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No rate rise soon

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by Peter Switzer

Don’t panic, because despite what you’re reading in newspapers, interest rates are not about to rise! In fact, I really hope no one reads the story as it might help to ensure that it actually turns out to be correct.

This is the classic economics writer dilemma when it comes to the sneaky game the Reserve Bank boss, Glenn Stevens, is playing.

Don’t get me wrong, unlike other experts in the media, I don’t play God with my predictions. I have been in this game long enough to realise you can never fool yourself that you are infallible.

Past predictions

Regular readers might recall I started bagging the Reserve Bank about raising interest rates in November 2007 as the credit crunch was starting to bite. The key reason was that small business confidence was already diving and wholesale market borrowing rates had spiked.

I then kept arguing that a rally of around 26 per cent follows the low point of US consumer confidence and I warned about panicking and going into cash at the low point of the market crash.

That’s all well and good, but I didn’t scream from the hilltops that this crash was about to happen despite regularly warning that stock markets can’t keep on rising by 20 per cent or more.

I also did not see the US authorities permitting Lehman Brothers to fail but I was not alone on that one.

This is why I need to emphasise that even given my view on rate rises it doesn’t mean they won’t go up this year. The important point is that there is no certainty about the matter.

Handle the truth

The trigger for the headlines in newspaper such as “Rate rise looming, warns top banker” was a speech to business economists where Stevens answered a question about whether the Big Bank could raise interest rates before unemployment peaked.

He simply gave a truthful answer: there is no rule that the Reserve Bank can’t raise interest rates before unemployment peaked. In fact, there aren’t many rules when it comes to monetary policy. There are lots of guiding principles, sure, but the gut feeling for the economy, the likely outlook and the effectiveness of implemented policies as well as pending ones all could be considered by the RBA board when they get together on the first Tuesday of each month.

Racetrack accuracy

The money markets have now priced in an even money chance of an interest rate rise before Christmas, but let me remind you the money markets history of accuracy is nearly on par with the infamous quality of tips from jockeys!

One little historical note is that the Reserve Bank has often raised interest rates on Melbourne Cup day but that could be selective memory from someone who hates to pay more for his home loan.

What the RBA wants

So, what’s the case for no rate rise soon?

There will have to be some really solid pieces of economic evidence that our economy is out of the woods. I think and have argued consistently that we will do better than the doomsday merchants have predicted, but we need to see more proof.

Also there is some method in Stevens’s madness and it’s called jawboning. Deep down, the RBA wants to minimise the jobless toll and keep a lid on potential inflation. In an ideal world we would get sic to nine months of seeing the economy through the worst of the potential unemployment rise and then the Big Bank would start raising rates to head off inflation.

Cool it

However, if we all get excited about a recovering economy with interest rates at 49-year lows then we could get silly borrowing piles of money for quarter-acre blocks and quarter-acre plasma TVs!

If Stevens can warn and we take the warning and don’t go hard with the bank loans and credit cards, then the rate rise could be delayed.

It gets down to, if you show restraint, so will Stevens.

For advice you can trust contact, Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Wednesday, July 29, 2009