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A matter of when: Interest rates likely to rise

A matter of when: Interest rates likely to rise

Interest rates are expected to remain steady over the next 6 months, according to Brendan Rynne.

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Partner, Chief Economist

KPMG Australia

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Mortgage interest rates and domestic interest rates are expected to remain relatively steady for at least the next 6 months, according to KPMG’s chief economist.

The view is based on a range of recent data, including the minutes from the Reserve Bank of Australia’s (RBA) August board meeting on 7 August 2018, which explains the rationale behind keeping the cash rate unchanged at 1.5 percent this month.

Although the RBA minutes describe current monetary policy as supportive of economic growth, reducing unemployment and lifting inflation, a rate change was forecast in the longer term.

“In these circumstances, members continued to agree that the next move in the cash rate would more likely be an increase than a decrease,” the minutes read.

“However, since progress on unemployment and inflation was likely to be gradual, they also agreed there was no strong case for a near-term adjustment in monetary policy.”

Other factors noted by the board include positive business conditions, moderate house price falls in Melbourne and Sydney and drought conditions in rural Australia.

Inflation yet to respond

Brendan Rynne, who recently discussed an improving labour market in a previous edition of KPMG Trendline, says there are signs of an improving labour market in Australia, with recent strong growth in employment and an anticipated near term growth in wages, but inflation was still unlikely to move in the short-term.

“Inflation is still a touch weak and there is an expectation that inflation will remain below 2 percent for the remainder of 2018,” Mr Rynne said.

“Until you start to see improvements more generally around consumption activity, which is being driven by wages growth and the number of people employed, and inflation being towards the middle of the RBA target band of 2 to 3 percent, then the RBA is likely to keep the cash rate at current levels.

“That being said, the RBA minutes did indicate that there remains an expectation that the next movement in the cash rate would be upwards; it’s just a matter of when.”

Other factors to consider

Mr Rynne said there were a number of other indicators which supported the view that market interest rates are also likely to be steady in the short-term.

“Deposit margins aren’t moving, with the margin holding at just over 1 percent, where in the decade previous it’s been closer to 2 percent,” he said.

“The CBOE Volatility Index (VIX) increased at the end of 2017 and early 2018 but has been stable thereafter.

“Ten-year bond rates have broadly only traded within a 40-basis-point band since the beginning of 2017 and remain at quite low levels, being just under 3 percent, and there is nothing to indicate they too will be heading up any time soon.

“And given 10-year bond rates lead the (1-month) Bank Bill Swap Rate (BBSW) by about 6 months, and the fact 10-year bond rates have been relatively stable for the past year-and-a-half, then we would expect the BBSW to also stay relatively stable in the short term.

“Given all of this, it would seem market interest rates should stay relatively flat for, at least, the remainder of this year.”

You can view Brendan Rynne’s weekly economics segment Trendline on KPMG Tax Now.

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