The mightiest of the bullhawks is back to claim his belated prey. From Chris Joye at the weekend:
Oh dear. The Reserve Bank of Australia’s worst nightmares, which this column has canvassed for some time, could be coming to fruition more quickly than most expected. Forget the future for a moment, and let’s reflect on the facts, which have profound ramifications for all the asset classes your personal and super portfolios are exposed to.
…While the RBA questionably lowered its cash rate twice in 2013 to the record low of 2.5 per cent, the headline inflation rate finished the year at 2.7 per cent. The RBA’s preferred “core” measures also punched out at 2.6 per cent over the same period, which is notably above the mid-point of its 2 per cent to 3 per cent target band.
…It is puzzling that analysts should be blindsided by these outcomes. I argued here that the low inflation prints Australia benefited from in late 2011 and 2012 were attributable to imported “tradeables” deflation that came from a soaring exchange rate.
And this line of argument really is a bit distracting. The point of this article should be about whether or not the RBA will lift rates and on that Chris is a bit thin:
While it is impossible to precisely forecast the future, it is worth thinking through what rising rates mean for our portfolios. They will almost certainly slow the capital growth in the housing market, which the RBA would be happy to see.
It is far too early to say whether house prices might fall because that depends on whether the RBA has the fortitude to lift the cost of capital back into neutral territory, which may mean a cash rate with a four handle in front of it.
Higher rates will be welcome news for investors in cash and floating-rate bonds, which generally track the RBA benchmark, but bad news for equities and fixed-rate bonds which typically fall in price when outside rates rise.
Of course, the RBA is not going to normalise the price of money if it thinks the economy is heading into a hole. So in the absence of having to navigate through stagflation, which denotes a rare combination of high inflation and unemployment, withdrawing the current monetary stimulus is actually an encouraging sign. It means the economy has successfully avoided a deep downturn and transitioned from a once-in-a-century mining investment boom to more broad-based growth driven by consumer and business spending and record export income.
Hmm, well, if we’re going to discuss things that are too early to call, navigating the capex cliff is the top candidate. It hasn’t even started yet. Second, if the RBA is forced to hike rates in the next year and probably two, then housing will almost certainly fall and quite possibly bust given there is no fundamental demand in the market beyond an investor mania and no business investment growth underneath it.
This conversation would be far more constructively aimed at how Australia can manage the fall in the dollar that the low rates have brought about. How can the improvements in competitiveness be captured without generating an inflation problem? Scare-mongering about interest rates does none of these things.
