The Prime Interest Rates - Essay Example

Interest rates Due to the current financial crisis, the interest rates have been lowered in order to accommo the borrowers to repay and allow businesses to borrower at low cost so that production activity can pick up. According to different forecasts, the expectations for interest rates to vary are based on the phases variations as there is no comprehensive forecasts which can predict interest rates for two years. According to forecasts made by Financial Forecast Center, the prime interest rates will move within the range of 3.25% until Oct 2009. (http://forecasts.org, 2009). It has been forecasted that the FED is going to increase the interest rates in late 2009 or early 2010 therefore the expectations are that the prime interest rates will be in the range of 3.50% to 4.00%. Another forecast indicates that until December 2009, the prime interest rates may hit the figure of 4.00% and will continue to move upwards until 4.75% in December 2010. (http://mortgage-x.com, 2009). This forecast is slightly more generous than the earlier projection however, considering the other fact that financial system has to cope with the increasing losses too therefore it is possible that the interest rates may go up to 4.75% in December 2010. The increase in the prime interest rates may decrease the demand for automobiles because the financing cost of such products would increase and consumers may find it difficult to purchase new cars at high increasing interest rates. Further, it may also be possible that the increase in interest rates may further increase the overall cost of doing the business for automobile firms. Housing Starts The forecast up to Oct 2009 indicates that the new housing starts within US would be 683,000. (http://forecasts.org, 2009) however; recent statistics suggest that there is a steep increase in the housing activity in the country. Whereas according to some estimates, the housing starts are going to depress or at least remain within the current limits until 2011. (National Post, 2009). These forecasts indicate somewhat mixed forecasts as it indicates that the housing starts may indicate random patterns on month wise averages however, the overall projections may indicate that the housing starts would remain at the present level at least up to 2010. I believe that later forecast that the housing starts will depress until 2010 are more plausible because interest rates are projected to increase later this year therefore the finance to builders as well as mortgage rates are set to increase too. This may therefore, result into depression of housing starts. The potential impact of this decline or at least persistence of the current level of housing starts would mean that the new and first time homeowners will decline and as such the demand for automobiles may decline too. It has been observed that historically those who buy a new housing unit tend to buy new or used cars too. Though to point a direct correlation between the two variables may be difficult to predict however, it is quite possible that with the decline in the housing starts the demand for new cars and automobiles will decline too. Auto Sales J.D. Powers and Associates, one of the most respected names in auto industry research projected an auto sales figure of 13.2 millions units of sales in 2009. (Henry, 2008). According to another source, the auto sales for year 2009 would be 13.9 million. (Henry, 2008). The forecasts for year 2010 are expected to be around 14 million units which are considered plausible only if the impact of credit crunch is controlled. (Henry, 2008). The above forecasts indicate that the auto sales may pick up and as such forecasts made of 14 million units seems to be more plausible. Since US Government is in the process of offering a bailout plan to the auto sector also therefore the possibilities are that the auto sales will pick up. It is also important to note that the demand from outside US may increase too as countries like China, Brazil and to some extent India is not that badly affected by the current financial crisis as US or UK is. It is therefore, imperative that the auto sales may go up to 14 million units and if the money from bailout plan is correctly utilized, the same forecasts may be revised upward based on the improved financial position of automakers in the country. Foreign Exchange Rate US Dollar has been under pressure from major currencies specially EURO as EURO is increasingly being dominated the international trade, especially in EU region. According to one forecast, the US dollar is going to weaken in the first quarter of the current year whereas it is expected to pick up in next three 3 quarters based on the performance of the US economy. (Lien, 2008 ). Further, the other estimates are almost the same as most of the analysts are considering almost the same impacts on the US dollar specially. Historically, the US dollar has shown random patterns as for consistent period of time, it was not performing well against the major currencies however, it performed well in the international market for brief period of time also. The adverse economic conditions in the market may be a blessing for the US dollar because US automobile industry in a bid to find new buyers may reduce the prices provided bail put the plan is provided. This reduction in price, therefore can create strong overseas demand for the cars and automobiles of US in the international market however the same may be offsetted by the unrealistic appreciation in US dollar values too. The strengthening of dollar may reduce the export sales of US automakers, mainly due to the high cost and as such if it performs well against the major currencies, the overall export sales may decline for automobile industry. Further, the strengthening of dollar can also result in reduced cost of manufacturing as the firms may increasingly find it more inexpensive to import parts in order to improve the quality of their products. Producer Price Index As per one forecast, up to Oct 2009, the PPI would increase to 163.93 against a base estimate of 100 taken in year 1982. (http://forecasts.org, 2009). Further, other forecasts indicate that the PPI will decline in year 2010 because of the expected recovery of the US economy based on the stimulus plan offered by the government. (Chandra, 2008). These trends indicate the firms will be experiencing significant relief, especially in the next year as the economy will start to ease out and as such the consumer spending will also pick up. I believe the forecasts that the PPI is going to decline in year 2010 is more plausible based on the future expectations of the revival of the US economy. This would also result into a substantial relief to the automobile industry too as the reduction in the overall PPI would provide them more and better cost advantage than they are experiencing now. This might therefore, result into increase in the domestic demand because of the low prices as well as availability of more and cheap credit to the consumers. It is also important to note that a reduce PPI may lead to the decrease in the supply as the exporters specially from developing world may find economically viable because a strong dollar will be an added motivation for them to export to the US at relatively low prices. Further, if some tariff restrictions are removed, the automobile sector in country can greatly benefit from cheaper raw material exported to the country. Oil and fuel Prices Oil prices have been really volatile in the recent past because they went on touch all time high as well as touching a record decrease in its price over the period of time. Before the financial crises, oil prices were extremely volatile moving upwards however, after the financial crises, there have been a consistent decline in the prices. According to the forecasts for current year i.e. up to Oct 2009, the oil prices are going to reduce up to $26 per barrel. (http://forecasts.org, 2009). Whereas another forecast indicates that the oil will remain up to $42 per barrel during 2009 and will touch an average price of $53 in 2010. (EIA, 2009). The forecasts by EIA are more accurate because given the recent price trends of oil in the international market, it has shown some level of resistance and moved up too indicating that the market forecasts for short term are healthy and positive as many are considering that with the strengthening of US economy, the overall prices of oil will start to increase too and as such the forecasts are relatively high. High oil prices can have negative affects for the automobile industry as oil and gasoline is a complimentary good for automobiles therefore increase in price of one would reduce the demand for other. If the forecasts are correct and oil prices really influence the buying decisions of the buyers, the increase in oil prices is going to affect automobile industry. Bibliography 1. Chandra, S. (2008). U.S. Producer Prices Fall 2.2%, More Than Forecast . Retrieved March 26, 2009, from Bloomberg: http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=auOy6acS8Rh0 2. EIA. (2009). Short-Term Energy Outlook. Retrieved March 26, 2009, from Energy Information Administration: http://www.eia.doe.gov/steo 3. Henry, J. (2008). Analysts paint darker picture of U.S. auto sales. Retrieved March 26, 2009, from Automotive News: http://www.autonews.com/apps/pbcs.dll/article?AID=/20080918/ANA05/809189969 4. Henry, J. (2008). U.S. Auto Sales Forecasts Cut Yet Again. Retrieved March 27, 2009, from http://industry.bnet.com: http://industry.bnet.com/auto/1000261/us-auto-sales-forecasts-cut-yet-again/ 5. http://forecasts.org. (2009). Prime Loan Interest Rate Forecast. Retrieved March 25, 2009, from The Financial Forecast Center: http://forecasts.org/prime.htm 6. http://mortgage-x.com. (2009). Prime Rate Forecast. Retrieved March 26, 2009, from http://mortgage-x.com: http://mortgage-x.com/general/indexes/prime_rate_forecast.asp 7. Lien, K. (2008). US Dollar 2009 Forecast. Retrieved March 26, 2009, from http://www.actionforex.com: http://www.actionforex.com/long-term/long-term-forecasts/us-dollar-2009-forecast-2008122673347/ 8. National Post. (2009). U.S. housing starts: permits post unexpected jump. Retrieved March 26, 2009, from http://www.canada.com: http://www.canada.com/business/fp/housing+starts+permits+post+unexpected+jump/1398815/story.html Read More