Despite the Australian economy seemingly lurching from bust to boom to bubble overnight, and RBA Governor Glenn Stevens warning of a coming post-credit era, the media has continued its obsession with the only issue that matters in voter land — interest rates, and the desirability or otherwise of locking in fixed-rate home loans. More indications on the RBA’s outlook will come next week, but for the moment it seems consumers are far from spooked. Data out this morning show building approvals soaring and house prices spiking, as consumers take on debt in a bid to beat the market and sidestep spiralling rent.
But have we acted too soon? Or did Stevens’ more substantive remarks flagging the end of easy credit simply fail to sink in? Crikey asked a group of leading economists to cut through the spin and dissect the how, why and when on rates so Kevin Rudd’s working families can properly plan for the future.
Shane Oliver — AMP Capital Investors: While the media and financial markets have concluded from RBA Governor Glenn Stevens’ comments this week that an interest rate hike is just around the corner, we are not so sure. Just because the phase of rapid rate cuts is over doesn’t mean rates will now go shooting back up again. Sure, the economic outlook is improving, a renewed unsustainable surge in house prices is a risk and monetary stimulus will have to eventually be reversed. However, against this, the global credit backdrop will remain pretty tight for some time to come and there is still considerable uncertainty about how strong US consumer demand will be.
June and September quarter GDP growth is likely to be weak and inflation is still falling. An early rate hike will put considerable upwards pressure on the $A, making life tougher for Australian businesses. Unemployment is probably a year away, at least, from peaking. Sure the RBA does not want to be constrained by still-rising unemployment in raising rates, but Glenn Stevens would want to be pretty sure that a peak in the unemployment rate is at hand. Right here, right now, it is way too early to say that. Our assessment is that rates won’t start going up for another year, taking the cash rate to around 4 per cent by the end of 2010.
Rory Robertson — Interest-Rate Strategist, Macquarie Bank: Here is the policy story so far: the RBA’s cash rate and mortgage rates are sitting at extraordinary low levels; over the past several months, our economy — and the global economy to a lesser extent — has begun throwing off stronger signs of recovery. Revved up by RBA briefings, key journalists last week started telling stories about future tightening that were more “hawkish” than suggested by either of the RBA’s July policy statements. Governor Stevens, when asked, carefully left open the door to hiking before unemployment has peaked (no “rule of thumb”!), in the process skipping past the fact that the RBA has over the past two decades — very deliberately — waited at least that long before beginning a tightening cycle.
Where does this leave us? Well, the RBA seems to have painted a consistent picture via key journos: “Its ‘present intention’ is to remain ‘on hold for the foreseeable future’, until the first hike; “…interest rates will stay on hold until mid-next year, when the Reserve Bank will start lifting its 3 per cent cash rate to normal levels”; and “the increasingly likely scenario … is for the official cash rate to be on hold for now, and to begin its journey back to more normal levels, probably about the middle of next year.”
So there you have it: if local and global economies and markets continue to improve gradually, the RBA expects to start hiking around the middle of next year. Surprisingly strong growth would drag the first hike forward, perhaps into this year, whereas serious growth disappointments might see the RBA remain on-hold into 2011, or even cut below 3 per cent. Good news on the jobs market will be bad news for interest rates.
Adam Carr — Senior Economist, ICAP: The way things stand at the moment the next move is clearly up. Given our current growth trajectory, the timing will be determined by the inflation rate which for me is the greater unknown. Current indicators suggest that core inflation is sticky. It’s higher than the RBA thought it was going to be six months ago. So if we don’t see a sharp drop in Q3 core inflation then I think the RBA’s first hike will occur in Q4.
Ultimately, policy must be about an assessment of risks. We’re not in a recession; we’re facing down very strong growth in the housing sector and the financial crisis has passed. The question for policy now is why do we have or need a historically low cash rate? The answer is we don’t. Yet neither do we need policy to be restrictive or even neutral at this stage. I suspect the RBA will keep rates accommodative by hiking to 4 per cent over the course of the next year. The risk, however, is for something a little more aggressive.
Stephen Walters — JP Morgan Chief Economist: Our forecast is that the RBA will hike by mid-2010 at the latest, even as unemployment is climbing towards 9 per cent. The substantial policy accommodation provided by the generational-low cash rate, coupled with the largest fiscal stimulus since the early 1970s, should be sufficient triggers for RBA officials to take a leap of faith and tighten pre-emptively, provided they are confident the jobless rate is close to peaking.
This will, though, be breaking fresh ground — at the start of the last three tightening cycles, the RBA waited for the jobless rate to fall before raising the cash rate. As the Governor hinted on Tuesday, timing the exit strategy will be difficult — the hike will come when the “time is right”.