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).
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.
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.
Junior Analyst, Markets & Money