Are we going to have low interest rates forever? | Pete Wargent

The Reserve Bank (R.B.A) released the Minutes from its June Board Meeting today, and, as expected, low interest rates are here to stay for a long ol’ while time to come yet.

I don’t need to regurgitate the whole document here, but suffice to say that the RBA believes that inflation will remain within the target 2-3% range for the foreseeable future (which makes sense given soft wages growth) and thus rate hikes are well and truly off the table for now:

They said:

“Notwithstanding a pick-up in growth around the turn of 2014, GDP growth was expected to be below trend over the next year or so, rising gradually thereafter. Inflation was forecast to remain within the target. 

 Given this outlook for the economy and the significant degree of monetary stimulus already in place to support economic activity, the Board judged that the current accommodative stance of policy was likely to be appropriate for some time yet.”

And accordingly interest rates were left right where they were at generational lows of 2.50%.

Slowing economic growth

As noted here previously, the economy smashed expectations with growth of 1.1% in the first quarter and a very satisfying 3.5% over the past year.

This extended the Australian economy’s unbroken run without a recession to a phenomenal 90 quarters  – nearly a quarter of a century:

 However, given that economic growth in Q1 was driven overwhelmingly by net exports, and given that bulk commodity prices have been falling apace, there is a growing groundswell of support for the notion that the next move(s) in the cash rate will actually be down.

In fact, take away the thumping 1.4% contribution to GDP growth of net exports from the first quarter and the economy was meandering nowhere fast.

 

More interest rate cuts?

The potential reasons for more interest rate cuts are obvious enough.

Household spending and retail sales have been very strong over the past year but appear likely to plateau as the Budget and other factors may have rocked consumer confidence.

Wages growth remains soft at 2.6%.

House price growth has also been very strong but may be slowing in many parts of the country.

Dwelling construction has been strong but itself isn’t a big enough sector of the economy to offset the decline in engineering (i.e. mining) construction.

Which kind of of leaves us with…exports.

Interest rates stuck at 2.50%

As I charted here, iron ore export volumes in the Pilbara to China/Taiwan in particular have been increasing at a truly astonishing rate, but this itself will not help the iron price spot price which, for want of a better phrase, has ‘crapped itself’ in 2014 to now sit below US$90/tonne.

If the China economy slows down the iron ore spot could have plenty further to fall too.

As of close of business yesterday 30 Day Cash Rate Futures July contracts were trading at 97.510, indicating only a very slender “1 in 25” shot expectation of an interest rate decrease to 2.25% at the next RBA Board meeting on July 1.

As for futures markets beyond next month, they can’t see rate hikes any time soon, possibly not for 18 months (click chart):

 

Happy news for ongoing cheap mortgage repayments, of course. In fact, all in all, it’s been a wonderful time for homeowners.



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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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