Thursday, November 01, 2007

How certain is next Wednesday's interest rate hike?

93% certain, according to the market late Thursday.

A cut in US interest rates, a surge in the world oil price and a continuing boom in Australian consumer spending have combined to push the Australian dollar through 93 US cents and push the Australian share market to a new record high, making next week’s hike in local interest rates a certainty.

Late yesterday the Australian dollar was trading at 93.14 US cents, its highest-level point since 1984. The futures market put the likelihood of next week’s expected interest rate hike at 93 per cent, up from 90 per cent one day earlier.

Westpac, which reported a record $3.451 billion profit brought forward its forecast of interest rate rises. The bank now expects one in November, next Wednesday, immediately followed by one at the following Reserve Bank board meeting in December.

The forecast implies a standard bank variable rate of 8.8 per cent by year’s end, with the added possibility that the banks may add a margin of 0.1 or 0.2 per cent on top of that as some of them have spoken of doing...

Early yesterday the US Fed cut its benchmark interest rate by a further 0.25 per cent to 4.50 per cent in a bid to prevent the US economy stalling. The move pushed worldwide share markets sharply higher on the belief that the US would avoid recession.

At the same time US oil prices surged to new highs, with New York crude topping $US94 a barrel, aided by news of a surprise decline in US crude stocks.

The oil price added to investor interest in Australia, seen as a country that benefits when commodity prices are high, pushing our dollar beyond 93 US cents for the first time since 1984 and pushing our sharemarket to a new record high.

The Reserve Bank’s Commodity price index released yesterday showed that the prices of the commodities shipped from Australia climbed a further 2.1 per cent in October when adjusted movements in the dollar. They are now at almost twice as high as they they were in 2003.

Retial sales figures also out yesterday showed consumer spending climbing at its fastest rate in more than three years, acelerating somewhat in September.

“You wouldn’t think that Australians were feeling any strain on the household budget from rising interest rates,” quipped CommSec’s equities economist Martin Arnold.

As well, Australia’s trade deficit widened from widened to $1,862 million in September from $1,665 million in August – giving Australia 66 consecutive monthly deficits - the longest run on record.

The drought, a strong Australian dollar, and bottlenecks at ports are all thought to have contributed to the record run of deficits.

Labor trade spokesman Simon Crean described Australia's trade performance as “woeful” claiming that “at a time when global trade is booming the Howard government has presided over a continuing decline in Australia's trade performance”.

The Reserve Bank’s decision next Tuesday is more likely to be affected by the news of soaring commodity prices that suggests that buying power and inflationary pressures will continue to build.

The retail trade news indicates that the last hike in interest rates, in August, had little affect on consumer spending.
Price figures released last week revealed that even after the August interest rate hike inflation kept climbing in Australia, on some measures moving beyond the Reserve Bank’s target zone.

The Treasurer and Prime Minister both said that that was not the case and that they believed there was no reason for the Bank to increase rates again.

The rate hike is expected at 9.30am Wednesday.