Yong-Long Lai

Just received this link in an email from a friend! Thanks Kristan! It s a very interesting article that must be read by all (especially if you have a home loan and/or are planning to borrow money in the future)

http://www.theaustralian.news.com.au/story/0,25197,22808650-643,00.html

I ve been keeping a very close eye on the interest rate over the past few months and if you check the major bank s website you will notice that they are definitely increasing interest rate higher than the official 0.25%

Why is this happening?
Simply because the credit crunch is affecting Australia s economy! Here s some background to the banking system.

• Banks source their lending from two sources, the wholesale market (US, UK etc.) or depositors. (That s why you have stuff like savings account, telenet saver etc. Major Banks can lend all these money out!)
• Non Bank lending can only source their money from the wholesale market.

Ie. Banks have an advantage over non-bank lenders because they have an additional source to fund their lending.

What s the problem then?
When bank cannot fund all the lending they are doing they have a few choices (especially if they want to keep their profits up):

• Stop lending (not wise)
• Borrow from more expensive source of money (cost of funding increase)
• Cut cost (short term gain for long term pain)

Banks making statement such as the one in the article simply means the credit crunch must be hurting their bottom line. Increase interest rate will help slow down the rate of borrowing which may cause some or all of the following:

• More businesses will not fund future project due to increase borrowing cost
• Economy will contract (shrink)
• Less money flow in the economy
• Retrenchment
• Cost cutting in companies (so that you can keep profits up)
• Less revenue/sales because since there is less spending (capital
• expenditure which are usually funded from borrowing)
• etc (you get the picture)

From my previous comments, I hope you remember what happens when interest rates goes up! If not, read this again! Click Here

Global debt market risk premia still rising

As sub-prime concerns refuse to go away

Base metal prices now feeling the pinch

In both $A and now even falling $US terms

Lower $A no longer insulating local motorists from record high $US oil price

Gold back chasing oil higher after seemingly giving up for a while

Global debt markets remain unsettled by sub-prime fallout, as US corporate bond risk premia spreads continue to rise. The spillage to the local debt market is not as severe, because the $A LIBOR spread over cash remains lower than in the US or the UK, even though the local one incorporates an expectation component. Nevertheless, the spread between 10-year swaps and risk-free Commonwealth bond yields is hovering around 100 basis points, roughly double what is before sub-prime losses started to mount in the US.

The long downward trajectory of base metal prices has gone to a new level so far this week, in both $US and $A terms.

But by sharp contrast, the gold price has jumped back up in response to yet another all-time high in the US dollar oil price. And while the Australian motorist was to some extent insulated from the rising oil price when the local currency was lapping at 94 US cents, the aussie s subsequent pull-back has sent the $A oil price up to a new all-time high of almost $112.

The latest bout of sub-prime nerves surely has all but extinguished the risk of another cash rate hike by the RBA next month. But contagion would need to spread well beyond the financial economy to smother the risk of another local cash rate increase in February, unless the late January publication of the December quarter CPI is surprisingly benign, which is unlikely.

As the key Thanksgiving and Christmas shopping seasons approach, all eyes will be on US retailers takings for the first signs that sub-prime contagion is spreading from the financial economy to the real economy.

No topic has yet been nominated for the RBA Governor s address to the Sydney Institute on the 11th of December, leaving him plenty of scope to guide local financial markets on the central bank s assessment of whether sub-prime contagion has the capacity to dampen upside inflation risk.

(See attached file: WEEKLYSNAPSHOT21NOVEMBER2007.pdf)

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Alan Langford
Chief Economist
HBOS Australia
Level 8
BankWest Tower
108 St. Georges Tce, Perth
Western Australia 6000
phone: +61 08 9449 6354
fax: +61 08 9449 6266
e-mail: alan.langford@hbosa.com.au

The information contained in this publication is of a general nature and is not intended to be nor should it be considered as professional advice. You should not act on the basis of anything contained in this publication without first obtaining specific professional advice. To the extent permitted by law, HBOS Australia Pty Ltd, its related bodies corporate, employees and contractors accepts no liability or responsibility to any persons for any loss which may be incurred or suffered as a result of acting on or refraining from acting as a result of anything contained in this publication

WEEKLYSNAPSHOT21NOVEMBER2007