 7.29%, down 50bp), respectively.

    Both Westpac and the Commonwealth are currently meeting to review their Home Loan rates.


    BANK BILL FUTURES BEING SOLD OFF:

    Bank Bill Futures for June and September have also risen, with the June implied yield up to 4.90% (previously, 4.82%), the the September implied yield up to 5.25% (previously, 5.13%).

    This suggests that the Bond Markets are factoring in for a further interest rate rise in July, with an outside chance of a June rise , as well.


    INFLATION, A REAL CONCERN FOR THE RBA:

    On inflation, the RBA sounded the following as an ominous warning to the markets:

    "Australia's inflation rate, at 2.9 per cent, remains close to the top of the target range. Inflation seems to be flattening out, following a period in which it had been on a rising trend owing in part to the substantial depreciation of the Australian dollar over the 1997–2000 period.

    "There are signs that these exchange-rate effects are beginning to fade, and hence the prospects are for a moderate decline in inflation in the next few quarters. Over a longer horizon, however, it is likely that inflationary pressures will continue, as surplus capacity in the economy is gradually used up.

    "This is a contrast to what was expected when the Bank reduced interest rates last year.....To persist with a strongly expansionary policy setting would risk amplifying inflation pressures and, over time, could fuel other imbalances such as the current overheating in the housing market, potentially jeopardising the economy's continued expansion.....The Board judged that an increase in the cash rate would reduce these risks and, therefore, enhance the prospects for sustained growth consistent with the inflation target."


    PROPERTY SECTOR IS A CLEAR TARGET FOR CORRECTION:

    On the household sector /property market, the RBA observed that:

    "(t)he strong rises in house prices seen over recent years have also been associated with a rapid expansion in household debt, a process that carries longer-term risks if households become seriously over-extended."


    WHAT IS THE RBA DOING:

    Clearly, the RBA has moved to:
    1)
    rein in inflation;
    2)
    dampen down the overheated property sector;
    3)
    lock in sustainable and improved economic growth;
    4)
    positioning Australia for the global economic uptick; and
    5)
    caution households against an over-reliance on debt, and an overabundance of enthusiasm for inflation driven asset prices (particularly in property).


    REACTION AMONGST ECONOMISTS:

    See, below. But, in summary:
    1)
    Further rises this year, up to 50 -100bp.
    2)
    Standard variable home loan rates to be above 7% by year's end.
    3)
    Inflation clearly of concern.
    4)
    Capacity constraints are starting to be seen.
    5)
    Concerns over current state of property market, and levels of household debt.
    6)
    Most households and businesses are very cash flow sensitive this time round (ie: little, or no buffers, in place). Therefore, more reaction will be felt through having fewer rate increases, this time round.
    7)
    Continued use of monetary policy will prove to be quite effective this tightening cycle.


    COMMONWEALTH BANK REACTION:

    1)
    More interest rate rises to come.
    2)
    RBA more optimistic about US recovery than the Fed.
    3)
    Renewed warning on household debt levels.
    4)
    Housing and housing prices of concern.
    5)
    "(P)eak in interest rates this cycle will probably be lower than the market expects".


    JP MORGAN'S REACTION:
    1)
    4.25% interest rate setting "was for a world still coming to grips with the events of September 11 and where expectations where the US and global economies were going to remain in recession until the middle of this year"
    2)
    A 4.25% setting is no longer appropriate.
    3)
    More rate hikes to come.


    SG AUSTRALIA REACTION:
    1)
    "(H)ighlights two very different economic outlooks and two very different economic situations".
    2)
    Australia outperforming the world.
    3)
    Property market overheating. Causing market imbalance.
    4)
    Household debt of concern. Also in imbalance.
    5)
    100bp increase expected, in stages, over the next 12 months, beginning in July.
    6)
    A June rate rise not expected.


    ANZ BANK REACTION:
    1)
    "Statement is a bit more hawkish than what...(was)anticipated.
    2)
    Re-emergence of inflationary pressures.
    3)
    RBA intends keeping inflation in the 2 -3% band.
    4)
    "We've seen the interest rate futures market sell off pretty aggressively on the back of the statement and I think the market will move to price in pretty
    aggressively more rate rises this year.
    5)
    Cash rate at 5.0% by year's end.
    6)
    Cash flow is now very sensitive to even slight interest rate adjustments.


    HSBC REACTION:
    1)
    Statement tougher than expected.
    2)
    Current outlook for inflation - declining, but with inflationary pressures continuing.
    3)
    "It supports our view that there are many rate rises to come and we would expect the cash rate to peak at six per cent by June of next year" (ie: a variable home loan rate of in the 8.5 - 9.0% range).


    WESTPAC REACTION:
    1)
    Another rise expected in June.
    2)
    World economy is improving and global outlook is better "notwithstanding the fact that some of the recent data from the US hasn't been quite as strong"
    3)
    Bullish on the Australian economy.
    4)
    Very concerned about inflation.
    5)
    Property market (valuations and throughput) clearly causing an imbalance. "(The RBA) would be looking for some of the heat to come out of it."


    DEUTSCHE BANK REACTION:
    1)
    Inflation, a clear concern. Quantum shift in outlook. Previously, the RBA considered that "that inflation was
    going to trend down to the mid point of the band, the bank is worried that inflation will be stuck at the top end of the band".
    2)
    RBA comfortable with strength of domestic and global economies.
    3)
    RBA has acknowledged "the housing market is in a
    bubble and this type of imbalance is a product of excess liquidity and I think that's an important factor".
    4)
    Comment:
    "All in all this is a statement that is attendant with not just a one off shift in monetary policy but a precursor of a series of policy moves and in fact given the bank's historical practice I would argue that series of moves would be more rapid than what the market has currently priced." (ie: rhetoric for a June rate rise, as well).


    RBC MARKETS' COMMENTS:
    1)
    RBA statement "was slightly more hawkish than people had anticipated at the time".
    2)
    Upbeat, domestically, and internationally.
    3)
    Inflation, a real concern.
    4)
    Property market "is one of the RBA's big worries".
    5)
    More ises, to come.
    6)
    25bp rise in July. Peaking @5.5% in December.


    DEUTSCHE ASSET MANAGEMENT REACTION:
    1)
    Domestic and international economies performing better than expected.
    2)
    Anticipating a mild tightening cycle, this time round.
    3)
    Housing, overheating in certain areas.
    4)
    Outstanding household debt has doubled since the mid 90s so households are sensitive to rate increases.
    5)
    RBA to be cautionary with its approach. It will "take its time and see how each rise impacts household sentiment and spending".
    6)
    50bp rise expected by Christmas.


    SSB REACTION:
    1)
    Hawkish statement. Domestic economy improving.
    2)
    A cash rate of 5.5% by year's end (ie: implying 100bp increase, or 4x 25bp increases over the next 7 months).
    3)
    Home loan rates to be ~7.5% by year'send.
    4)
    "The statement also supports the view that bonds are very expensive at current levels, both in nominal yields and relative to the US".
    5)
    Long-term risk of households being over extended.
    6)
    Comment:
    "25 basis points won't slow that down. It will require a move to 5.50 per cent, in our view, to slow down."


    THE NATIONAL COMMENTS:
    1)
    Upside risks to the economy and inflation.
    2)
    RBA does not want to see household gearing much higher than it is now.
    3)
    RBAwants to rein in "some of the excessive demand
    aspects of the economy".
    4)
    Comment:
    "We think there are reasons to be cautious and they won't be gung ho on the rate rises. The fact that we will see a downturn in housing means we have to be a bit careful we don't repeat the mistakes of late 2000 and tighten into a housing downturn".
    5)
    Progressive tightening to 5.0% (ie: 2 more 25bp rises) by year's end.


    STANDARD & POORS' REACTION:
    1)
    RBA's view on inflation has changed.
    2)
    Concerned with long-term inflationary outlook, particularly "as the capacity in the economy is used". - NICKOO, TAKE NOTE AND HARK BACK TO MY COMMENTS OF AUGUST 2001 REGARDING CAPACITY AND SUPPLY SHORTAGES FEEDING INTO AN INFLATIONARY PRESSURES ENVIRONMENT BY MID-2002.
    3)
    Comment:
    "Pospective tightening cycle will probably be more pronounced than perhaps what was previously
    thought. "They have put a lot of weight on the role of housing".




DISCLAIMER:
Before making any financial decisions based on what you read, always consult an advisor or expert.

The HotCopper website is operated by Report Card Pty Ltd. Any information posted on the website has been prepared without taking into account your objectives, financial situation or needs and as such, you should before acting on the information or advice, consider the appropriateness of the information or advice in relation to your objectives, financial situation or needs. Please be aware that any information posted on this site should not be considered to be financial product advice.

From time to time comments aimed at manipulating other investors may appear on these forums. Posters may post overly optimistic or pessimistic comments on particular stocks, in an attempt to influence other investors. It is not possible for management to moderate all posts so some misleading and inaccurate posts may still appear on these forums. If you do have serious concerns with a post or posts you should report a Terms of Use Violation (TOU) on the link above. Unless specifically stated persons posting on this site are NOT investment advisors and do NOT hold the necessary licence, or have any formal training, to give investment advice.

Top