I saw a recent survey that said 83% of economists now think that the next interest rate move is likely to be up. That’s almost a dead-ringer for it going the other way.
Here’s what I think…
But first, before we get to that… Let’s look at two big issues that are giving the RBA headaches.
Let’s start with a chart that shows just how much the game has changed in Australia over the past 20 years.
This is the share of export trade going to our three biggest trading partners – the US, Japan and China.
It’s a stark reminder of just how important China has become. The share of exports to Japan and the US have been in steady decline over the past twenty years. China on the other hand has gone bang.
China’s share has gone from less than 5 percent at the turn of the millennium, to just shy of 35 percent this year. Over one third of our exports are now going to China!
This is an incredibly rapid ascendancy into an amazingly dominant position. We have become hugely reliant on the fortunes of China, and just how much of our stuff they can buy.
To a large degree this is a resources story. If you look at the breakdown of Aussie exports, there’s been a similar surge in the resources share of exports, again kicking off around the turn of the millennium.
But while resources have dominated the China story, we’re also exporting rural (=food) and services to Chinese buyers.
And this is why everyone is watching China so closely these days. China does have a big impact on how things are flowing here.
What’s interesting about the explosion in exports to China is that it’s come at a time when the Aussie dollar has remained persistently and stubbornly high. And it’s remained a thorn in the side of policy makers – especially poor ol Glenn at the RBA.
Because the high dollar – and pretty much everyone agrees it’s too high – is real headache for those Aussie businesses that have to compete with companies overseas.
When the Aussie dollar is strong, it’s not just the price of our exports goes up and foreigners don’t want to buy as much. It’s also that the price of competing imports goes down.
So if you’re an Aussie manufacturer – making cars for example – a higher AUD makes your overseas competitors’ cars cheaper.
And so you’ve either got to cut your price as well (decreasing profitability) or find ways to cut costs, or both.
But the AUD’s been high for a long time now. The low-hanging fruit of efficiency gains have been picked. And so it’s tough times for Aussie companies.
This chart here sums it up.
It compares inflation (the annual change in prices) of tradeable and non-tradeable goods and services in Australia. Tradeable goods are those goods where an import from overseas would do just as well – like cars. Non-tradeables are those things were you can’t import them from overseas – like haircuts.
What it shows is that inflation in non-tradeables has been pretty consistent – hovering around 4 percent over the past three years.
Prices of tradeable goods and services however have been falling since the beginning of 2012. Inflation has been negative from that time on, and is only now just starting to push back towards positive territory.
It’s likely that the high AUD has a lot to do with this.
But what that means is that if you’re a company producing tradeable goods and services, then you’ve had to cope with a climate of falling prices. You’ve either had to cut your own prices as well, or risk being priced out of the market.
This, of course, would eat into your profit margins and make for very lean times.
And so the high AUD is making for tougher economic times. If it’s hurting company profits, then it’s also taking a swipe at employment, which in turn means consumer confidence and retail sales.
And so everyone would like to see the dollar move lower.
But it won’t.
It’s currently stuck in a band a few cents either side of US 95c, and has been for months. And the fortunes of the dollar are largely being dictated by what’s going on overseas, and there’s very little anyone here at home can do about it.
And for the time being, the headwinds coming off the high AUD are keeping downward pressure on rates. If the AUD is slowing us down, then interest rates need to be speeding things up.
(We could be asking fiscal policy to chip in here as well, but the Abbott government went to the election with a cost-cutting agenda, so they’re on the side-lines for now.)
Glenn Stevens would like to avoid cutting rates if he can. With official rates already down to 2.5 percent, and a lot of nations already pushed to the zero-bound, he’ll be doing everything he can to avoid a similar fate.
Once rates go to zero, your options really narrow down. And you end up with crazy experiments like Quantitative Easing.
And so it would be a dream come true if the AUD fell another 10 to 15 percent. It would make Glenn’s job a whole lot easier. And it would be a big shot in the arm for the Aussie economy.
But the AUD just won’t move.
Glenn’s even got into the ‘jawboning’ game. At the beginning of the month he threw up his hands and took the unprecedented step of trying to talk the Aussie down.
He said: “these levels of the exchange rate are not supported by Australia's relative levels of costs and productivity. Moreover, the terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower.”
It might not sound like such tough-talking to us, but for central bankers and markets, these were fighting words.
And it worked… for a bit. Glenn’s statement knocked more than a cent of the Aussie dollar that day.
But the effect was only temporary, and was unwound when another central banker – this time in Europe – said that Europe could be on the way to quantitative easing too, and the AUD jumped again.
And the net effect is that this month, the AUD has held fairly steady.
Stevens is right. In theory the dollar should be lower. And everyone would like it to be lower. But it doesn’t matter. It’s what happening overseas – particularly in the US that’s driving the dollar’s fortunes.
And this means, that for the time being, the RBA’s easing bias remains in effect.
Marc montano says
So… Up or down? I’m in the middle of fixing me rates as we speak. We don’t have a lot of buffer if they start going in an effort to kerb the real estate boom.
Mel says
Hi Marc, as Xavier said, if you don’t have a lot of cashflow/room to move if rates head upwards again, it could be a good thing for you to lock in what you are comfortable with now & know what your payments over “X” years will be, regardless of rate moves.
We run one of those DAMN SMSF’s that recently bought a property, in this booming/collapsing/stagnant market (depending which news headline you read on any particular day!..) We did fix our rate for two years, as it will take another three moves downward of 0.25% to better that particular rate.
Being an SMSF loan, the variable rates are generally 1% higher than “standard” & would have cost us an extra $100p/m over the next two years. So we actually weighed up the option of 75-to-100-basis-points short term rate DROPS going against us within two years, (rather than the less-likely rises everyone worries about atm) over the immediate to short term/two year costs of taking out a variable loan!
It can be a gamble either way, as the banks still do whatever they damn well please with their loan rates, or dick around with their fees & costs so people think they are getting a better rate deal upfront, yet getting screwed behind the scenes…
Not that I would think for a SECOND that the banks may try to scare people into fixing now (& effectively locking in extra banking profits for years to come) by raising some of their fixed rate options, knowing people will panic, thinking of a looming rate rise, while knowing full well that the banks are still factoring in the far greater possibility of further rate cuts!… Perish the thought! 😉
Interest rates will inevitably head north again – but under current conditions, perhaps only slowly over the course of the next two or three years, or perhaps even drop another half-to-full-percent slowly, before rising again, given the World vs Australia’s current economic standings. I can’t see them going anywhere except down over the shorter term, but the RBA appears to want to hold off on another down move as long as they can, so we are fairly comfortable with our own rate gamble!
Xavier says
Hi Marc, ‘Steady’ would be a be better word on the bank of the above article.. however is tour cashflow would feel threatened by an increase it looks like fixing may be a sound thing to do.. especially in the light of lenders looking to increase their fixed rate offerings very soon due to medium/long term Futures trend heading up
Jarad says
I’d be surprised to see the RBA lift rates even a little. There are just to many downward pressures that we need to contend with and it would really hurt the little momentum we do have.
Damn SMFs and their buying spree…
joe petranov says
Damn SMSF alright ! ….I’ve got one of those and the yields are going down as the oversupply of investment properties in Sydney is putting downward pressure on rents .
I cant see Interest rates moving much at all….the world economies are struggling except for few like China Brazil maybe Australia
We are in unprecedented times ….if it wasnt for China we’d be at zero interest and printing money as well ….i think i might learn some basic Chinese words as they might be buying my properties in the future if i decide to cash in a few .
The devil must be smiling as the world flounders in anxiety …nothing works like fear !!
God help us
Marc montano says
Thanks everyone for your helpful input.. It’s a difficult decision.
Peter Tsorakos says
Up, down sideways my property portfolio is always killing it. I strictly deal with what I call blue chip bread and butter properties (properties that every standard Aussie wants to rent). When the GFC hit my family doctor was eager to ask how I was coping with my properties. I told him my rents were skyrocketing and I was loving it, he nearly fell off his chair. When shit hits the fan the larger market (tenants) turn to bread and butter properties and often pay you a premium to secure the lease.
With current conditions interest rates, low property prices it’s an investors paradise. If you could ever make it – now is the time. People often ask me about interest rates and when to buy, I simply answer “when the math ads up”.
Don’t be greedy, where at the bottom give or take a few basis points. By the time you work it out banks will have moved, that’s my theory anyway.
That family doctor asked me to a meeting, I’ll let him simmer over his empty $800,000 unit on Glenelg SA, a little longer.
Love these articles, keep them coming.
Ken. says
Definitely do the opposite of what the banks tell you to do on fixing interest rates on your mortgages. The banks are there to make money. That’s why the CEO’S get well paid.
Drew says
hmmm considering that the govt is asking for an increase in the debt level they can go to, and the high dollar that they haven’t been able to curb after this long, as well as the extremely cheap fixed rates, I don’t think rates are going to go up too soon.
The govt knows they are going to have to spend a lot soon to keep the economy chugging along, which indicates to me they know lean times are coming.
The banks are offering cheap fixed terms because they are confident they will stay low for a while.
So what to do….I’m going to stew on it and decide at the beginning of next year. i think that I will lock in at some point within the next year tho.
I agree with Peter T in that we shouldn’t be too greedy, we’re at a very low interest rate.
Those hoping for the low rates that the U.S has had, shouldn’t because the Australian economy is in a lot better position than most and wont need to move that low.
I love these emails from Mr Gian!!
Marc montano says
Low property prices? I’m guessing your not in Sydney.
Peter Tsorakos says
Adelaide SA, where you can buy a 2 bedroom unit near the beach for 250-290k and metro units for 250k, add 3k worth of furniture a $700 split air-con system, add our great tax system and you have positively geared rentals all day long. People don’t believe me so I just have to keep buying them for myself. Subdivision is cream, buy a house with large block add a second house, collect 2 rents and again with our fantastic tax system (depreciation schedules on new house), low rates and you have instant positively geared rentals, dam I love this country.
Interest rates are just great, don’t get too greedy, if they fall lower that’s great. Make your sums and deals with current low rates, just find those bargains and great deals. If your too unsure use option to fix 50-60-70% of your loans and get back to making those deals happen.