Are Aussie interest rates about to hike?

Fri, 02 Dec 2016  |  

This article first appeared on the Yahoo 7 Finance website at this address: https://au.finance.yahoo.com/news/are-aussie-interest-rates-about-to-hike-012908729.html 

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Are Aussie interest rates about to hike?

There is a slowly growing vibe that the next move in interest rates in Australia will be up. Perplexingly, money markets are starting to price in higher interest rates for reasons that are paying scant regard to local economic news.

It is a case of the local market reverting to its unthinking, unquestioning attitude to what the RBA tells them in private “Chatham House rule” meetings plus the lead from the US where its strong economy will see the Fed hike its interest rates a few times over the next six months.

In Australia and for the RBA, it is an approach that is ignoring a litany of weak economic indicators.

Think about this for a moment for the Australian economic scorecard. Private sector business investment is in free-fall to be down 13 per cent in the last year and 33 per cent in three years. Underlying inflation is the lowest ever recorded and has been below the bottom of the RBA target range for over a year. Wagers growth has slipped below 2 per cent which is the weakest wages growth in many decades. Employment growth has stalled and underemployment is at a record high.

Making the scenario of steady interest all the more problematic is the resilience of the Australian dollar which is being underpinned by current interest rate settings which has Australia one of the highest interest rate countries in the industrialised world. As a result, money continues to flood into Australia to underpin the Aussie dollar.

It seems the RBA and the market have ants in their collective pants about the possibility of higher house prices if interest rates were cut further. This ignores a couple of vital issues. Mortgage interest rates are already rising on the back of the rise in bank funding costs so a cut in official interest rates would at least partly reverse some of that pressure just when the economy needs it.

As noted, house prices are poised to weaken, perhaps even fall sharply, as the glut of property hits the market and investor demand falters. The fresh supply of housing will have a more significant dampening effect on dwelling prices than a small fall in interest rates. Thinking a rate cut from the RBA would underpin house prices is to ignore the other drivers of house prices.

Perhaps most importantly, it is the business sector that would be a significant beneficiary of lower interest rates with cash flows freed up on existing debt and the hurdle to borrow more for much needed investment lowered.

The economy is not disasterously weak, but it needs an injection of policy stimulus and interest rates can be cut quickly and easily and the RBA should simply do it.

It costs nothing, the global economy is hardly poised for an inflation break out and the risk that Australia’s inflation rate will skyrocket anywhere near the top of the RBA target band on a rate cut of even t50 basis points is fanciful.

A cold hard look at economic facts screams lower interest rates are needed. A convoluted, model based rose coloured forecasting strategy says rates should be on hold.

The RBA needs to put its fancy model aside for now and get into the real world and cut interest rates – and do it soon. RBA, your country needs you.

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What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.