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Interest rate horror story

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by Peter Switzer

The only thing good about the latest speculation that the Reserve Bank will increase interest rates by 100 basis points next year, after a 25 basis points or 0.25 per cent rise before Christmas is that this very scare campaign might prevent this prediction from becoming a reality!

Negative media

By the way, there are a number of good developments that might worry the Reserve Bank Governor, Glenn Stevens, and this is why he started this media frenzy speculation about rising interest rates. However, the media has a pathetic tendency to primarily go along for the ride with speculative stories provided that they are negative.

For example, yesterday the big story was an ex-RBA economist who now has defected to an investment bank made the big call that we will see a 0.25 per cent rise in rates before the end of the year. But wait there’s more — he tipped a 100 basis points rise over the course of 2011!

This will gut many home loan borrowers who are already feeling the pinch and will hurt house prices going forward. These predictions will work against business confidence, which already has had to cope with five months of drops and only went positive in August.

November rate rise

The question is how long will it last with this crystal ball view that rates are due to rise by 125 basis points or 1.25 per cent over the next 15 months?

I have argued and the chief economist at UBS, Scott Haslem, agreed with me last night on my Sky News Business Channel program that we have never seen a central bank effectively broadcast the promise that rates would rise by around two times before the end of 2010. This spooked consumers and small business, and until this week, it looked like this forecast by just about every economist, including the galah at the local pet shop, was going to be wrong but who knows now?

I reckon we could see one more rise with November being the more likely but these suckers on the RBA board could move in October if Haslem is right about what inflation the Reserve Bank cares about. Most economists think the September quarter inflation figure due out in late October will be the important one for determining when the Bank next moves rates up and so November has been the month that many economists have referred to as the one where the RBA could move again.

Future inflation concern

Haslem argues the Bank will be more worried about future inflation than inflation in the past or present and so he thinks they could move earlier than most of us hope.

However, it’s not all bad news. He doesn’t think rates will rise by 100 basis points next year — he thinks it will be less.

Economic growth forecast downgraded

Finally, to ensure I don't fall into the same trap as everyone else in the media, let me point out there was another story out there yesterday and that came from the Government’s commodity forecaster ABARE. These guys actually downgraded their forecast for economic growth for the financial year from 3.25 per cent to three per cent, which means these guys think we will grow a bit slower than they once expected. If these guys are right, then we will not see a 1.25 per cent rise in interest rates over the next 15 months.

I know I’m well known for being optimistic but right now I prefer optimism with a bit of a lid on it because everything turning out to be better than expected — including this nice September market rally — is coming back to haunt me and anyone with a home loan!

For advice you can trust, contact Switzer Financial Services.

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Published on: Wednesday, September 22, 2010