Are You Ready for Interest Rate Rises?

From Bloomberg yesterday:

“2018 is the year when we have true tightening,” said Ebrahim Rahbari, director of global economics at Citigroup in New York.

Citigroup expects the Fed and its Canadian peer to move interest rates up three times. And the UK, Australian, New Zealand, Swedish and Norwegian central banks once.

JPMorgan is forecasting the Fed will shift four times.

I’ve talked about this previously.

In a 16 November article I predicted that Australia will possibly see up to four rate rises next year. That’s a lot more than many think will happen.

Here’s what I wrote:

‘I’m of the opinion we will see four or five interest rates rises next year. At least one every quarter.

There are three reasons for this.

The first reason is continuing economic growth. I’ve talked before how I see a coming infrastructure boom. This will take place in Australia, China, the USA and South East Asia.

There’s trillions of dollars of plans already drawn up. And a massive infrastructure gap according to consulting firm McKinsey & Company

The second reason is the desire of the RBA to ‘normalise’ rates as fast as possible.

The threat of an economic crisis in the world is always there. And Australian only scraped through the GFC in 2008 by having the power to drastically decrease interest rates as a response.

Government spending combined with this monetary easing resulted in a recession-free GFC for Australia, one of the only countries in the world to do this.

Lastly, there’s the situation in the US. If the Federal Reserve continues to tighten US interest rates, Australia will be under pressure to do the same.

You see the last time US interest rates were lower than the US level, the Australian dollar plummeted to US48 cents. That was 16 years ago.

I still stand by that.

And if these predictions come true, it will be the biggest jump in annual interest rates since 2006.

Deflating the bubble

To some this might seem a risky move.

We have negligible inflation. Consumer spending is still precarious. With consumer debt so high, any increases in mortgage costs may reduce economic activity.

And there’s still a shaky feeling around the global economy, as people worry what years of money printing and low interest rates have done.

But that’s precisely why interest rates have to rise.

And soon…

You see the asset inflation — that is the booming share and property markets — that we’re seeing is a consequence of the low interest rate environment. It’s a growing bubble that must be slowed down.

It’s not sustainable.

Now of course letting a bubble down gently is no easy feat. Central bankers will continue to walk a fine line between actual action and jawboning for effect.

That is, talking tough while easing conditions ever so carefully.

But if a second part of the government policy includes significant infrastructure spending that keeps employment up, then the boom stage of this cycle may expand for a few years yet.

Done correctly, a simultaneous increase in government backed infrastructure spending along with an increase in interest rates might make logical sense.

A stalling of low interest rate fuelled asset prices on the one hand, backed by an increase in wages and employment on the other.

And if the infrastructure policy is smart — by way of public-private partnerships — it could be a good lure to get investors out of risky, non-income generating assets and into stable, income generating ones.

A kind of pact with the younger generation. In return for jobs, good future highways and railways and more affordable houses. Older generations benefit from steady taxes to maintain the health and pension system while at the same time getting decent returns on cash deposits and infrastructure dividends.

If it works out like that…

The longer it goes, the worse it gets

You might read this and disagree. I’m sure more than a few of my colleagues here at Port Phillip Publishing would, too.

After all, what’s the point of spending more and at the same time increasing interest rates?

Yes, I know it sounds counterintuitive. To have monetary and fiscal policy butting against one another.

But years of monetary stimulus have resulted only in asset price bubbles. Not inflation. Not wage growth. Not the promised productive investment.

Just an era of ‘everything bubbles’.

Bubbles that, left unchecked, will eventually pop of their own accord.

Without action on rates, the outcomes only gets worse. It’s time to end the monetary experiment.

So perhaps next year we will see the promised year of rates tightening?

And if we do, I don’t think that’s a bad thing.

But if you’ve got a mortgage it’s wise to get prepared in advance.

Ryan Dinse,
Editor, Money Morning

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

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