By Stephen Koukoulas There’s no way the Reserve Bank of Australia will increase official interest rates while the economy remains in its current rut.
Australia’s economic fundamentals are quite problematic but this has not stopped some analysts from ramping up speculation about interest rate hikes, perhaps before the end of the year. More interesting, the money markets are pricing in higher interest rates over the next 12 to 18 months.
The reason why this is so misguided and misreads the current status of the economy is straight-forward. Growth, inflation and wages growth is low and the unemployment rate is high.
It is worth taking a step back to see how the economy was performing the last time the RBA started an interest rate hiking cycle. That was back in October 2009, when the RBA increased the cash rate from 3.0 per cent to 3.25 per cent as the economy picked up steam as the impact of the global crisis faded.
In the six months prior to that hike in 2009, the unemployment rate hovered around 4.2 to 4.3 per cent and at the same time, annual wages growth was locked between 3 and 4 per cent.
Importantly, this ultra low unemployment rate and solid wages growth fed into underlying inflation which was above 3 per cent for two years. It was around 3.5 per cent as the first rate hike of that cycle was delivered.
At that time and with hindsight, it was quite obvious that higher interest rates and tighter monetary policy was needed to reign in inflation pressures which had been stubbornly high. In a nutshell, the economy was strong, with low unemployment, solid wage growth and inflation was uncomfortably high.
Fast forward to today. Let’s now look at the economic fundamentals the RBA will be confronted with as it considers what to do with interest rates.
"For an interest rate hiking cycle to start, inflation needs to pick up to at least 2.5 per cent, while wages growth needs to lift to 3 per cent. This implies the unemployment rate needs to drop to 5 per cent or less and which on even the most optimistic forecasts, seems more a wish that a robust expectations of labour market conditions.
Until these sorts of readings for the economy come to pass, the RBA will not lift interest rates. Indeed, if there is any evidence of low wages growth and low inflation continuing near current levels, the RBA will cut interest rates to a fresh record low."
A Professional Demographer to an amateur demographer:"negative natural increase will never outweigh the positive net migration"
"For an interest rate hiking cycle to start, inflation needs to pick up to at least 2.5 per cent, while wages growth needs to lift to 3 per cent. This implies the unemployment rate needs to drop to 5 per cent or less and which on even the most optimistic forecasts, seems more a wish that a robust expectations of labour market conditions.
Until these sorts of readings for the economy come to pass, the RBA will not lift interest rates. Indeed, if there is any evidence of low wages growth and low inflation continuing near current levels, the RBA will cut interest rates to a fresh record low."
As said they'll do exactly what the The Fed did during GFC1.
As said they'll do exactly what the The Fed did during GFC1.
If similar circumstances were to arise in Australia as in the US in the GFC, then Yes, I imagine the RBA very well may do something rather similar to what the US Fed did there then.
However, if different circumstances arise here as to what prevailed in the US then, it would seem self evident to me that the RBA is extraordinarily likely do something rather different to what the US Fed did there then.
But either every which way, the RBA will do what it judges to be most appropriate at the time, under the the circumstances, in accordance with its mandate, for the sovereign nation that is officially known as the Commonwealth of Australia.
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