Newsletter Articles
Stop all the smoke and mirrors about interest rates?
Stop using the various channels of the media to scare Australians in to thinking that interest rates will rise month after month.
6-Point Finance Managing Director, Simon Pressley, predicts that official interest rates will today remain unchanged.
The fact is that, of the 16 monthly Reserve Bank meetings since January 2006 there have only been 3 rate rises. Now, if you believed everything that you read and heard in the lead up to each meeting you would expect rates to have risen every single month.
Why does this happen? It’s a tactic called “jawboning”. The RBA continually threaten rate hikes so that consumers and business pull back on spending, expecting a rate rise.
I am certainly not an economist. From the perspective of the average man on the street however, there are a range of factors that the RBA consider including:
• Inflation
• Global economy
• Sharemarkets
• Pressure on wages
• Business confidence
Let’s not forget that 2007 is also a federal election year! History tells us that it is rare to see interest rate increases at least during the 6 months in the lead up to an election. How do you think it will look for ‘Little Johnny’ if there was a rate rise or 2 in the next few months?
I read a refreshingly frank article by Finance Reporter, Terry McCrann, recently that said a lot…
“…With 2 successive quarters at 0.5 per cent working to multiply the comfort zone on possible future inflation.
So is there anything lurking to drive him (the RBA) and us out of our comfort zone? Tow broadly.
The first is pretty much the only thing that could prompt a rate rise in August and thus before the election. The second, one, possible multiple rises after the election.
The first is the US economy really accelerating or irrational exuberance gripping global share markets.
The second is if Kevin Rudd starts sleeping with the Prime Minister’s wife in The Lodge.
Despite the records on both Wall Street and here, share prices are not anywhere near 1987 territory. So I’d rank the prospect of these forcing a rate rise in August as low.
However, any build-up of wages pressure needs to be watched.
Three things have clearly been working for the RBA. The first is the three cautiously staggered rate rises last year, in May, August and November.
All, as is now the default case quarters, adding just up to 0.5 per cent. That’s monetary policy at its best. Taking heat very gently out at the margin, without rocking the economy.
The second factor was RBA ‘jawboning’. Continually threatening to hike – the official term is having a bias to raising rates.
So consumers (and home buyers) and business pull back a bit, expecting a rate increase. So you get a virtual reality increase; up to a point the one you don’t have to actually have.
This only of course works provided there are enough useful idiots’ to keep predicting the next rate increase. Lucky for the RBA, there are more than enough.
The third factor is the rising Aussie dollar. Up over 10 per cent since the start of 2006, worth at least on paper as much as 1.5 per cent off what inflation would otherwise have been.
Which brings us to the ‘fourth’ man and life after the election. Because Rudd as prime minister proposes to ditch the IR and employment policies that have underwritten these dynamics.
So if Rudd does win, and actually tries to implement his two key policies, we will go in one of two directions. And so pretty quickly in 2008.
Either unemployment will start to rise; or interest rates will."