Frequently Asked Questions - Finance

Albert Einstein dies and goes to the pearly gates where he's told he'll have to share a room with four others. When he meets them, the first says,"I have an IQ of 190."

"That's great," says Einstein. "We'll be able to talk about higher mathematics."

"I have an IQ of 150," says the second room-mate.

"You beauty," says Einstein. "We will be able to talk about particle physics."

"I have an IQ of 100," says the third.

"Splendid," says Einstein. "We can discuss the latest movies."

The last room-mate introduces himself: "Sorry, but my IQ is only 80."

Einstein smiles and asks: "So where do you think interest rates are going?"

On 6th April the RBA increased the cash rate by 25 basis points, not unexpectedly. The Big 4 Banks all increased their lending rate by 0.25%, no more no less which to some was surprising! The NAB's variable rate went to 6.99%, considerably lower than that offered by the other three.

The question is what does the future hold for interest rates? The Australian Chamber of Commerce has good reason to complain that the RBA's use of monetary policy to dampen the inflationary threat of the renewed commodities boom has seen it acting far too harshly. There is ample evidence of a two-speed economy: on the one hand there's the commodities boom; on the other is the "real" economy. The Australian Consumer Group monthly services sector index has suffered a third consecutive contraction: services such as the all-important retail sector (and accounting for that matter) have been held back by household expectations of higher interest rates. Construction, retail, wholesale and manufacturing aren't doing well at all and they are the major employers in Australia. Sure, mining is doing well and as RBA Governor, Glenn Stevens said on Tuesday, Asian export markets are "contributing to pressure on prices for raw materials" and "Australia's terms of trade are rising, adding to incomes and fostering a build-up in investment in the resources sector"......BUT mining accounts for less than 2 percent of employment in Australia!

This all begs the question whether the rest of us will suffer as the RBA tries to keep a lid on the possibility of a spending frenzy from a few! Certainly the Australian Chamber of Commerce and Australian Industry Group seem to think so. The credit crunch is squeezing commercial property, housing developers and small business.....AND household disposable income has fallen in real terms in the past year after an initial boost by Labor's stimulus package and consumer spending on household goods has been flat since 2007. Witness the heavy discounting going on!!!

Stevens has pointed to "the market for established dwellings (being) still chracterised by considerable bouyancy". Fair enough. In Sydney and Melbourne on the Easter weekend auction clearances were over 70%, phenomenal. But it was recently announced that there is a shortfall in those cities of a 1,000 available rental properties for people wanting rental accommodation against the backdrop of a squeezed contruction sector. As claimed by the Australian Chamber of Commerce, there appears to be a two-speed economy operating in Australia and we can only hope that Stevens addresses the problems of the services sector stuck in low gear by leaving interest rates alone for a period. At worst, one would think that he might indulge in one more hike from the current 4.25% to 4.50% which would bring the rate into line with the average over the last (very successful) decade. That would mean 6 rate hikes in a few months, if he does so!

BOB LAMONT>>>>>>>>>>>>>>>>>>>>>

CPBMAC Finance Solutions can now offer standard variable loans at 5.99%. Repeat, 5.99%.

This is around 20-25 basis points less than the cheapest of the banks!!!
Bob Lamont >>>>>>>

On Tuesday, 2nd March, head honcho at the Reserve Bank, Glen Stevens, increased the official cash rate by 25 basis points to 4 percent. The important to come from his announcement was the board's belief that not only has Australia avoided a recession of any perceptible depth but the world is just about out of the woods and we'll see significant growth in the next couple of years. In fact, Stevens revised the Bank's projections for growth here in Oz upwards to around 4%. The problem with this, assuming the board's view is accurate, is that economic growth translates to the threat of inflation and the threat of inflation translates to more monetary tightening...yep increased interest rates. The natural level for the cash rate is 5-6% so I reckon there is every chance of 4-6 more 25 basis point rises at least over the next 1.5 to 2 years; but if there is a sudden spike in inflation (watch for union pushed wage increases, particularly in the mining sector!!) then the increases could get a bit of a gallop up! >>>> Bob Lamont