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 

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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.

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Podcast: The case for rate cuts, the wages conundrum and the end of QE

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This is a thoroughly enjoying and I trust interesting podcast I did with the excellent Paul Colgan and the hugely knowledgeable David Scutt.

Click on the link: https://www.businessinsider.com.au/podcast-devils-and-details-stephen-koukoulas-2018-6

Paul and David do a regular podcast "Devels and Detals" on the economy and markets - I strongly recommend it.

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The case for rate cuts, the wages conundrum and the end of QE

Stephen Koukoulas is one of the few economists in Australia who believes the RBA should be cutting rates.

That’s where we start this week on the Devils and Details economics and markets podcast, with the conversation also covering the major central banking decisions from the Fed and the ECB this week, and the impact of the proposed changes to negative gearing on the housing market — which gained a lot of attention this week after the release of the report by RiskWise warning of the potential for severe unintended consequences in some geographical areas from Labor’s policy plans.

You can find the show on iTunes or under “Devils and Details” on your podcasting platform of choice.

 

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This article first appeared on the Business Insider website at this link: https://www.businessinsider.com.au/rba-rate-cut-2018-6

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The remarkably simple case for an RBA rate cut

The performance of the Australian economy is a bit like my old report cards at school: “Doing reasonably well, but could do better”.

Unlike my approach to school work, which only impacted me, the current policy complacency is seeing unemployment rise, wages growth remain in the doldrums and our $1.8 trillion economy underperform. In the latest test of economic growth, the 3.1 per cent annual GDP growth rate for the March quarter was reasonably good.

It was close the long run trend and a welcome result given the performance of the economy in recent years.

Alas, it is probable that this 3.1 per cent growth rate will turn out to be a “one-off” spike, with some pull-back in the June quarter highly likely from a lower contribution to GDP from net exports, inventories and government demand. When the June quarter national accounts are released in early September, annual GDP growth is likely to slip back to around 2.7 per cent.