Australia’s Inflation Confirms Good News On Rates

With the latest release of Australian Inflation data coming in at 1.3% for September, it is highly unlikely the Reserve Bank of Australia will be cutting interest rates anytime soon.

This is actually very good news for the property market.

While the general wisdom suggests and is usually justified, that lower rates are good for property markets, there is a limit at the extreme where this isn’t necessarily so. The current global environment is one of extremely low, for real and perceived crisis reasons, interest rates across the board. Official interest rates are actually negative in many major economies.

This is by no means normal. Yet as we have been saying for some time now, the world is actually prosperous and the global economy is clearly re-accelerating. The media will continue to paint the picture gloomy at every opportunity, but even they, are beginning to see the wisdom in describing the world as it actually is. The most prosperous period in human history.

Interest rates then, in most western economies will remain stable or begin moving higher.

This is especially true in the US. I still believe the Federal Reserve Bank will be raising interest rates either next week, though this may be unlikely due to the US election just the following week, or in December. As we have pointed out previously this will be a raising of rates from just half of one per cent to just 0.75%. Nothing scary about this at all. Just an edging away from the crisis efforts of some seven years ago now.

Australian interest rates endured a far greater roller-coaster in recent years than for any other country. The nation suffered at the hands of the country’s worst ever Governor, Glenn Stevens. Of course, it is the entire institution that has much to answer for. In the end, the RBA had to admit what everyone else had known for years, that rates should be a lot lower. So we belatedly moved down to 1.5%. At the time, the view here was that this was where rates would stay.

This view on official rates is greatly encouraged by that inflation number of 1.3%, moving up as it did from the previously already firming slightly 1.1%.

We have Australian inflation firming in a world of firming inflation. It is, therefore, unlikely that given interest rates are already at crisis levels in Australia, 1.5%, and the economy has been gathering speed and now inflation too, that there will be any reduction in rates. In fact, I believe the next move in interest rates will be to hike very slowly back toward 2.25%.

This interest rate tightening cycle, and I do believe we are already in that domain, is likely as per the USA, to be the actual slowest and most moderate in history. The first rate hike itself in this cycle by the RBA is probably not until 2018.

This is great news for property in Australia. In fact, the news could not be any better.

That the RBA will not be cutting rates, at these levels, simply confirms to potential buyers that the crisis has passed. It only amplifies the well-established hint, that property is a great investment at the moment, and if you are ever going to buy you better act quickly.

Interest rates will be stable for a long time, and then only rise modestly and slowly. While all the time the economy will be strengthening. It is difficult to imagine a better environment for property purchases.

We should only see the prospect of rates being on hold, not going lower, as encouraging buyers.

Clifford Bennett