Goodness, interest rate expectations can turn on a dime, eh what!? Early this year, many economists were predicting lower interest rates by years end. Now? At least one more 0.25% rise and possibly two! The markets currently indicate a 100% chance that interest rates will be higher by the end of the year!
The funny thing is – all this speculation is helping push the Australian dollar higher, which puts downward pressure on inflation.
F. [cowboy2]
Bonds closed weaker on RBA rate worries
March 21, 2007 – 1:04PMThe Australian bond market was weaker at the close as dealers bet the Reserve Bank of Australia was poised to raise interest rates next month.
Analysts tip April rate rise after Reserve hint
* Scott Murdoch
* March 22, 2007FINANCIAL markets have been caught off guard on pricing in an interest rate rise as the prospect of a policy tightening dramatically firms.
Investments banks UBS and Citigroup both changed their recommendations yesterday to tip a rise in interest rates next month of 25 basis points to 6.5 points.The Reserve Bank meets on April 3 and the markets are tipping an almost 50 per cent chance that rates will be tightened.
The prospect of an April move was seen as virtually zero at the end of last week, before a speech on Friday by Reserve Bank assistant governor for economics Malcolm Edey.
The 30-day futures market has put the likelihood at 44 per cent for April and 100 per cent by the end of the year.
Forex – Australian dollar likely to hold 10-year highs but risks remain
Published on : Thu, 22 Mar 2007 02:26
By : AgenciesSYDNEY (XFN-ASIA) – The Australian dollar hit a fresh 10-year high of 0.8090 usd earlier after the US Federal Reserve softened its tightening stance overnight, pointing to possible interest rate cuts in the US towards the end of 2007, analysts said.
Dealers and market economists said the Australian dollar is also benefiting from the possibility of higher domestic interest rates in the coming months.
Market View Shifting Towards April RBA Rate Hike
FN Arena News – March 22 2007
By Chris ShawLast week Reserve Bank of Australia (RBA) assistant governor Dr Malcolm Edey spoke on the outlook for the Australian economy, delivering a far more hawkish statement than the market had expected. This led to the market revising its expectations as to the outlook for interest rates, as it is clear the RBA has not budged from its tightening bias.
According to GSJB Were the market now is pricing in a 50% chance of a tightening of official interest rates in April, while it is considered a 100% certainty there will be a further increase by August at the latest.
There is now speculation that US might drop their interest rate.
cheers,
Sanjiv Gupta“There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living.†– Nelson Mandela
Originally posted by propertypower:There is now speculation that US might drop their interest rate.
They still have plenty of inflation risks plus a precipitously balanced dollar. If they lower rates, the USD is toast, and the carry-trade, which currently supplies much of the liquidity holding up their financial markets, will disappear. I don’t think they’ll be dropping rates anytime soon unless deflation becomes a serious risk.
I have nothing constructive to ad, finance is not my strong side, but reading thru this post make me feel “ YAAAHHHHOOOOâ€
Another year or so with few more interest rises like this and our efforts in saving every cent and throwing it in to our PPOR loan will pay out big way. We will be shopping with cash buying from those who were overspending.
[biggrin]Can someone explain to me why the strength of the dollar impacts on inflation…
I'm not very strong on finance either!!
Kelly
the China effect has seen the real cost of goods fall dramatically e.g. TVs, clothes etc etc and as the dollar strengthens the price of those goods continues to fall. exports become less competitive so there is less demand on the economy and more supply available to the local economy. more supply = lower prices. Also we are so heavily indebted to the rest of the world that the cost of servicing those debts falls as our dolar strengthens. this means more money available in the economy, equals more demand. however as the driver of the stronger dollar is primarily interest rates, this dampens demand.
kellylock wrote:Can someone explain to me why the strength of the dollar impacts on inflation…It makes imported goods cheaper.
If a good costs US$1.00 when AU$1.00 = US$1.00, the good costs AU$1.00.
If the AU$ then strengthens to AU$1.00 = US$1.50, the same US$1.00 good costs AU$0.67.
(Note, all values are examples for ease of understanding).This is deflation in the cost of the good as denominated by the Aussie dollar. Thus, a stronger dollar can help lower inflation. This is also a consideration for reserve banks when they think about dropping interest rates. Falling rates have a double-stimulating effect on inflation. Firstly, lower rates encourage more borrowing for consumption which leads to more money competing for the same goods (upward price pressure). Secondly, foreign investors are less likely to buy Australian dollars or AU$ denominated assets when interest rates are lower, thus the value of our dollar falls and the price of imported goods rises.
Cheers, F. [cowboy2]
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