ANZ Economist Predicts Aussie Interest Rate Rise

For a while now, I’ve been convinced the Reserve Bank of Australia (RBA) wouldn’t increase interest rates any time soon. My reasoning is based on low income growth, households drowning in debt, and inflation showing little sign of hitting targets of 2–3%. All of which could worsen if interest rates were to climb higher at a dramatic pace.

Let’s take a quick look at household debt.

The average Aussie household owed $168,600 (after adjusting for inflation) in 2015–16. This figure has almost doubled since 2003–05, as shown below. ‘This increase was mostly driven by property debt,’ according to the Australian Bureau of Statistics (ABS).

mean household debt

Source: ABS

Growth in debt also outpaced that of income and asset values. Mean household debt has climbed 83% in real terms since 2003–04. By comparison, mean asset values and incomes have grown by 49% and 38%, as show below.

increase in value of debt

Source: ABS

What Do Higher Interest Rates Mean?

Higher interest rates would just make things worse for households swamped in debt. This would then lead to a decline in spending, as disposable incomes would decrease. And because fewer Aussies are spending, inflation will take a hit. But more importantly, business might then be hesitant to lift wages as fewer consumers are demanding their goods and services.

But am I wrong? Will the RBA follow in the footsteps of the Federal Reserve and lift interest rates regardless of inflation stability?

Yesterday, the Fed stuck to their guns and told the market they would start to unwind their US$4.5 trillion balance sheet in October. As reported by Bloomberg:

In the statement, the Fed set October for the start of their previously announced plan to shrink its $4.5 trillion balance sheet. As expected, policy makers left the benchmark interest rate unchanged in a range of 1 percent to 1.25 percent.

‘…Treasury prices fell and the dollar rose as investors weighed the Fed’s plans to press ahead with gradual policy tightening. U.S. stocks were little changed.

U.S. central bankers are counting on steady growth and low unemployment to raise inflation closer to their goal, which would support their policy of gradual tightening through interest-rate increases and a reversal of quantitative easing.

Actions in the US have encouraged ANZ Banking Group [ASX:ANZ] economists to change their views. As Australian Financial Review columnist, Christopher Joye wrote:

ANZ’s pessimistic economists confidently claimed the Reserve Bank of Australia would not raise rates this year or next, only to backflip on Wednesday with a revised call that we would indeed see 50 basis points of hikes.

And now even macro hedge fund manager, Brett Gillespie believes higher rates are on the way.

But it wouldn’t be the first time that the ‘experts’ have been wrong.

Just because the Fed is lifting rates, doesn’t mean the RBA will follow. I still believe interest rates will be low for the foreseeable future. While this doesn’t help out savers, there is a way to profit from persistently low interest rates. Find out more here.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money


Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.


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