MELBOURNE AUSTRALIA, 8 November 2006 - Well, just as certain as it was that your correspondent would come up with a big fat nothing from the Melbourne Cup, so it was certain that the Reserve Bank of Australia would raise interest rates by a quarter of a percent to 6.25%. And so it came to pass at 9.30am yesterday morning.
Just so there was no doubt about the reason for the increase, the second sentence of Glenn Stevens' statement spelled it out, "The decision was taken against a background of continued expansion in the global economy and further evidence that inflationary pressures had increased."
"Further evidence"? Surely this further evidence that the RBA speaks about has been around for some time. It has been around while the RBA has sat on its hands hoping inflation would go away. Not surprisingly it has not gone away. And the reality was that it was never going to go away while the RBA took passive action.
As if to try and show that they have been taking preventative action against inflation, they slip in a coy, "Monetary policy has been responding to these risks for some time, with increases in interest rates in May and August." Perhaps that should be changed to "...for some of the time,.."
Anyway, we will look out for further signs of inflation and see whether the RBA just sits and waits or whether they will spring into action.
Still, the market didn't like what it saw from the RBA as the All Ordinaries fell by 0.6%. Stocks that don't care much for interest rate rises such as the retailers didn't fare so well. David Jones (ASX: DJS) lost 2.6%, while music store JB Hi-Fi (ASX: JBH)fell by 2.5%.
Even though we have always been told that rising interest rates are bad for banks due to the higher cost of money and lower margins, the good earnings results and the perceived safety of the banking sector makes a churn from other interest rate sensitive stocks irresistible. However, the time will come when they won't look quite so irresistible, especially when investors start to seriously consider the risk of a bank which yields 5.4%, or 7% grossed up, compared to a "risk free" investment in a high interest savings account at 6+%.
At the moment though, it is a risk many investors are prepared to accept. Especially when the alternative is only cash. Also considering the relative scarcity of blue-chip 'safe' investments in the Australian market and the ever increasing flow of funds into it from overseas and from domestic superannuation funds, the argument that suggests that the Aussie market has an ever rising 'floor' becomes self perpetuating.
On to other matters. What goes up, must come down. We mentioned yesterday the soaring stocks of uranium miners Deep Yellow (ASX: DYL) and Redport (ASX: RPT). Well, yesterday they didn't so much soar as nosedive. Deep Yellow lost 15% of its value to close at 36 cents. While Redport declined by nearly 13%. All of a sudden uranium was quite as good an investment as it was the day before!
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About the Author
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.
