Rampant Kouk goes all-in on rate hikes

Advertisement

From a now rampant Kouk:

Could the next move in interest rates be up and could it happen relatively soon?

The short answers are ‘yes’ and ‘yes’.

As things stand, Australia is currently in the midst of the longest period in modern monetary policy history without an interest rate hike.

It is, of course, clear why the current record five-plus years without an interest rate hike has occurred. The economy has over that time been stuck in a below trend growth phase, commodity prices were in free-fall, inflation was low and until most recently, the unemployment rate had been creeping up.

Economic circumstances are now changing and so too will the pressures on interest rates.

The recent run of economic data confirmed the anecdotal evidence that the pace of GDP has lifted to a little above trend with annual growth now at 3.0 per cent.

Indeed, in the last six months of 2015, the annualised pace of GDP growth was a strong 3.5 per cent.

As a result of this lift in economic growth, the unemployment rate has eased lower to between 5.75 and 6.0 per cent in the last four months, down from a recent peak of 6.3 per cent in July 2015.

There has also been a solid upswing in commodity prices, albeit from a low base.

Compared with the low of US$38 a tonne in January, the iron ore price in now US$52 a tonne which, if sustained, with provide a substantial boost to the economy.

The price of gold, copper and other metals are up by between 10 and 20 per cent from the recent lows.

At these levels, the economy will be stronger than Treasury or the RBA were forecasting late last year and with it, there will be a necessary upward revision to inflation forecasts in the next month or two.

Any further lift in commodity prices and the inflation outlook could look more problematic.

If rates are hiked this year I will run naked up Mount Kosciuszko in the dead of winter.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.