Yield Curve

It's worth pointing out that the longer end of the yield curve has lifted a little with the wholesale 5 year swap rate hovering around 6.00%. It was as low as 5.61% back on the 5th of Feb. The last time the 5 year rate was consistently over 6.00% was towards the end of last year. The reason for this latest jump is the belief that the RBA may attack an increase in housing prices more aggressively and that with confidence continuing to strengthen that inflation may become an issue.

Some of the regional banks such as Bank of QLD and Rural have some very attractive longer term rates at the moment.

RBA

Glenn Stevens made clear indications yesterday that he is focusing on inflation for particular asset classes - ie housing. Traditionally the RBA has limited itself to inflation as a whole and has not dived into micro level inflation. As such expectations for an April rate hike has risen considerably as has BBSW.

$1m Deposit Continues

There's a lot of press about the ending of the Wholesale Deposit Guarantee this morning. To avoid any confusion I'd like to repeat that the Financial Claims Scheme, which guarantees deposits of up to $1 million for free with eligible ADIs remains in place until Oct 2011.

The guarantee being phased out is for deposit sizes of OVER $1 million where a fee was payable.

India

This may not be of direct importance but it's interesting to note that the other huge fast growing economy after China has also started to put the brakes on. India last week raised interest rates in an effort to take a bit of heat out of their economy.

Guy Dabelle, RBA Assistant Governor, Comments:

"They will rise a bit further" That's what Guy Dabelle said yesterday in a talk in relation to cash rates. This is nothing new as we know rates are due to return to 'normal' levels (4%-5%) over the course of the year. He also downplayed the impact European instability would have on rates.

Matthew Godden - Senior Manager Fixed Interest - Curve Securities

Curve Securities are pleased to welcome a very experienced market veteran in Matthew Godden. To read more about him please click here.

Other staff changes are that Patrick Norris has returned to the UK to resume his banking career and Caroline Bradley has completed her short-term contract.

RBA Minutes

The RBA minutes for their last meeting were released yesterday. As usual the concluding paragraphs, below, illustrate their thinking. Note the bold green text were it confirms they will continue lifting to 'normal' levels which are likely to be between 4.50% and 5.00%

Members took note of the positive developments in the financial sector, including early signs that credit to business was becoming easier after the difficult period last year. They also noted that, while housing loan approvals had slowed a little, house prices had gained significant momentum and were continuing to rise strongly for all but the bottom segment of the market.

Members agreed that the fiscal problems in Europe, if not resolved satisfactorily, could result in renewed turmoil in markets and fresh weakness in the global economy, which could have implications for Australia. But while such an outcome could not be ruled out, it was not the most likely one. The central expectation remained that the global expansion would continue at a reasonable pace with significant regional differences. Members concurred that the appropriate course was to set policy as required by the most likely outcome, and to be ready to respond to other outcomes if they eventuated.

On balance, members concluded that the evidence that had become available recently had confirmed that it remained appropriate for interest rates to move gradually towards normal levels, and that it was timely to take another step in that direction.

The Decision

The Board decided to raise the cash rate by 0.25 percentage points to 4.0 per cent, effective 3 March.

Term Deposit Rates

The majors have dropped their term deposit rates, something widely reported in the press and on TV. There are still some great alternatives to the majors though with some rates near and over 6% and with an implied AAA rating given up to $1 million is guaranteed by the Australian Government. A rating which is not under pressure unlike the USA & UK.

Government Guarantee

Please note the guarantee that is being phased out is the Wholesale Guarantee for Large Deposits - this is for deposits OVER $1 million where a FEE IS PAYABLE to guarantee the funds. It also covers the raising of offshore funds by the banks where they can elect to pay a fee and have their bonds guaranteed.

The FINANCIAL CLAIMS SCHEME which covers deposits up to $1 million with any ADI (Authorised Deposit-Taking Institution) and ensures those funds are guaranteed automatically, and for free, by the Commonwealth Government remains in place until October 2011.

Employment

The headline rate came in yesterday at 5.3% which was constant. The market was hoping for a further 15,000 jobs to be created but the reality was only an extra 400. There was an increase of 11,400 full-time created which is quite positive. The hours worked also increased 2.4% indicating that workers are starting to get some of their hours back that they lost during the crisis.

Home Lending

During the past crisis one of the stimulus measures adopted by the government was to provide assistance to first home buyers. This assistance ended in December so we saw a rush of home lending leading into the end of 2009. Figures released yesterday showed that home lending subsided dramatically as a result of purchasing plans being brought forward. One of the key things the RBA has been looking for has been the resilience of the economy in the absence of stimulus measures such as this. I wouldn't read too much into these figures just yet and in a speech yesterday the RBA's Phillip Lowe warned that there is still a risk of climbing house prices as a result of supply constraints.

Figures: Home loans dropped 7.9% in Jan. The biggest fall since June 2000.

Job Ads

ANZ job ads had a bit of a surge in February. That month is traditionally pretty strong for job ads but nevertheless there was a 19.1% jump on January's figures. This is the biggest increase in 11-years.

Employment figures are due on Thursday with expectations for the headline rate to remain at 5.3% with an expectation for an additional 15,000 jobs created.

GDP

Australia is the envy of the developed world at the moment with it's economy showing consistent growth. Yesterday figures showed the economy grew in the December qtr by 0.9%.

From a year earlier the economy has grown by 2.7%. Much of this, about 2/3, was as a result of stimulus added to the system by the government. The economy now has to try and continue that growth on it's own.

The economy still has room to move as it approaches trend but expect further rate hikes to ensure it doesn't overshoot.

Yield Curve

As a result of the rate rise yesterday the yield curve curve has flattened pivoting around the two year part of the curve. Rates out to 1 year have gone up about 5 points as much of the 25 point rise in the cash rate was priced in. Yields for 3 to 5 year terms have gone down as the smart money realises that the RBA is committed to staying on top of inflation and that future rises have been priced in.

GDP figures are due out today with expectations of 0.8 or 0.9 for the qtr. This will still be below trend but expect further rises during the course of the year as the RBA brings rates to neutral.

Rate Rise?

A rate rise today is a bit of an even bet - possibly a 60% chance of a rise. There are factors weighing on each side of the scales so the RBA could go either way. Greece, sited last month when they paused, is still unresolved but China, and the stimulatory potential it holds for the future can't be discounted. The USA is showing signs of uneven growth while our capital investment shows optimism for the future despite weaker private sector wages figures.

One thing can be sure though, if they don't tighten today a rate rise isn't far away. Our monetary policy setting is still very accommodating and the RBA is eager to get it back to a neutral setting between 4.50% and 5.00% at the first available opportunity.