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Interest rate rises here we come!

Peter Switzer
7 March 2017

By Peter Switzer

Many years ago, Doug Mulray (my old colleague at Triple M) used to joke on air saying “avoid clichés like the plague!” But our recent post-GFC experience has me a great believer in “never say never” and “you live and learn”. And our next big lesson might come today and this month, with central banks thinking about what to do with interest rates.

Today, our Reserve Bank won’t change interest rates. All that its Board is thinking will be summarised with the statement that comes with the decision at 2:30pm. The view on inflation and the housing sector will be a prime focus for economists and financial market smarties, who want to make a dollar or two second-guessing what will happen to rates here.

Meanwhile in the USA, later this month, the Federal Reserve could in all likelihood give the Yanks the first interest rate rise of 2017. And because Donald Trump is expected to turbo charge growth, the market smarties think four or five rate rises could happen this year!

A couple of months ago, the markets were pricing in three rate rises but they’ve turned more bullish on the future of Trumpland!

Let’s stick to the US central bank because its rate rise story is now following the script that economists like me were brought up on. This reads: when inflation rises, get ready for interest rate rises. This made governments, businesses and consumers despise inflation, as it brought higher interest rates that eventually killed off stock market rallies and sowed the seeds of recession.

Until the post-GFC period, I would never have dreamed of a period where we would be praying for inflation. However, as we now recognise, when economies are flat and going nowhere, disinflation (falling inflation or deflation), which is negative inflation, prevails.

The Yanks were so desperate for inflation that they took their benchmark official interest rate set by the Fed to 0.25%. The Europeans were even more desperate and have gone negative but because we’re set to be the world’s best growing economy of all time, we saw our cash rate only go to 1.5%, where we are now.

The Bank of England is at 0.25% and the Bank of Canada is 0.5%, so they’re still praying for inflation. In Brazil, official rates have gone as high as 12.5% and their prayers are very different because they have inflation. It’s coming down but a year ago inflation was 10.36%!

A year ago, the UK’s inflation rate was 0.3%. It’s now 1.8%, so that’s progress. And it’s part of the picture that Morgans' chief economist, Michael Knox, painted on my Sky News Business TV program of a world economy set to have a very good year. He even told of a Eurozone economy that has surprised economists with its current prospects of growth this year.

A year ago, the region had inflation of minus 0.2% but now it has climbed to 2%, so it’s happy days ahead.

But what about Australia? This chart tells you why I’m hoping that the Reserve Bank can see inflation coming:


Inflation fell here with the petering out of the mining boom but there is an uptrend emerging. However, it's not very positive, yet. It’s why some economists think another rate cut is needed and will come. Knox is in this camp.

However, the RBA is worried about house price growth and would love to raise rates but it’s also concerned about our economic growth rate, which is picking up and our inflation rate, which, as you can see, isn’t great, yet.

Last week, I showed my regular readers just how good the economy is going, including the 1.1% growth rate in the December quarter and how business confidence is at a three-year high and business conditions are at a nine-year high.

Some good signs are out there but we need to see some inflation. And that’s why the Reserve Bank won’t move rates today.

I think we will get inflation this year and the next move with rates will be up but it could be a close run thing.

And this whole surprising situation where I’m hoping for inflation teaches me that, even with economics, you live and learn!

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