Lowe Closes the Door on a Speculative Rate Rise

Global rates are on the rise. The US Federal Reserve is now ending its historically low interest rates. Fed Chair Janet Yellen told reporters in London:

‘We think it will be appropriate for the attainment of our goals to raise interest rates very gradually to levels that are likely to remain quite low, although there is uncertainty about this, to remain low by historical standards for a long time.’

Yellen’s words and the Fed’s actions have led other central bankers to follow suit. But not Philip Lowe, head of the Reserve Bank of Australia.

In his most recent monetary policy statement, Lowe told the press:

‘The outlook continues to be supported by the low level of interest rates. The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.’

The Australian Financial Review condensed Lowe’s speech to the following: ‘…the Australian economy is plodding along, inflationary pressures remain feeble, so there’s absolutely no reason to lift Australian interest rates any time soon.’

Also adding to sluggish inflation are depressed commodity prices. And according to the AFR, several agencies have downgraded their outlook on many key Aussie commodities.

‘Last week, the Department of Industry, Innovation and Science downgraded its forecasts for iron ore, meteorological coal and copper.

‘Iron ore could yield just $US48 a tonne by 2018 – a sharp fall for the metal that sold for $US62.80 per tonne on Friday. The price touched $US94.86 in February.’

What happens next?

As long as interest rates remain low, stocks remain cheap (on a discounted cash flow basis). However, I wouldn’t continue to invest on the assumption that interest rates will stay at historical lows. I suggest you take a conservative approach. Meaning, you invest in things you understand while favouring highly probable outcomes.

Regards,

Härje Ronngard,

Junior Analyst, Markets & Money

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Härje Ronngard

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.