Winners and Losers from the Interest Rate Rise

Submitted by Craig Strzelecki on 7 May, 2006 - 22:40

We look at who wins and loses from last weeks' interest rate rise.

Here's an article from the SMH about the property investors who bought in Sydney's property boom in late 2003 who are now facing negative equity. "Negative equity occurs when the price of a house falls far enough to wipe out the value of the home owner's deposit. If the house is sold, the borrower would still owe the lender money." The "scale of house price falls in Sydney was likely to affect highly geared investors who bought at the peak of the property boom more than owner occupiers planning to live in their home long-term."

How about a winner from an interest rate rise? We all know that the Aussie dollar appreciated - could be seen as a positive or a negative depending on which side of the fence you are sitting on and which industry you are concerned about. Anyway Macquarie pointed out that rising interest rates are actually beneficial for banks. Take note: the bank with the largest base of consumer deposits is Commonwealth Bank (CBA). This is because there is a lag between the interest rate rise that they impose on their borrowers and the actual increase of the interest paid in the deposits made by their customers. And by the way, Macquarie has an Outperform recommendation for CBA with a 12 month price target of $47.60.

Having the interest rate rise would definitely tighten households who have a mortgage to pay. This would of course limit discretionary spending so taking a wild guess that cafes, newsagents, take-away food and video libraries would be impacted by the move.

Car sales were down 3.5% in the first four months of 2006 so any rise in rates on car loans and car leases might not be the full 0.25%: dealers and their financiers might keep paying some margin simply to keep sales going. However, car sales in April appear to be have fallen a steepish 10% according to industry figures.

The stockmarket reacted the day after the rate rise, which was quite interesting. But take note if Rio Tinto (RIO) or BHP Billiton (BHP) runs strong in the coming months. It may weigh up as additional evidence for an interest rate rise.

Now, the Aussie dollar is up, so of course travel would probably be back on the boards for some Australian families. But with the stronger currency we should see a falling export competitiveness level. Job losses may not be too far down the track. We should also see imports becoming cheaper - watch Current Account Deficit (CAD), here we come!