The reason why interest rates may remain low all of next year- Pete Wargent

No surprises that the cash rate stayed on hold in December at 2.50%.

But what for next year?

We’ve had some interesting developments today on the debt ceiling in Australia, and in particular some interesting news in the National Accounts.

GDP growth for the quarter came in at a somewhat disappointing 0.6% q/q and 2.3% y/y.

In other words, the Aussie economy is growing ‘below trend’ (which in Australia essentially means 3.00%-3.50% depending on your chosen timescale and your source).

While retail sales have picked up, consumer spending remains fairly weak, and it’s clear that dwelling construction has not picked up to anything like the level that the Reserve Bank was hoping.

Business confidence is quite fragile and mining investment expenditure is likely to fall over the next year or two.
What does it mean for interest rates?

In a nutshell, there will be no hikes for quite some time to the cash rate, perhaps not even until 2015 depending upon how the economy fares.[sam id=40 codes=’true’]

Here’s what the futures markets say, which is to say a one-in-four chance of rate cut to just 2.25% at the next Reserve Bank meeting on February 4, 2014.

“On the 3rd of December 2013 the RBA left the official cash rate unchanged. The current official cash rate as determined by the Reserve Bank of Australia (RBA) is 2.50%.

The next RBA Board meeting and Official Cash Rate announcement will be on the 4th of February 2013.

As at 4 December, the ASX 30 Day Interbank Cash Rate Futures February 2014 contract was trading at 97.550, indicating a 23% expectation of an interest rate decrease to 2.25% at the next RBA Board meeting.”

And here is the cash rate futures implied yield curve at the close of business today (4 December), which on balance isn’t seeing a hike to a cash rate of just 2.75% for some 15 months.

pw graph

Source: ASX

Households will continue to enjoy very cheap mortgage repayments through 2014 while the economy struggles to rebound.

And we should enjoy it while it lasts. History shows that interest rates can – and will – run high at various points in time.

[post_ender]



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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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