No interest rate hikes in 2014…or 2015…?- Pete Wargent

It’s likely there will be interest rate stability ahead.

Think back to the Reserve Bank’s April Minutes, where it said that:

“…the Board’s judgement was that monetary policy was appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the 2–3 per cent inflation target.

The Board would continue to monitor developments in the economy, with members noting that, on present indications, the most prudent course was likely to be a period of stability in interest rates.”

If back in April we were expecting to see a period of stability in interest rates (i.e. stuck at a generational low of 2.50%), then a month or so on, we should be expecting an even longer period of stability.

Recall that in April, the RBA mused that:

“Despite commodity prices falling further over the past month, the exchange rate had appreciated a little further.”

Declining confidence pushes out hikes

That may have been true then, but since that time the iron ore spot price has continued its decline, now sharply by an extra 7% or so in just a couple of weeks, to well under US$100/tonne.

And further, with Treasurer Joe Hockey delivering a number of cuts in the 2014 Federal Budget, consumer confidence today was reported as having been wiped by 3.2% in the last week and 14% over the past four weeks, the sharpest monthly decline since the ANZ/Roy Morgan series began.

In short, if interest rates were set to be on hold for quite a while anyway, now they are likely to be staying on hold for longer:

pete wargent blog

Futures markets are struggling to price in even one hike in the next 18 months and the implied yield curve has flattened out quite markedly.

The next cash rate adjustment might even yet be down.

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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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