Who sees what for Australian interest rates?

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From Bloomie comes this compilation chart of current interest rate forecasts:

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As you can see, the most hawkish prognosticator is Laminar Capital, a fixed income specialist, so one hopes they’re hedging. Next is a small group of hawks including Ausbil Dexia, the boutique fund manager, our own Paul Bloxham of HSBC and Societe Generale who are clearly not reading enough Albert Edwards.

At the other end of the spectrum is Macquarie Bank, which has been more right than wrong in recent years, forecasting 2% by year end and staying there. Given the need to fund the current account deficit, 2% is the equivalent of zero interest rates for Australia so that gives you some idea of what Macquarie sees ahead. It might explain as well its recent push into mortgages.

It is interesting to note that the major banks, who will be funding any rebound in non-mining growth and hence have a box seat on any potential growth and inflation issues, all see rates at current levels or below as far out as the end of next year. That’s hardly a vote of confidence in their own capacity to lift the post-mining boom economy. The majority seem to agree.

My own view is the same as Macquarie Bank, though I would push two rate cuts into next year. I remain skeptical of a sustained property surge unless fiscal incentives are altered for first home buyers. Even then I don’t know how the needed credit expansion will be funded.

The great unknown for interest rates is the dollar and in what circumstances it ultimately falls, whether that’s inflationary, and what the RBA will do about it.

David Llewellyn-Smith
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Comments

  1. Here’s the perversity of the interest rate global scenario. Over the weekend NZ Government/Agencies advised that we need another $25 billion more then we thought to fix Christchurch ($10bn, and it will be more than the $40bn they now tout!) and the Auckland($15bn) transport system. So will we have to pay more % to get those unexpected and unaffordable funds? Nope. “Just lower interest rates” is the thinking, to make what we need, cheaper. The world’s gone mad…..

    • $40b !!! that s crazy, more than 100k per inhabitant, including babies and unaffected.And I suppose this in addition of the insurance payout !!

      is it not getting out of hand there ??

      I guess some locals are making a killing.

      • “Auckland Council stands to make billions of dollars at the stroke of a pen if its proposed “value uplift levy “or “betterment tax” is adopted….today after it was revealed that Auckland homeowners could become $24 billion richer under the Auckland Council’s proposed Unitary Plan….the… Council will be able capture part of the increased value through the proposed tax which is outlined in an addendum…”
        Low interest rates and higher property prices…..We’re saved!

    • I can’t see a hike for a very long time yet. I’m predicting the top of this interest rate cycle will simply be a bit of sustained jawboning by the RBA about the need to raise rates if inflation doesn’t subside. I think it’s fair to say that rantes will get down to 2.5% at some stage soon. From there, it’s very difficult to see them getting back up above 3% in the forseeable future. So I think we’re at the high water mark right now. High debt levels have effectively crippled this country.

  2. Interesting table.

    A popular meme on property investment forums has been that you shouldn’t fix your mortgage interest rate because the banks know what lies ahead and set their rates accordingly (e.g. you won’t beat the banks so don’t fix). This table tells a different tale, most seem to have differing opinions with only an 18 month time frame, little consensus.

  3. Credit growth and house prices is what will determine what the RBA do this year.

    They believe that increased housing investment requires rising prices and they know that isn’t going to happen unless credit continues to grow.

    With inflation ‘playing nice’ they have nothing to fear except a stubborn refusal by locals to take the low interest bait.

    Oh sorry – I forgot, even that is not a problem if we pump up foreign purchasers of real estate (new and cough cough existing) and population growth.

  4. Alternative scenario: if world money truly see mining boom unwinding they will be cuting long positions in aud now and not in 1 year time when it is projected, second, overleveraged people in Perth and Darwin may found themselves in a very uncomfortable position as mining contracts expire and no new work in pipeline that would put pressure on banks to tighten lending combine it with lower aud and higher inflation RBA in this scenario will be forced to either sit on its hands or fight inflation.