WHERE NEXT FOR INTEREST RATES?

May 02, 2017
Michael Matusik

No rate change today. Yet the yield curve suggests that we are at the bottom of the official interest rate cycle, for now, and the next move is most likely up.

But for mine, they will remain on hold.

  • Despite rising inflation – albeit still within the bottom end (2.1% per annum) of the RBA target range – much of the recent lift in prices can be attributed to essential items, and in particular, energy bills and the cost of petrol.  Inflation is now outpacing wage growth.  This is shaping up to be the new normal.
  • There is lots of noise about employment.  Much of it is exactly that – noise.  The real deal is that one in five (yes, that’s 20%) of us either don’t have a job or do work, but want 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.  Remember, debt is consumption brought forward.  Growth is the assumption that consumption will continue to increase.  Something has to give.
  • Consumer confidence is now falling, especially when it comes to personal finances and expectations for future economic conditions.
  • Sydney and Melbourne are well into housing bubble territory.  True, the rest of the country’s housing markets are at different phases, but interest rates are a blunt tool.  And, well, the RBA board are very Sydney-Melbourne centric.  Remember, its Sydney or camping out.

So, for these reasons, the cash rate is likely to remain on hold.  For now.

On the flip side, the Australian dollar is likely to fall sharply – say, down to 60 to 65 cents against the dollar – if the US Fed continues to increase interest rates and the RBA maintains its policy of leaving the cash rate on hold.

This, in turn, would impact on Australia’s inflation rate.  It would lift the rate of price escalation.  And if beyond 3% per annum, then the RBA will start lifting the cash rate.

So again, at present, the cash rate is on hold, but for how long?

Unless things start to slide – both economically and politically – the cost of money is going to rise.

Get all 7 of our 2017 first-release reports and save 67%!  Report #3 on population growth and forecasts is out later this week.

“Michael is one of the few property analysts that I trust – I know his work is founded on research and not spin.”  Kevin L.

Keen to hear your thoughts.

Until next time,

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Michael Matusik

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