The Reserve Bank is stuck on interest rates … so right now, it’s every man, woman, child and business for themselves. Banks too.
The rate decision from the Reserve Bank will be on hold. Get back to me in 12 months’ time, minimum, to see if that view has changed.
Money markets today say there is a 100% chance of no rate move. Get that … even the biggest speculators in the world don’t want to take even the hint of a punt that the Reserve Bank will change interest rates.
That’s how clear the message has been from the Reserve Bank. Rates are not changing.
Normally, if the dollar ran up from 73.5 to 80 US cents – as it has in the past five months (it was 71.75 in December last year) then there would be speculation about an interest rate cut. After all – compared with last December – the nation is 11.5 percent less competitive (that’s the dollar movement).
It might be good for internet shopping, cheap petrol and overseas holidays, but it sure isn’t helping the economy pick up from its malaise of low inflation and record low wages growth. That’s why the rising dollar is generally associated with falling interest rates.
But not this time. That’s because of Melbourne and Sydney house prices. After having waged a campaign to curb soaring home values – the latest house prices are out today – the Reserve Bank hardly wants to let the genie out of the bottle by cutting interest rates.
(Remember here, the strategy to curb housing was to require banks to put extra capital aside and to limit the growth in investment lending, which had the impact of banks raising rates for investors and those with interest only loans). Get that? Rising interest rates at a time when rates should have been falling.
That said, the Reserve Bank can’t raise interest rates either. The corporate sector, along with households in Perth, Darwin and many regional areas simply would not cope. Australia, after all, is not just Sydney, Melbourne and Canberra.
One of the real problems of Australia right now is that wages growth is slow, which says everything about people being under-employed. Because of a surplus of people wanting to work more hours (even if the unemployment rate appears to show most people are in work, it’s illusory) their wages are not growing.
If there was more business, there would be more work, and there would be higher wages. But there’s not. So higher interest rates on business are not going to encourage investment or bosses to take on more workers.
So you see? The Reserve Bank is stuck. No interest rate movement until at least November-December next year … so 16 months away. That’s what money markets are saying right now. Mind you, they can change that view in an instant.
Keep watching … but maybe look away for a year or so.