December 7, 2017 by Dymphna

Will RBA hike in 2018..? Ha!

My outlook for rates in 2018.

A few people thought the RBAs decision to leave rates on hold came with a wiff that rates might be rising soon.

The key statement the hike hopefuls pointed to was this one: “Employment growth has been strong over 2017 and the unemployment rate has declined.”

That is, the economy is looking Bonza lads.

That said, inflation is still under target, so it’s hard to see any excuse for rate hikes soon. But you know, maybe mid 2018. That’s what markets are currently pricing in… tentatively.

But I doubt it.

The thing to remember is that the RBA totally changed their stance a few months ago… and hardly anyone noticed.

To be fair, when they said, “we have a new neutral rate”, most people didn’t really get what they were saying.

So what does that mean? Neutral rate?

Think about it this way. Interest rates are like the accelerator of a car. Add gas and the economy speeds up. Back off and the economy slows down.

And somewhere in the middle is a setting that just maintains speed. Where you’re cruising.

This is the neutral interest rate – an interest rate setting that isn’t causing the economy to accelerate but isn’t getting it to slow down either. It’s neutral. It’s the Switzerland of interest rates.

And what the RBA reckon is that the neutral rate has changed. It used to be 5%. Now it’s 3.5%.

And that means that our current official setting of 1.5% is still quite aggressive.

Some people thought this was a signal that the RBA was laying the ground work for interest rate hikes. That the RBA was flagging where they’d ultimately like rates to be, and since it’s a long way north of here, people suddenly started imagining that the a large number or rate hikes might come very quickly.

Never mind that the RBA never – EVER – hikes rates that quickly.

And never mind that they’ve got their thinking entirely backwards.

Sure, they’re saying that interest rates are still having a stimulatory effect on the economy, particularly the housing market. At some point, as the economy gathers steam, we’ll need to back off the accelerator.

But think about what they’re really saying here.

Right now they’re saying that if the neutral rate is 3.5% then our current setting of 1.5% is two full percentage points below neutral.

But previously, if they thought that the neutral rate was 5%, then our current setting would be 3.5 percentage points below neutral.

That’s another way of saying that interest rates are currently LESS stimulatory than we thought a few months ago.

Which is another way of saying that there’s actually less reason to raise rates, and to raise rates quickly, than there was before.

Which is another way of saying, guys, take it easy. Have a cup of tea and a good lie down. Rates are going nowhere in the near future.

Any time in 2018?

Maaaybe, but I wouldn’t be betting on it.

The take home for me is that the RBA is comfortable with where rates are. They’re low and they’re staying low. At some point they might start edging up, but it’s not going to be soon, and it’s not going to be quickly.

So let’s all just take it easy.

No need to get our knickers in a twist.

Is that what you think the RBA was saying?