The Reserve Bank Governor, Glenn Stevens, today released a media statement to confirm a 0.25% rate rise to 4.25%. It will be interesting to see if we end up with the hoopla on banks passing on this rate rise in full or part or more as we did with the last one and the Westpac issue – but i digress…
If you are wondering about the direction of interest rates, simply read the final sentences of the statement.
“The Board judges that with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average. Today’s decision is a further step in that process.”
i’ve added the bolding for emphasis.
To bring a little perspective to the notional level of this interest rate, we can return to September 2007 (just prior to the explosion of Lehman Brothers and the subsequent spiral of global markets into near meltdown), at which stage interest rates were lowered b7 25 basis points (0.25%) to 7.0%. Just what is “normal” or “average”? It is certainly higher than 4.25% but being precise about such things misses the main point under consideration. The interest rate that is set in Australia will be impacted by one or more of the myriad areas that the Reserve Bank looks at when setting rates.
The media statement again places importance on the residential property market in Australia – highlighting the worry that another property market “bubble” is developing in this area. The worry for economic forecasters is that the RBA will increase rates to the general community in an effort to put a stop to such asset speculation in a specific area. Were that to happen, it would be an indictment on the lack of Government action to bring the supply/demand equation for housing back into order. However, housing is a local issue and bigger things are afoot on the international stage and this is where potential ‘wildcards’ are hidden.
My ponderings lead me to the thought that Australia remains very much the flea on the tail of the global financial dog. Our resource sector is booming as a by-product of Chinese infrastructure development. Our banks have obtained finance from global markets partly on the strength of that boom. Our sharemarkets reflect the global perspective of our future prospects and the returns are more heavily influenced by that external vision than by any internal frame of reference our political and financial leaders may raise. Our currency is a plaything of those global forces, exacerbating the impact of the commodities (ie, materials, energy and agricultural production) on the overall economy.
The call for capital on the international market will increase dramatically in the near term, and this will raise the cost of funds almost independently of the position of Australia’s economy – leading to our interest rates being set predominantly on the basis of global issues. As an example of this, consider the recent update from listed investment company Global Value Investors (GVI), in which they point to the reduced “5 year debt maturity” profile of major banks of the developed world. In other words, this is the average time at which existing debts will be due to be “rolled over”, and suggests that there will be a lot of banks looking for new finance in the medium term. More specifically, the United States figure is an average debt maturity of 7.2 years (5 years ago) now recording as 4.7 years. In the UK this has reduced from 8.2 down to 4.3 years. Regular readers would recall previous musings about Government borrowings, and the projected increases in borrowings from developed countries over similar time periods. Again, this brings to mind the “crowding out” effect, whereby Government borrowers take the cream of available funds, while corporates and others further down the food chain scramble over what is left – the resultant demand causing increases in rates. The final outcome are interest rate rises higher than expected and continued constrained credit availability.
At least, that is what i think…