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

illion: Business forecasts bumper profits in 2018

Mon, 11 Dec 2017

The illion Business Expectations Survey presented a positive outlook for the economy.

Business profits expectations for 2018 are the highest they’ve been since 2011, with companies set to boost employee numbers in the first quarter on the back of the positive outlook, according to illion’s latest Business Expectations Survey.

Data from the survey indicated businesses operating in the Finance, Insurance and Real estate sector had the highest profit expectations approaching the new year, followed by the Transport, Communications and Utilities sector.  The survey shows that overall, the Business Expectations Index is up 25.7 percent on the same period last year and the actual performance of businesses across all sectors is at a 13 year high.

Stephen Koukoulas, illion Economic Adviser, said there were a number of factors driving the positive outlook for 2018. “Corporate profits are getting a boost from lower costs, which are being driven by record low interest rates and on-going low wages growth – which is all occurring at a time of solid gains in the ASX”.

Oz economy: The good, the bad and the ugly

Fri, 08 Dec 2017

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/2138618-050543271.html 

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

Oz economy: The good, the bad and the ugly

The Australian economy continues to grow, but the pace of expansion remains moderate, being constrained by ongoing weakness in household spending and a slide in housing construction. The good news is further evidence of an upturn in private business investment and stronger growth in public sector infrastructure spending which is providing support for the economy.

At face value, 2.8 per cent annual GDP growth rate is quite good, but the devil in the detail on how that growth has been registered is why there are some concerns about the sustainability of the expansion as 2018 looms.

Household spending remains mired with growth of just 0.1 per cent in the September quarter. It seems the very low wage growth evident in recent years, plus data showing a small rise in the household saving rate, is keeping consumer spending in check.

Making up well over half of GDP, household spending will be the vital element of the economy into 2018. If wages growth remains weak, there seems little prospect of a pick up in household spending. And if household spending remains weak, bottom line GDP growth will be relying on a strong expansion in business investment and public sector demand.