Interest Rate Outlook: Global Perspective

The RBA left interest rates on hold, and this was a bit of a yawn… We said all the way back on the day of the last rate cut, that rates would stay at 1.50% for 18 months, before then moving higher. It may be even longer before anything at all happens.

Meanwhile, elsewhere around the world, there are rumblings of reducing the stimulus in even the European economies in the not too distant future. In the US the Federal Reserve continues to hint at further interest rate hikes. Already up from zero to 1.50%. In the UK, where despite all the cultural tradition whinging about things, they actually already have an accelerating economy, full employment and booming property prices, they too are going to consider raising rates. Yet these will still be historically low levels.

Janet Yellen, the Chair of the Federal Reserve central bank in the USA, recently gave a press conference where she was all about how “nothing was certain”. Every point she made, she followed up with, “but there is a lot of uncertainty around that”?

I mean really. No one is prepared to say anything definite or make a forecast these days. The world is suddenly populated with people who will not stand up and make a call. (Janet was sitting at the time.)

Hard calls, which sometimes seem aggressive to other people, but are just really individuals who feel they can help and so are shouting from rooftops as loudly as they can, are what true success is made of. It can be a little off-putting to some people, but then again these very same people are usually the ones who benefit most from the courage of others.

All the central bankers of at least the West at the moment, are all about playing mother to investors and looking concerned. Central bankers no longer see themselves as leaders of the economy, but mere caretakers, just checking to see the grass isn’t too overgrown, or too brown as the case may be from time to time. They are keen to be what’s called in the markets, “behind the curve”. This means their decisions are following with a lag what is already happening in an economy. This use to be the biggest insult you could hurl at a central banker. Now, it is all they are interested in doing. Human beings, even central bankers, all react to recency, frequency and intensity. The impact of the Global Financial Crisis is still psychologically and even emotionally significant. Therefore they are all acting from a point of view of being fearful of another downturn at any moment. Even though there is no sign of one. Much as most bankers, fund managers and investors have been doing all these years by the way.

The investors are missing the boat. The central bankers are allowing their economies to run away from them to the upside. Many probably quietly recognise this fact, but they would much rather be wrong under-estimating their economies, than the other way around.

This is important because it again brings into focus, alongside sustained lower inflation as we have previously discussed, just how low-interest rates all around the world will remain for many years to come. This will make it very difficult for the Reserve Bank of Australia to raise rates too, as relativities come into play with regard to currency values and the business investment environment in this new global village.

This is not to say there is any reason for the RBA to raise rates at all. Inflation is not a problem, and unemployment is still far above what it should be. It is just to say if there did develop an argument for the RBA to raise rates, we don’t see one yet, then they probably would not do so in any case, or delay such a move to a painful degree.

The new Governor is in my book not even as capable as his predecessor, but he is smart enough not to do anything to draw attention to himself if he can. So we can add in a personal disposition of our own central banker to the list of reasons for why interest rates will remain “Lowe" for years to come.

Clifford Bennett // Chief Economist