Interest rates goin’ to 1%

Says Capital Economics:

If Paul Dales is right the Reserve Bank will cut the official cash rate to 1 per cent later this year.

The chief economist from Capital Economics, who’s called the current interest rate cycle better than most, “suspects” the RBA will be forced to cut from the current level of 1.5 per cent, thanks to inflation and GDP growth that he says will stay lower than what most economists are now forecasting.

…According to Bloomberg, National Australia Bank, Macquarie Group and JPMorgan are also forecasting a 1 per cent cash rate in 2017.

Dales and Hickie don’t think the RBA will “cut interest rates again until there are clear signs that doing so won’t risk stoking the housing market even further”.

…there’s a chance the RBA will increase its forecasts for headline inflation thanks to a decent 10 per cent spike in the price of petrol and a healthy turnaround in inflation expectations.

In addition there’s the rise in commodity prices that has caught most by surprise.

All up though Dales thinks the bank’s inflation forecasts won’t change but in the end they will be too high.

Seems reasonable to me though APRA will have to wake up first. Perhaps Backbone Phil can set an alarm for it.

Next year, more cuts, non-stop to 0.5% or, depending upon wider conditions, zero. That’ll translate to an average terminal discounted mortgage rate somewhere around 4%:

sergsw

Believe it or not that is still very high versus other ZIRP nations. Such is the lot of the externally funded Banana Republic.

Comments

  1. “until there are clear signs that doing so won’t risk stoking the housing market even further”.

    So never then.

    • Again, I haven’t kept up with current events so may be off base – but if the same interest rate is applied equally across Australia, why is warp-factor speed house price growth mostly a phenomenon of Sydney and Melbourne? I’m not saying it isn’t also overvalued elsewhere but the same kind of very low interest rate price growth fuel does not appear to be having anywhere near the same effect elsewhere. Seems to imply prices in Sydney and Melbourne being pushed at least partly by something else, although the plunge in interest rates was probably required to help get prices this high in the first place. Perhaps Sydney and Melbourne have become so desirable to wealthy foreign buyers for whom domestic interest rates are of lesser (if any) concern that lifting rates would not stop price growth (but would smash vulnerable young locals).

      I have no problem with the obvious conclusion that low interest rates are a big part of what has allowed prices to go so high

      • Foreign buyers would be my guess. The other cities don’t register on their radar. Otherwise as you rightly note the other variables are applicable to all cities.

  2. TailorTrashMEMBER

    “Dales and Hickie don’t think the RBA will ““cut interest rates again until there are clear signs that doing so won’t risk stoking the housing market even further”.”…….what are these clear signs of which they speak ? …………….a squadron of pigs flying across Sydney harbour ? ………..
    More of the same ……more free money ……houses up by another 15% this year ……..go Straya !

  3. Yeah. Despite the flurry of excitement this economy is not strong, I think this reality will asset itself soon enough. Rate hike this year? Doubt it. A lot of households are close to the edge in terms of rate rises (DFA). If the RBA were to hike now they’d be attempting to recreate what the Fed did leading into the GFC.

    • I’d be focussing on other sources of interest rate reference points, like the money markets. RBA reference rate is not the major determinant of where mortgage rates will go this year, witness the recent mortgage rate upward movements on a reducing / flat base rate.

  4. Just wonder how the CPI calculated….forget about housing jumps by 10% plus ..it is exclusive
    YOY Iron ore jump by 92.84% , Copper up by 31.75%,rubber 103.85%, crude oil up by 79.01%, sugar up by 58.9%…even the worse one, gold up by 7.35%…how can CPI just sit below 2%??? can any rocket scientist work out? Interest rate is a joke…

      • Petrol is, oil increases raises inflation for many products with the flow on effect. All commodities have gone up sky high and commodities are used in almost everything..

      • Yes, petrol is. That’s why are said most are not. The rest find their way into imported goods and merchandise, machinery and equipment etc. Generally competitive global manufacturing ensures the household consumer barely notices raw commodity increases all helped by there not being a collapse in the AUD 😉

  5. Possible scenario? RBA lowers rate, banks don’t pass on. Increasing funding costs require margin buffer, banks may even raise rates. RBA does its job, banks theirs. APRA can keep eyes wide shut.

  6. We supposedly live in a globalised world, how can Strayan households not access significantly cheaper offshore funding directly and bypass these gouging local bank goons? Pardon my ignorance in advance!

    • History is a wonderful teacher! In short, foreign exchange risk.

      ‘The ‘foreign currency loans’ saga was a significant feature of the decade following the deregulation of the finance sector in Australia in the 1980s. In a companion paper to the current paper, I briefly describe the rise of this phenomenon (Jones, 2005b:1):
      Beginning in 1982, and with impending deregulation of the Australian financial sector, three major banks (and some lesser players) fashioned loan products denominated in foreign currencies for small business borrowers. Australian interest rates were high; interest rates in some other countries (notably Switzerland) were significantly lower (roughly 7% compared to 13%). The number of such loans was never established with any accuracy, but it is estimated that between 3000 and 5000 such loans were made, mostly in the 1982-1985 period. The Australian dollar plummeted in 1985, and the principal owing blew out dramatically. A million dollar loan in Australian dollars (a not unrepresentative sum) blew out to over two million dollars as the Swiss franc appreciated against the Australian dollar.

      Disbelief on the part of borrowers led to meetings seeking clarification and reassurance or instructions to cope with intolerable debt burdens.’

      http://sydney.edu.au/arts/political_economy/downloads/JonesFCLsLegalCultureWP1205.pdf

      • Thanks – that’s very insightful.

        Wonder if such a product could be fashioned in a more stable AUD:FX relationship, like SGD to reduce the FX risk.

    • You want to borrow long term eg. 30 years and international lenders are only keen to lend short term eg. 0-5 years. Australian Banks manage that maturity mismatch and to be fair deserve reward for doing that.
      Lending to you only represents a concentrated credit risk which you yourself can not diversify. Banks can diversify that by constructing a portfolio of exposures.

    • Chart suggests they are more like 4.5% currently (even though you can get lower). So a 1% drop in interest rates with half of that passed on and other half gobbled by the banks is the (rough) inference I think.

      • You can get MUCH lower if you bother to do some work. But contrary to what most property investors will tell you, most wouldn’t work in an iron lung. Hence why they prefer to speculate.

      • depends where the interest rate curve goes, more likely to steepen (rotate) rather than wholesale gap change down by magnitude of base rate change
        my view no chance any base rate reductions passed on ie. less than 25% of any move reflected in mortgage rates

    • Yeah, recently (as in last 4 months) rates come up a bit – expecially investment or IO. Owner Occupied PI rates 3.70ish, investment IO 4.2 ish

  7. SchadenfreudeKing

    The rate cut this year might happen, but in the medium to longer term, I find it bizarre that a lot of people think low rates are a new normal. We’re living in an age of unpredictability. Globalisation is reversing, countries are wracked by political troubles (the UK probably won’t even exist in 10 years time), and every man and his dog is trying to lower their currency to beggar his neighbour. I realise there are some strong forces pushing rates lower (demographic headwinds, increasing production efficiency), but considering that volatility in everything appears to be getting worse, I’m highly suspicious of a ‘permanently low plateau’ for interest rates. They’ll be low until suddenly they can’t be anymore, and everyone will be shocked, shocked I tell you!

  8. With the US forcing interest rates up, international funds will pull out of Australian banks, and the banks’ borrowing costs will increase, as well as costs of having to offer higher deposit rates to consumers to keep competitive with local branches of foreign banks.

    • I’m not sure, but for 4 or 5 years now you seem to pop in daily to write the same thing over and over and over and again.

    • not joining the good looking, champagne-popping property owners year after year as you get further left behind in the dust?

  9. “Next year, more cuts, non-stop to 0.5% or, depending upon wider conditions, zero. That’ll translate to an average terminal discounted mortgage rate somewhere around 4%:”

    I don’t get it. Everyone is paying less than 4.00% now.

  10. The signal sent by RBA reducing official interest rate is in essence to retail banking, and it is….. you need a bigger buffer for NPL. So a 0% RBA rate is big trouble for banks.