Global Inflation Could See ‘Crushing Rate Rises’
Monday, 9 July 2018
By Bernd Struben
- RBA cash rate at 17.5%?
- Does Trudeau’s groping apology imply guilt?
You’d be hard pressed to find an economist predicting an interest rate rise from the RBA this year.
In fact, more analysts are expecting the central bank will keep Australia’s official cash rate at its record low 1.5% not only this year, but throughout 2019.
As Business Insider noted, UBS economist George Tharenou recently amended his views as well.
George pushed back his forecast for a 0.25% increase from mid-2019 into 2020. He cited ‘continued weakness in underlying inflation, tighter lending standards, further declines in home prices and uncertainty over the trajectory of wage pressures’ for that decision.
Those are all good reasons for the RBA to hold off on bumping up rates. Although that could prove a disastrous mistake.
As we’ve written here before, Australia doesn’t exist in a vacuum. The actions of central banks across the world impact borrowing costs for Australia’s commercial banks. They also impact the value of the Aussie dollar.
If the dollar falls that will drive up the price of imports — and overseas holidays — stoking inflation. That could see the RBA move higher far sooner than consensus forecasts suggest. Though possibly still far too late…
The US Federal Reserve has already raised rates twice this year. At least one, possibly two more rate increases are on the cards for 2018. Now the Bank of England looks set to follow suit.
This headline comes from Bloomberg, ‘The Bank of England Is on Course for an August Rate Hike’. The article continues:
‘Investors are currently pricing in about an 80 percent probability of a rate hike on Aug. 2. Asked last week whether the BOE would have enough information to make a decision next month, [Governor Mark] Carney said “the short answer is yes.”’
Bloomberg’s own economists agree, saying,
‘The new rolling monthly series is likely to show the economy is on track to rebound in 2Q, banishing concerns that the soft first quarter was more than just a blip. We expect the Bank of England to respond with a rate hike in August.’
Yet here in Australia, RBA Governor Philip Lowe has indicated the bank is unlikely to raise rates — last moved in August 2016 — this year. And he’s yet to outline any specifics for 2019.
That’s despite dire warnings from a committee of the Bank of International Settlements (BIS), which Lowe chairs, on maintaining low rates for too long.
From The Australian Financial Review:
‘The Bank of International Settlements has delivered a timely warning on the dangers of leaving interest rates too low, for too long. A committee of the BIS chaired by the Reserve Bank of Australia’s governor Philip Lowe warned on Friday that failure to raise rates could see an outbreak of global inflation that would force policy makers into crushing rate rises to contain it. In Australia, mortgage rates would soar, growth would collapse, and banks would once again be in the front line…
‘[T]he so-called inflation snap-back scenario described by Dr Lowe and the BIS is a tough reminder that the world has yet to find the safe exit and orderly transition out of these extraordinary measures, or escape all the unexpected pitfalls.’
Soaring mortgage rates. Collapsing growth. Unexpected pitfalls. And no safe exit in sight.
Those are some frightening words. And they’re not coming from just anyone. This is the BIS, after all. Sort of like the central banks’ central bank.
If the BIS is right, and the RBA can’t manoeuvre its way out of record low interest rates, the impact on Australia’s all important — and wobbling — housing market could be devastating.
We’ll get back to that, right after the markets.
(By the way, renowned US economist and forecaster Harry Dent believes the Australian property market is due not just for a correction, but for a 50% plunge. He details why — and much more — in his new book Zero Hour. You can claim your copy of Zero Hour here.)
Over the weekend the Dow Jones Industrial Average closed up 99.74 points, or 0.41%.
The S&P 500 gained 23.21 points, or 0.85%.
In Europe the Euro Stoxx 50 index finished up 7.57 points, or 0.22%. Meanwhile, the FTSE 100 gained 0.19%, and Germany’s DAX rose 31.88 points, or 0.26%.
In Asian markets, Japan’s Nikkei 225 is up 279.23 points, or 1.28%. China’s CSI 300 is up 2.06%.
In Australia, the S&P/ASX 200 is up 15.01 points, or 0.24%. That keeps the index into 10-year highs, dating back to early January 2008.
On the commodities markets, West Texas Intermediate crude oil is US$73.84 per barrel. Brent crude is US$77.10 per barrel.
Turning to gold, the yellow metal is trading for US$1,256.62 (AU$1,688.10) per troy ounce. Silver is US$16.07 (AU$21.59) per troy ounce.
One bitcoin is worth US$6,709.92.
The Aussie dollar is worth 74.44 US cents.
RBA cash rate at 17.5%?
So, the BIS is finally sounding the alarm that interest rates have been too low for too long. An alarm our own wealth preservation expert, Vern Gowdie has been sounding for more than five years now.
But extricating ourselves from the cheap, debt–fuelled party isn’t going to be easy…or painless. Which explains why Lowe and his predecessor Glenn Stevens (RBA governor from 2006–2016) have been loath to move rates higher since the end of 2010.
The graph below shows you the official cash rate going back to 1990, when it stood at 17.5%.
Now have a look at the following graph, which shows you how debt levels have rocketed as the cost of borrowing became ever cheaper.
It’s good to be a world leader in some things. Not so much when it comes to record debt levels.
One of the more worrying aspects of this graph is that the upward trend in Aussie household debt — already at 120% of GDP — shows no sign of reversing. And it may well not decrease until households are hit over the head with rising rates.
As noted earlier, that could see economic growth in Australia collapse while hammering property prices.
And it would put banks in a very sticky situation.
‘While Australia’s banks remain well-capitalized and are still churning out massive profits, the millions of customers backing their biggest assets aren’t. Wage growth is elusive as indebted workers struggle to cling to their jobs, and consumption—which makes up more than half of the economy—is pressured as households scrimp to meet mortgage repayments.’
You can see the risky situation commercial banks now find themselves in. As the graph below shows, the total value of Aussie banks’ mortgages is roughly 80% of GDP.
The big four banks alone hold over $1.3 trillion in housing debt. Little surprise then that they’ve been nudging up interest rates outside of the RBA’s cycle.
But a 0.10% rise here and a 0.05% rise there is akin to bailing out a sinking ship with a tablespoon.
If global forces outside the RBA’s control push inflation and interest rates up 3–4% in rapid order, indebted home owners and the banks that leant to them could be in big trouble.
And if the housing market and banks tank, you can expect most stocks on the ASX to follow them down.
It’s with this scenario in mind that publisher Kris Sayce and analyst Selva Freigedo have put together an action plan to capitalise on falling markets. (Details later this week.)
Yes, the ASX 200 is at 10-year highs today. But then it was trading at all time highs in 2007 as well. And we all remember what happened next.
Finally, this from The Australian Tribune:
‘Does Trudeau’s Groping Apology Imply Guilt?’
‘Few would be surprised to hear yet another allegation of inappropriate behaviour levied against US President Donald Trump. From alleged dalliances with adult film stars to infamous off the cuff comments like ‘grab them by the pussy’, Trump has taken plenty of heat from feminists.
‘Yet he has not once apologised.
‘That stubborn refusal to admit fault sets him apart from the likes of Canadian Prime Minister Justin Trudeau. Yet it’s…’
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