Got a massive mortgage? Rest easy, for now – you could get a rate cut

Thu, 13 Apr 2017  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/got-huge-mortgage-rest-easy-now-231105702.html 

=============================================================

Got a massive mortgage? Rest easy, for now – you could get a rate cut

Everyone with a large mortgage can rest assured for a while, given that an interest rate hike is unlikely in the next year and if anything, the next move in rates will be a cut.

The market has been speculating about the need for an interest rate hike as the global economy improves and for reasons linked to dealing with house prices in Sydney and Melbourne. The latter point is remarkably silly and ignores one critical factor that always feeds into RBA deliberations – unemployment.

Since December 2002, the Reserve Bank of Australia has hiked interest rates on 17 occasions. Of course, there have been a series of interest rates cuts over that time as well, but it is clear that the unemployment rate is a factor of substance that feeds into the decision to tighten monetary policy.

Those 17 interest rate increases over 15 years have occurred against a range of differing backdrops – the removal of emergency stimulus, dealing with the inflation surge from the terms of trade boom and simply managing the economy in a prudent way, with an eye on keeping the inflation rate on target at between 2 and 3 per cent.

A standout issue for the RBA over the 15 years of modern monetary policy management is that it has never hiked interest rates when the unemployment rate has been above 5.7 per cent.
This begs the question about monetary policy considerations now, with the speculation about an RBA rate hike. These views are a little strange, not just because the current unemployment rate is 5.9 per cent, but because inflation is currently below the bottom of the target band, wages growth is at a record low and bottom line GDP is still some way below trend.

Indeed, just three of the last 17 rate hikes have occurred with unemployment at 5.6 per cent or 5.7 per cent; a further four rate hikes have occurred with unemployment at 5.3 to 5.5 per cent; a further three with unemployment at 5.0 to 5.2 per cent with the remaining seven hikes delivered with an unemployment rate at 4.9 per cent or lower.

This no doubt reflects the RBA judgment that the unemployment rate associated with full employment and the risk of rising inflation is around 5 per cent. If the economy is growing strongly and the unemployment rate is on track to hit or even break below 5 per cent, inflation risks are building and with the, tighter monetary policy in the form of interest rates hikes are needed.

It is a strategy that has, on balance, worked well.

For now, there seems little chance for the unemployment rate heading to 5 per cent. On Thursday, there will be the regular monthly update on the labour force which will provide an update on employment and the unemployment rate. It needs to be a strong result for there to be any credibility in the interest rate hike forecasts. If not, it seems likely that rates will be on hold a lot longer and if there is a move in the unemployment rate to 6 per cent, or higher, the RBA and market will soon change its tune and an interest rate cut will be on the agenda.

comments powered by Disqus

THE LATEST FROM THE KOUK

Could tax cuts threaten our AAA credit rating?

Thu, 22 Feb 2018

This article was written for The Wire, a publication produced by FIIG. This link is here: https://thewire.fiig.com.au/article/commentary/opinion/2018/02/16/could-tax-cuts-threaten-our-aaa-credit-rating

-----------------------------------------------------------

Could tax cuts threaten our AAA credit rating?

In just over 10 weeks, on 8 May to be exact, Treasurer Scott Morrison will deliver the 2018-19 budget - almost certainly the last before the next election.

The budget is likely to offer mixed news, but encouragingly remain on target to a small budget surplus in 2020-21.

Importantly, from both an economic and political perspective, there has been some upside to government tax receipts since the mid year economic and fiscal update was published in December. This is largely the result of company tax receipts running strongly as profits and therefore tax payments have been buoyed by higher commodity prices, boosting the financial position of mining companies. Strong employment growth has kept income tax payments flowing freely to Treasury, despite soft wages growth.

If the current speculation from Canberra is correct, and it appears to be well founded, the government will use the windfall revenue gains to promise income tax cuts on top of the company tax cuts it is currently trying to get through parliament.

Tax cuts stimulate growth

While the timing and magnitude of the income tax cuts is yet to be revealed, there is little doubt that there will be something of a sugar hit to the economy if the Coalition win the election and the tax cut legislation is passed. There will plainly be more cash in the economy rather than in the government coffers at the time the tax cuts are delivered. This would support bottom line economic growth and at the margin, add to inflation. Financial markets would also be impacted, if the US is any indication.

When next for the Aussie dollar?

Wed, 21 Feb 2018

This article first appeared on the Yaho7 Finance web site at this link https://au.finance.yahoo.com/news/next-aussie-dollar-041651007.html 

------------------------------------------------------------ 

What next for the Aussie dollar?

It has been a turbulent few weeks for financial markets, including for the Aussie dollar. The AUD has been on a roller coaster, having reached a high of 81.2 US cents in late January and a low of 77.7 US cents about 10 days ago having traded at a low around 75 cents in December.

It is currently trading around 79.5 US cents, with the market divided about which direction will break over the next 12 months.

Foreign exchange markets are driven by many factors. For the Australian dollar, there are some powerful influences that have shown to determine its fortunes. One of those is the gap in interest rates between Australian and the rest of the world. When Australian interest rates are substantially above those of the rest of the world, there is often a bias from investors towards the AUD which drives it higher. When the interest rate gap compresses, the appeal of the AUD is reduced.

Which brings us to a fascinating situation at the moment, when we compare Australia and the US. With the US Federal Reserve embarking on a series of interest rate increases and the Reserve Bank of Australia squarely on hold, the interest rate gap between Australia and the US is effectively zero. This is not only for the official cash rate, but also for 10 year government bonds. This is a rare occurrence and prospective changes in the interest rate gap is one reason why the risks favour the AUD falling back towards 70 US cents over the next year or so.