Lowest Interest Rates in 49 years.

The Reserve Bank is due to announce whether it will move on interest rates at 2.30pm this afternoon. The jury is out as to whether it will slash rates by a further 50 basis points or leave them on hold.

Certainly there’s arguments for either outcomes. Some are saying that we should take a wait and see approach as to whether the current round of stimulus programs will have the desired effect before resorting to further stimulatory action by the RBA.

On the other hand, the official unemployment figures are due out this Thursday and by all accounts the prognosis is not good. Job ads fell 8.5 per cent last month, taking the annual decline to 45 per cent. This marks the 10th consecutive fall.

Everyone now accepts that the forecast of 7 per cent unemployment for next year is too low and we should be adjusting forecasts to 8%.

The Government is also due to lay down it’s Budget in May, which is expected to include large rounds of cuts, including cuts to “middle class welfare” as we have been warned. What does seem pretty clear is that this budget will have to be a mix of tough cuts and more targeted stimulus.

While there may be “green shoots” emerging in China, it seems that we’re still heading for worse economic times ahead – particularly in terms of unemployment.

The Opposition has accused the Government of spending money irresponsibly without measuring or evaluating the effects of such stimulatory measures.

The Government argues that the ground is moving so quickly, that it’s almost responding to challenges on a monthly if not weekly basis.

Failure to respond appropriately could have disastrous consequences for Australian businesses and the economy while over-spending also carries with it its own set of ramifications.

This week will be an interesting week in politics..

Disclaimer: The author of this post once lived in a rented flat.

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61 Responses

  1. Reb. I’ve never been certain as to whether job advertisements were an indicator. For example, 20 service providers advertising the same job = 20 jobs. But not so, it was just 4 jobs. During a downturn I would expect a cutback on advertising and so these same 4 jobs might be advertised just once.

    Also during a downturn the ‘expressions of interest’ will also not be advertised continually.

  2. I love the disclaimer reb!

  3. Likewise reb. When I met hubby he was living in a share flat of a 3 storey property. Upstairs were police cadets, downstairs were teachers and nurses and in the middle were tradies and assorted . It was an excellent place to be.

  4. Just in case Ken_L is reading Joni!

    😉

  5. now accepts that the forecast of 7 per cent unemployment for next year is too low and we should be adjusting forecasts to 8%.

    Indeed! But will we get to the 10.7% of 1992 or the 10.9% of 1993? Or perhaps the 9.9% of 1983?

    Interesting to compare historical rates of employment across the developed world. BTW I would be very interested if someone has a more up-to-date table.

    http://www.aph.gov.au/library/pubs/histmesi/histmesi8.3.htm

  6. NEWS FLASH:

    RBA cuts cash rate target by 25 bps to 3.00%, the lowest level in 49 years, bringing to a swift end a pause in rate cuts begun at start of March.

    Decision was in line with market expectations and signals RBA has grown more concerned about
    economic outlook with Australia now almost certainly in midst of its first recession since early 1990s.

    But cut amounts to fine tuning of economy and there is no reason to expect it will be the last easing.

    Economists expect RBA will take further steps to
    bolster economy, especially if a rise in unemployment already evident gathers momentum.

  7. Share market dipped! Now what’s that ‘truth’ that interest rates will always be lower under a Liberal Government. Lol.

  8. Nature 5, on April 7th, 2009 at 2:10 pm

    OECD – Harmonised Unemployment Rates and Levels (HURs)…twiddle the ‘time and frequency’ button to select your time capsule.

  9. Hot off the Press !!!!

    CBA will cut its Home Loan rates by 0.10%. The bastards.

  10. Thanks for that Legion. Took a bit of fiddling but finally some understanding of how it works. Much appreciated.

  11. “Disclaimer: The author of this post once lived in a rented flat.”

    But so did Malcolm Turnbull.

  12. Exactly Tom.

    Apparently it’s been suggested that I’m not sufficiently impoverished enough to speak about matters that might relate to people facing financial hardship, so I’ve been taking some affirmative action.

  13. Shane,

    I’ve heard that the C**** at NAB are not planning to pass on any of it at all!!

    Which is leading some people to say that the RBA have stuffed this one up, and should’ve either left rates unchanged or passed on a full 50 basis points reduction which would’ve allowed the banks more lattitude to pass on more to consumers…

  14. Does anyone know of a graph/data that shows the actual RBA rat cuts against the banks cuts?

    Would be interesting to see how much the banks have kept for themselves… and would this amount (ie. the extra interest) be the trade off for putting mortgages on hold in times of hardship?

  15. reb

    The hot off the press came direct from the CBA 0.10% rate cut. I have the circular in my hand.

  16. reb

    No other Banks have yet released a circular to the broker network, will let you all know when they do if you would like to know about a particular bank.

  17. Joni,

    The RBA cash rate is now 3%. Most banks still have their mortage rates at over 5%, so there’s at least a 2% margin that they’re hogging for themselves.

    The f*ckers!!

  18. And Joni how many staff that they sack due to the downturn…

  19. yes please Shane – NAB.

  20. I understand Reb.

    I’ve also rented. So I’m able to speak freely and with credibility about all matters.

    Some years ago I also rented. I shared a house with others, the number of others varied between about 3 and 30.

    When the numbers approached the upper end of the range, the bathroom access was fairly limited.

    We were so poor, most of our sustenance can from beer. Couldn’t afford food.

  21. reb

    This is very interesting read regarding the banks crying poor about not passing on the rate cuts

    http://www.theaustralian.news.com.au/story/0,25197,25300058-643,00.html

  22. can = came, but oddly it makes sense anyway.

  23. Don’t worry reb..you and b/f are on peel-the-potatoes duties when you come up to visit.

  24. I know Tom. Can from beer. It makes sense to me too oddly enough…

  25. reb

    Will let you know as soon as anything comes through.

  26. The margins the big 4 are now making is over 80% higher than before the crisis when they had competition.

  27. I reckon a graph of the margins would be very informative – also when the Credit Card rates were included too!

  28. joni

    The last I had seen was that the RBA had dropped rates by 400 basis points (or 4% in normal language rather than Americanism)

    The Banks had passed on different levels of the reduction with the CBA being the largest amount passing on 3.60% of the 4%.

    Now it is 4.25% with the CBA passing on 3.70% so that one Bank is keeping .55% more, adding .55% to the margin they used to make prior to the crisis.

    Hope this makes sense.

  29. joni

    Am on leave for a week after easter but would be happy to create a graph and email it to you guys for publication after 20 April showing the major banks and a few of the smaller ones as well.

  30. reb

    NAB not passing on any rate change to any products, just came through.

  31. shane – thanks – I will see what I can get together

  32. Thanks Shane, confirms the rumour I heard earlier…

    The miserable sods!!

  33. So, doesn’t help my kids with their mortgage (who weren’t complaining, BTW) but makes my income drop…clever RBA (and Mr Rudd et al – you don’t really think the RBA is independent do you?)…clever..

    These dicks have really lost the plot…in 1961 interest rates were 6%…it has never been lower…until now.

    Who benefits from this? The banks – always the banks – them Robber Barons are still at work – who do you think “owns” the RBA?

  34. TB,

    Are you game to switch some of your fixed interest investments to bank shares? (Dividends look very attractive in comparison.)

  35. TB Queensland, on April 7th, 2009 at 6:41 pm Said:

    in 1961 interest rates were 6%…it has never been lower…until now

    ReallY?

  36. shaneinqld, on April 7th, 2009 at 4:57 pm Said:

    reb

    “NAB not passing on any rate change to any products, just came through.”

    Let’s hope Swan leans on the thieving buggers!!

  37. Geez, the guys over at Daily Reckoning are panic merchants. What crisis?

    We’d suggest that the credit bubble deflates even faster. But in point of fact, is begun deflating already. Check out the chart below from the RBA. Does this not explain how Australia’s house price boom began earlier than the boom in the States? And does it not suggest that the collapse in the annual rate of growth in credit is going to remove a regular supply of money to the property market?

    Money and Credit – Source: RBA
    http://www.rba.gov.au/ChartPack/financial_indicators.pdf

    Hugh Morgan, a former official at the RBA, gave a speech at the HR Nicholls Society in which he confessed that the bank knew at the time that the credit boom would cause problems later. “It was beyond argument that the rate of change in the growth of credit in all markets, particularly the household sector; the rate of growth in the money supply, however defined; the rate of growth in consumption and the staggering increase in housing prices; were proceeding at an unsustainable rate. It is just not possible to have credit growth and money supply increases in the realm of 14 per cent compound, without a disaster occurring.”

    The disaster is now occurring, but in a slow motion fashion. The government has sucked first home buyers into the market with an increase in the first home buyers grant. House prices are hovering just below their highs thanks to the influx of new money.

  38. ….are they suggesting that the housing market is F%&ked? Is the boom over? I think that’s what they’re saying.

    Thank goodness the Government have stepped in to pick up the slack, because there’s plenty of slack to go around by the look of it.

  39. …oh, and it won’t stop a collapse in prices simply because the banks will be shutting shop on lending and hoping like hell that their willingness to assist distressed borrowers helps cushion against the downturn and expected fallout.

  40. So much for assisting distressed borrowers.

    Borrowers in fix on fees as charges of up to $50,000 to switch loans
    http://www.theaustralian.news.com.au/story/0,25197,25306291-5013404,00.html
    HOME owners are expected to swamp banks trying to refinance from high fixed-rate mortgages after yesterday’s 25-basis-point interest rate cut.

    But borrowers trying to discharge high fixed-rate loans face hefty “break fees”, which can be more than $20,000 on a $500,000 home loan.

    Fujitsu Consulting managing director Martin North said banks had reaped $899 million in home loan fees in 2007, with Fujitsu estimating this will rise to more than $1 billion this year.

    Break fees, made up of a comparatively small charge to exit the loan plus a bigger fee that is the economic cost to the bank of losing the business, had become a bigger proportion of housing loan fees in recent years, he said.

    The Housing Industry Association yesterday called on banks to drop severance and other refinancing charges from fixed-rate loans, but banks are unlikely to do so.

    Taxi driver Moses Traore, 41, from the Perth suburb of Beckenham, said his bank, ANZ, should not charge him anything to change over from a fixed interest rate mortgage to a variable one.

    Mr Traore is paying an interest rate of 8.99 per cent on his $200,000-plus mortgage.

    He said the bank told him it would cost $12,000 if he changed over to a variable rate.

  41. John

    With regards to fixed rate home loans there are 2 sides to every story.

    1) A customer should only ever select a fixed rate to ensure certainty in their monthly repayment for a particular purpose. If they are locking in because they think interest rates may rise then they are gambling with the market which is no different than gambling on shares as no one knows the future. I never recommend a customer fix a home loan. I recommend they weigh up all of their options and select the best way to go for their individual circumstances without factoring in the emotional rollercoaster of changes in interest rates.

    2) If rates go up we never ever hear the Banks complaning that they are now losing money on the deal. We also never ever hear of customers complaining.

    3) if rates go down all we hear is customers complaining that their rate is now higher than the current variable rate.

    4) The Banks take just as much risk as the customer. I had clients on 5.40% fixed when fixed rates had risen to 8% for the same loan.

    5) While I think Banks are greedy in not passing on the full rate cuts, I also understand that both sides take the risk when it comes to fixed rates yet we only hear the news of customers losing out on their loan, never about the losses the banks face if the reverse occurs.

    6) In the history of fixed rates it is pretty much a 50/50 win for both customers and banks.

  42. Shane

    Sounds like a major dilemma for both sides

  43. John

    It is and has been since they were invented. A risk is taken by both sides and as such the cost of exiting the facility by either party should lead to compensation by the exiting party.

    When people lock into a fixed rate it allows the bank to lock in interest rates for term deposits to investors and gain a bit of certainty for its overall portfolio.

    How would investors like it if the Bank came along and said, sorry Mr Smith, we can no longer pay you 8% for your 5 year Term deposit because rates have gone down too far and it is no longer returning us a profit.

  44. Shane

    I told you wouldn’t have to wait 6 months for the stock market to deflate again. A lot of earnings worries. I’m thinking it will go below the 3,000 mark before we see hints of a recovery, however, the recovery won’t be a speedy one.

  45. Shane

    When people lock into a fixed rate it allows the bank to lock in interest rates for term deposits to investors and gain a bit of certainty for its overall portfolio.

    How would investors like it if the Bank came along and said, sorry Mr Smith, we can no longer pay you 8% for your 5 year Term deposit because rates have gone down too far and it is no longer returning us a profit.

    No argument from me. It simply shows how much strain both lenders and borrowers are under. That’s the system.

  46. In Pyrmont – a group wants to open a community bank (Bendigo Bank). Does anyone on here have any experience with a local bank of this type?

  47. John

    I have thought it would hover between 3,000 and 3,500 for quite a while with fluctuations during this band.

    While the recovery may not be speedy, history shows that the stock market starts recovering before the the general population and economy show positive trends.

    I think much of the current movements are large scale buys and sells by major corporations purchasing and selling millions of shares, while maybe only making 2 or 3c on each share, but at least they are getting some type of return by entering and exiting the market at the moment. 1,000,000 shares making 2c for a 24 hour or less holding returns $20,000 for the 24 hours.

    As always this is my personal opinion.

  48. John

    I have criticised the Banks loud and long on many occasions and will continue to do so but once again I can also see when they are being made a scapegoat for decisions made by customers that did not go the way they expected.

    I have a customer who locked in at 8% simply because the Rudd government was elected and interest rates ALWAYS ( according to him ) rise under a Labor government. No amount of explanation that our rates are also guided by world factors and rates were high at the time all over the world would make him think logically.

  49. joni

    I don’t know that much about community banking but they are everywhere in the country. The community raises the funds necessary to open the branch. The community investors then get a portion of the profits made form the branch. At the moment Bendigo cannot source finance as cheap as the big 4 and therefore cannot offer home loan rates at the same rate. Some community banks have closed as the local area did not support them enough to remain viable, but many operate successfully.

    Other than this I do not know the intricasies of the details.

  50. Shane

    Thanks for the feedback – I was thinking along the same lines (re finance rates). I think I will still buy some shares – not so much as a personal investment, but more as a community investment.

  51. Joni

    …your community spirit brings a tear to my eye (wink)

  52. At the moment Bendigo cannot source finance as cheap as the big 4 and therefore cannot offer home loan rates at the same rate. Some community banks have closed as the local area did not support them enough to remain viable, but many operate successfully.

    Which, perhaps, in part goes towards explaining why the nice, big banks are entertaining a bit of an amnesty on mortgage lapses for the ‘temporarily between jobs’ people, among other activities the bigger banks are engaged in, like absorbing their smaller competitors…retention of recently seized market-shares through special guarantees, better access to and lower prices for money, etcetera. The same decimation of regional banks and thrifts is occurring across global markets, presumably leading to banking concentration in more and more (or, is that fewer and fewer?) banks which are ‘too large to fail’.

  53. Legion

    Completely agree.

    Yes it is back to the future, only there will be even less banks than we had in 1960 if it continues along the same path and the monoliths are able to swallow everything in their path which conversly allows them to refuse to pass on rate reductions as the competition no longer exists.

    It also places us in the dangerous position of many other countries, where so many of their private companies have grown so large through allowing them to swallow the competition that the country cannot allow them to fail even though they are not government owned as it will decimate the country.

  54. re: monoliths

    Which is why I think the public needs to support their community banks.

  55. Gees Wayne’s ever so polite ‘so I changed the headline’

    Banks need a ‘kick up their rodent rectums”
    http://www.theaustralian.news.com.au/story/0,25197,25307255-12377,00.html
    BANKS that fail to pass on the latest interest rate cut to borrowers need “a good kick up the bum”, federal Treasurer Wayne Swan says.

    The Commonwealth Bank has said it will only pass on a cut of 0.1 percentage points from the 0.25 point cut in the cash rate announced by the Reserve Bank on Tuesday, while the National Australia Bank says it will not pass on any of it.

    “Certainly I’m pretty disappointed with their decision or the decisions that have been announced so far,” Mr Swan said.

    The banks would have to justify their commercial decisions in the court of public opinion, he told Fairfax Radio Network.

    “You know what they’re like, they do need a good kick up the bum occasionally,” Mr Swan said.

    The failure of the banks to pass on the latest rate cut had blunted the effectiveness of monetary policy, he said.

    “It’s not helpful when we’re trying to get everyone in the community working together to deal with this global financial crisis.”

  56. ANZ

    Rate down 0.10% same as CBA, just received advice.

  57. From: http://business.theage.com.au/business/why-the-banks-can-tell-us-go-jump-20090407-9zo3.html

    “Thanks,” said the banks, “just what we need. The customers can wait.”

    However National Australia Bank and Commonwealth Bank explain their decisions to keep all or most of the cut for themselves, the reality is that they are able to do so only because the global crisis has knocked their competitors out of the ring.

  58. It should all be starting to make sense now.

    Slow credit growth to cut banks’ profits
    http://news.smh.com.au/breaking-news-business/slow-credit-growth-to-cut-banks-profits-20090408-a0ps.html
    Slowing credit growth is set to crimp the profits of the big banks, despite their moves to re-price business lending in order to subsidise mortgage margins.

    JPMorgan and Fujitsu Consulting’s latest joint report on the mortgage industry shows overall system credit growth will continue to decline with falling house prices.

    Money and Credit – Source: RBA
    http://www.rba.gov.au/ChartPack/financial_indicators.pdf

    Hugh Morgan, a former official at the RBA, gave a speech at the HR Nicholls Society in which he confessed that the bank knew at the time that the credit boom would cause problems later. “It was beyond argument that the rate of change in the growth of credit in all markets, particularly the household sector; the rate of growth in the money supply, however defined; the rate of growth in consumption and the staggering increase in housing prices; were proceeding at an unsustainable rate. It is just not possible to have credit growth and money supply increases in the realm of 14 per cent compound, without a disaster occurring.”

    The disaster is now occurring, but in a slow motion fashion. The government has sucked first home buyers into the market with an increase in the first home buyers grant. House prices are hovering just below their highs thanks to the influx of new money.

  59. Hugh Morgan, a former official at the RBA, gave a speech at the HR Nicholls Society in which he confessed that the bank knew at the time that the credit boom would cause problems later.

    Hi JMc,

    Where were all these geniuses before the sh*t hit the fan? Note that all these ‘We knew it’ speeches are being made after the event. Why weren’t they shouting it from the rooftops beforehand?

  60. Tony

    Yes, where were they? Mate, I’ve been on the rooftops for a while and not once have I come across any of these geniuses (wink). I’m not surprised though, I’ve been shot at a few times (Lol)

  61. This may bump up membership of community banks like Bendigo Bank and credit unions, unless they’re playing the big 4’s little game as well.

    They’re such a bunch of thieves. Their customers are propping them up and so are being doubly robbed!!

    Where’s Malvolio’s mob’s outrage, now? Apparently, it’s OK for his scaly mates to rob their customer’s blind, but God forbid they have access to decent broadband.

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