On the back of an improved GDP forecast, the RBA is set to keep interest rates at 1.5% until 2020.
This comes after RBA Governor Phillip Lowe claimed that:
‘The Australian economy is performing well. Over the past year, GDP increased by 3.4 per cent and the unemployment rate declined to 5 per cent, the lowest in six years. The forecasts for economic growth in 2018 and 2019 have been revised up a little. The central scenario is for GDP growth to average around 3½ per cent over these two years, before slowing in 2020 due to slower growth in exports of resources.’
Australian interest rates hinge on resources
As we have discussed previously, resource exports (in particular iron ore) have been a major driving factor behind the relative health of economy.
These exports have even lead to one of the largest trade surpluses on record.
But things are starting to not add up here.
Wage growth is meant to improve to 3.5% but in the year to June, annual wage growth was just 2.1%.
As you can see over the last 10 years, wage growth has been slipping for some time:
As a result, it seems like a complete mystery where the RBA thinks 3.5% wage growth is going to come from.
The RBA likely thinks a tightening labour market is going to do the trick with supposedly strong jobs numbers driving the change.
But as established earlier, this is largely an illusion – we still only use 2/3 of our workforce and many job vacancies exist because Australians aren’t skilled enough to fill the jobs.
For the past four decades, Australia has been attempting to fix this problem with immigration as you can see below:
Source: Australian Bureau of Statistics
Ultimately however, this is mostly just a Band-Aid to fix an economy that relies heavily on exports of resources when it all boils down.
Interest rates could be cut to zero in a market downturn
With all this reliance on resources (mining), a sharp downturn in commodities could cripple us.
The RBA doesn’t see this happening until 2020 and attempts to paint a rosy picture for us.
If a major slowdown in growth were to occur, the RBA could cut interest rates to zero or near zero.
Europe’s central banks and Japan cut interest rates below zero in 2014 – so it’s not inconceivable that Australia would follow suit in a downturn as well.
Imagine the cruelty of that, paying to keep your money in the bank!
So given all these factors, it becomes easier to see why interest rates in Australia will continue to stay low.
For Markets and Money