Will interest rates go up soon?

Could the next move in interest rates be up and could it happen relatively soon?

The short answers are ‘yes’ and ‘yes’.

As things stand, Australia is currently in the midst of the longest period in modern monetary policy history without an interest rate hike.

The last interest rate hike in Australia was delivered by the RBA in November 2010 – some five years and four months ago. Never before, even during the global crisis, has the RBA gone so long without at least one interest rate hike.

Until this current cycle of lower or steady interest rates, there have in fact been only been two calendar years since 1999 where there has not been at least one rate hike – 2001 and 2004.

It is, of course, clear why the current record five-plus years without an interest rate hike has occurred. The economy has over that time been stuck in a below trend growth phase, commodity prices were in free-fall, inflation was low and until most recently, the unemployment rate had been creeping up.

Economic circumstances are now changing and so too will the pressures on interest rates.

The recent run of economic data confirmed the anecdotal evidence that the pace of GDP has lifted to a little above trend with annual growth now at 3.0 per cent.

Indeed, in the last six months of 2015, the annualised pace of GDP growth was a strong 3.5 per cent.

As a result of this lift in economic growth, the unemployment rate has eased lower to between 5.75 and 6.0 per cent in the last four months, down from a recent peak of 6.3 per cent in July 2015.

There has also been a solid upswing in commodity prices, albeit from a low base.

Compared with the low of US$38 a tonne in January, the iron ore price in now US$52 a tonne which, if sustained, with provide a substantial boost to the economy.

The price of gold, copper and other metals are up by between 10 and 20 per cent from the recent lows.

At these levels, the economy will be stronger than Treasury or the RBA were forecasting late last year and with it, there will be a necessary upward revision to inflation forecasts in the next month or two.

Any further lift in commodity prices and the inflation outlook could look more problematic.

The interest rate question needs to be viewed in the context of the current rate being a record low 2.0 per cent.

They are super stimulatory, which has filtered into strong house price gains.

Interest rates are not an impediment to borrowing for business or consumers, with the lift in credit growth clear evidence of the ease in new borrowing,

The key question is policy too easy?

To be sure, an interest rate rise is very unlikely in the next few months.

The upswing in the economy noted above needs a gain a little more traction before the RBA would be sure that inflation pressures are building.

But by the middle of the year, if GDP growth is confirmed at 3 per cent or more, if the unemployment rate is tracking below 5.75 per cent, the next couple of inflation readings tick even moderately higher the RBA will obviously abandon its easing bias and will contemplate increasing interest rates.

 

Stephen Koukoulas is a Yahoo7 Finance expert with 

more than 25 years experience as an economist in government, as Global Head of economic and market research, as Chief Economist for two major banks, and as economic advisor to the Prime Minister of Australia.