When will Interest Rates rise?

Ross Greenwood speaks to Head of Asia Pacific Research at TD Securities, Annette Beacher, about why the RBA is expected to remain steady at the 1.5% cash rate for some time.

Introduction: When will Interest Rates rise?

Ross Greenwood: Glad to have your company on Money News right around Australia. I need to explain something to you. If you’re looking at reports today about interest rates and how long it is that the Reserve Bank has had them on hold, you’ll see some reports say that it’s been on hold for 20 meetings, others say it’s been on hold for 22 months. Well, actually, both of those reports are right, because, do remember, the Reserve Bank does not meet in January.

If you go back, it is actually 22 months or, if you like, 20 consecutive meetings, which is a longer stretch that the Reserve Bank has kept interest rates on hold. Now, the other truth is, that it’s likely to keep interest rates on hold for an extended period of time. The question is, how long will that be? Professor Ian Harper, who was a Reserve Bank Director, remember, we spoke with him. He’s the head of the Melbourne Business School.

He told us that he thinks that wages growth is the absolute key. As soon as you start to see wages growth moving in Australia, then you start to see the interest rates rise. But, right now, there is no sign of wages rising particularly quickly in Australia. Let’s now go to the head of Asia-Pacific Research of TD securities, Annette Beacher, who is on the line from Singapore now. Many thanks for your time, Annette.

Interview with: Annette Beacher, Head of Asia Pacific Research, TD Securities

Annette Beacher: Thanks, Ross.

Ross Greenwood:  Just in regards of the Reserve Bank, no surprise here on anything that’s been said. The one interesting point is that the very first time the Reserve Bank in its summary, raised the issue of the Banking Royal Commission and the impact it might have on consumer’s behaviour, bank’s behaviour as well. It almost seemed to discount it to a certain extent, didn’t it?

Annette Becher:  I guess the Reserve Bank, under its various senior officials, has hinted that the fact that the Banking Royal Commission and the impact on the real economy may be a little overblown. For example, I’d say, a good three or four weeks ago, Governor– Excuse me, Deputy Governor, Debelle, did warn us that tighter lending standards may have an impact on house prices. Of course, then, we all wake up the next day and the headlines say RBA predicts property price crash. Of course, they’re very wary to distance themselves from predicting anything of the sort. But there’s nothing wrong with the with the RBA still having an eye on the strength of bank balance sheet. Prudential lending, I think, is better for all of us in the longer term.

Ross Greenwood:  I did mention their wages growth being one of the keys and there are couple of sentences there. Wages growth remains low, is a statement from the Governor Philip Lowe today. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. In other words, if wages growth is the key, then this is a real clue that interest rates are likely to be on hold for an extended period of time.

Annette Becher:  Exactly. We don’t know how long this particular piece of string is. One thing that I do know, we are all tied up to the fact that wages are released quarterly. That definitely adds to RBA patience. We have to wait for months on end in order to get these wages updates. The last reading we got week before last did tell us that wages are actually tracking sideways, at barely above 2 percent, which is great. It used to be one point eight something. Yes, it’s off the lows. The RBA said that wages are off the lows, but are we picking up materially from here?

The answer is no. One thing that we’re going to now be looking out for is late last week we found out what the Fair Trade Commission said about minimum wages. That does directly impact a couple of million workers. They will be getting a three-and-a-half percent pay rise. Now, we thought last year that the pay rise of three and a quarter percent would be going straight into services wages growth and we’re all getting quite [unintelligible 00:03:53] about that.

It just didn’t happen. As we say, wages growth has been tracking sideways. Now, the RBA is going to see is this time different. Will we see minimum wage start to impact on services wages? Again, it adds to the patience. They are not preemptive. This is not a preemptive era that we’re in post financial crisis. They want to see runs on the board before they even introduce a tightening bias, let alone actually lift interest rates.

Ross Greenwood:  It’s a very weird time in the Australian economy. Wages growth is very weak, despite the fact that 400,000 new jobs were created in the country last year. The Reserve Bank is forecasting that the economy this year could pick up to grow at a bit above 3 percent, it says. Yet, it seems that housing prices are falling, some conditions, particularly in retail, are very sluggish. It’s almost, again, like we’ve got this two speed economy that’s re-entered the Australian marketplace.

Annette Becher:  We’ve got two speeds on everything. Two of my favourite discussion points to the clients is in fact the CPI, or inflation rate, is actually this mythical number because what we’re seeing is essential of inflation, what we all call cost of living. If you just talk about food, housing, shelter, and transport, that inflation is running at three plus. What’s left over is is your discretionary spending.

Suddenly your clothing, not that clothing is optional, but what you spend on clothing, audiovisual equipment, recreation, that’s outright deflationary. We’ve got a two speed inflation story, for starters, and we definitely have a two speed housing story. Because it’s the investor market that dropped out, thanks to regulation changes. Investor finances negative year on year and, yet, owner occupiers are doing quite well. I don’t think that gets enough differentiation in the marketplace out there.

That owner occupiers is actually a fairly good time to buy, given that house prices are off the high.

Ross Greenwood:  I’m going to say, always great having a chat to Annette Beacher, who says, interest rates are not likely to move, as a result of what you’re seeing from the Reserve Bank today, for quite an extended period of time. Being an economist, also gives you a small clue as to how to cut your cost of living in the future. That is perhaps to make clothing somewhat a discretionary item, as to whether you need it or not. I love that and that was very good. I think, in winter, most people won’t agree with you.

Annette Becher:  [laughs] I always try to put something a little bit more interesting than normal.

Ross Greenwood:  Thank you so much, it will be great. Annette Beacher, Chairman of the Nudist Economists. No, that’s not true. She’s actually very respected, Annette Beacher, she is. She’s the Head of Asia-Pacific Research for TD Securities from Singapore. Annette, I appreciate your time.

Annette Becher:  Thanks, Ross. Let’s speak again. Cheers.


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