WHERE NEXT FOR INTEREST RATES

Nov 07, 2017
Michael Matusik

No rate change again today. The smarties tell me that a neutral interest rate setting is when the yield curve is at 0.5%.

Above this magic marker official rates are likely to rise and below the cash rate is likely to remain steady or may even fall.

Our chart this Missive, shows three different time frames – short, medium and long-term.  For those into the detail; short-term is the two year daily bond rate minus the daily 90 day bill rate.  Our medium term is based on five year bonds and long-term by ten year bonds.

The longer-term picture is that interest rates look set to rise.  The financial markets think that what is going on in the world – that dark matter that we are creating – is somehow inflationary.  I don’t get it, but well, there it is.

The medium-term view is much more subdued and suggests little change in official interest rates; and, if there is a rise, it is likely to be very mild.

The short-term outlook again suggests no change in the cash rate.  But for mine, I think that the RBA will drop rates sometime next year!

CPI inflation has dropped again – it is below the 2% to 3% RBA target range – and is now outpacing wage growth.  This is shaping up to be the new normal.

There is lots of noise about improving employment.  Much of it is exactly that – noise.  The real deal is that one in five (yes that’s 20%) of us either doesn’t have a job, or does work, but wants more of it.  Part-time and casual work is the new norm, not full-time gigs.

We have been living off the credit card for about 20-odd years and now the Sydney and Melbourne housing markets are starting to cool.  And with a very likely close federal election in early 2019, it’s best to keep the gravy train rolling rather than checking to see if we are running out of gas.

Remember, debt is consumption brought forward.  Growth is the assumption that consumption will continue to increase.  Something has to give – and for mine, it will be interest rates.  Bugger the consequences.

Until next time,

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Michael Matusik

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