Why a Rise in Interest Rates Won’t Mean Much

interest rates Australia

I haven’t bought the latest iPhone. It’s way too expensive in my opinion.

The iPhone X, at time of writing, will set you back around $1,579.

If it cost below $500 and my current phone was broken, I might consider buying one. Until then, I’ll hold off.

But putting aside my personal biases, the iPhone X is actually extremely cheap.

Blackrock’s chief investment officer, Rick Rieder, has said:

An iPhone in 1991 storage and computing cost dollars would be worth $1.44 million per phone. An iPhone today costs a minuscule portion of that…’

That gives you some sense for this incredible inflationary impact on so many things that are now done via mobile or done through automation.

And it’s not just the price of iPhones. Technology and innovation have also made wireless telephone services very cheap.

Competition among carriers ‘has resulted in a near 13 percent year-over-year decline in wireless telephone services prices, which at the margins is weighing on recent CPI readings,’ Rieder wrote in a recent note.

Why do banks worry?

So why then do central banks worry so much about inflationary figures?

Maybe it just makes their job easier. Long ago, they decided that 2% to 3% inflation was good for the economy. And now all they see is that target — with monetary policy as their weapon to hit it.

In 2017, the US Federal Reserve has been able to get inflation back above 2%.

US inflation rates

Source: Trading Economics

According to them, the US economy will continue to grow at such a rate.

It’s why they’ve already taken the chance to increase interest rates now. According to Wall Street economists, it could get even higher next year.

As reported by Bloomberg:

With the world economy heading into its strongest period since 2011, Citigroup Inc. and JPMorgan Chase & Co. predict average interest rates across advanced economies will climb to at least 1 percent next year in what would be the largest increase since 2006.

As for the quantitative easing that marks its 10th anniversary in the U.S. next year, Bloomberg Economics predicts net asset purchases by the main central banks will fall to a monthly $18 billion at the end of 2018, from $126 billion in September, and turn negative during the first half of 2019.

That reflects an increasingly synchronized global expansion finally strong enough to spur inflation, albeit modestly. The test for policy makers, including incoming Federal Reserve Chair Jerome Powell, will be whether they can continue pulling back without derailing demand or rocking asset markets.

US and Australia could lift interest rates

It’s definitely possible that the US and even Australia could lift interest rates in the future. This would cause bond prices to drop and the supply of money to contract.

But even if rates were to rise 1%, rates across the developed world would still be extremely low. We are a long way away from double-digit interest rates. Which is great for those holding assets, rather than cash.

Cheers,

Härje Ronngard,

Junior Analyst, Markets & Money

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Härje Ronngard

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.  

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