Could rates fall even further?

Thu, 03 Aug 2017  |  

This article first appeared on the Yahoo7 Finance website at this link: https://au.finance.yahoo.com/news/rates-fall-even-055840162.html 

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Could rates fall even further?

There’s no way the Reserve Bank of Australia will increase official interest rates while the economy remains in its current rut.

Australia’s economic fundamentals are quite problematic but this has not stopped some analysts from ramping up speculation about interest rate hikes, perhaps before the end of the year. More interesting, the money markets are pricing in higher interest rates over the next 12 to 18 months.

The reason why this is so misguided and misreads the current status of the economy is straight-forward. Growth, inflation and wages growth is low and the unemployment rate is high. It is worth taking a step back to see how the economy was performing the last time the RBA started an interest rate hiking cycle. That was back in October 2009, when the RBA increased the cash rate from 3.0 per cent to 3.25 per cent as the economy picked up steam as the impact of the global crisis faded.

In the six months prior to that hike in 2009, the unemployment rate hovered around 4.2 to 4.3 per cent and at the same time, annual wages growth was locked between 3 and 4 per cent.

Importantly, this ultra low unemployment rate and solid wages growth fed into underlying inflation which was above 3 per cent for two years. It was around 3.5 per cent as the first rate hike of that cycle was delivered.

At that time and with hindsight, it was quite obvious that higher interest rates and tighter monetary policy was needed to reign in inflation pressures which had been stubbornly high. In a nutshell, the economy was strong, with low unemployment, solid wage growth and inflation was uncomfortably high.

Fast forward to today. Let’s now look at the economic fundamentals the RBA will be confronted with as it considers what to do with interest rates.

Now, the unemployment rate is hovering around 5.6 to 5.7 per cent, a full 1.5 percentage points above the rate when the last interest rate tightening cycle started. Annual wages growth is currently at a record low, running at 1.9 per cent, almost half the rate in 2009. A critical point now is the underlying inflation rate. It has been below the bottom of the RBA target band for two years and last week, it was confirmed at 1.8 per cent to be about half the rate at the time of the start of the last interest rate tightening cycle.

For an interest rate hiking cycle to start, inflation needs to pick up to at least 2.5 per cent, while wages growth needs to lift to 3 per cent. This implies the unemployment rate needs to drop to 5 per cent or less and which on even the most optimistic forecasts, seems more a wish that a robust expectations of labour market conditions.

Until these sorts of readings for the economy come to pass, the RBA will not lift interest rates. Indeed, if there is any evidence of low wages growth and low inflation continuing near current levels, the RBA will cut interest rates to a fresh record low.
In the mean time, keep an eye on the data on wages, inflation and unemployment to work out when, and in what direction, the RBA will next move rates.

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Employment - the odd one out or is the economy booming?

Thu, 19 Oct 2017

I am reluctant to bag and slag the employment data, because it is all we have when looking at the health of the labour market. But there are a few quirky bits and bobs in the news of the wonderful run of job creation over the past year.

Employment rose by a remarkably strong 3.1 per cent in the year to September, a fabulous result.

But, and it is a big but, the results are at odds with just about every other indicator in the economy. EIther they are misleading or the employment data are misleading.

One way to check it to have a look at the economy the last time annual growth in employment was above 3 per cent. This takes us to the period around 2007 and into early 2008.

In 2007, annual real GDP growth was generally around 4 to 5 per cent, as you would expect with such jobs growth. The economy was on fire!  In 2008, the CPI surged by over 4 per cent which is again as you would expect given the boom in employment. The RBA was hiking rates at an agressive pace, with the official cash rate hitting a stonking 7.25 per cent in 2008. Wow! 

What bubble? The financial sector is fighting fit

Tue, 17 Oct 2017

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/1897318-045821149.html 

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What bubble? The financial sector is fighting fit

Australia’s banking sector is in peak health and the household sector is having few if any problems managing its debt.

This is the good news from the Reserve Bank of Australia Financial Stability Report which effectively put the kybosh on the fear-mongers who continue to forecast a crisis in household debt, a crash in house prices and turmoil in the financial system and more specifically, the banks.

The key conclusion from the RBA was that “the financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

These are strong and direct words from the normally cautious RBA.

It also noted that the bank’s non-performing loans (bad debts in other words) “remain low” and bank profitability “is high”, which are the key indicators of financial stability and strength. The RBA went as far to say that “the banks also have ample access to a range of funding sources at a lower cost than a decade ago” which is fundamental to the functioning of the financial system. Nothing was presented that indicated current problems in the financial sector.

The RBA assessment can be tested from the markets, specifically bank share prices. Most evidently, bank share prices remain strong as the investment community continues to place its money where its mouth is when determining actual performance and even risks when allocating investment funds.