What does the future hold for interest rates?
“What’s going on with interest rates?”
It’s one of the most common questions I get, and the answer needs to take two factors into consideration:
1. What’s the RBA planning to do? Answer: nothing, for a least a few years.
2. What will the banks do? Answer: they’ll look to shift fixed rates sooner rather than later.
Remember, a low cash rate (set by the RBA) means home loan rates will remain low, but right now the bond market is arguing with all central banks that they globally can’t keep interest rates around current low levels.
The RBA says wages will need to take off before they’ll look to raise interest rates. And to keep interest rates in the bond market down, it has been buying three-year bonds, which simultaneously drives their price up and keeps interest rates down.
Fortunately, you don’t need to understand how the bond market engages with central banks, but the bottom line is the RBA, the FED in the USA and the ECB in Europe are prepared to take on the bond market to keep interest rates for home loan borrowers and small businesses at low levels, which will generate lots of jobs, higher wages and eventually inflation.
And when that inflation gets worryingly high, which should coincide with much higher wages and strong economic activity, that’s when interest rates will rise.
The RBA is predicting it will take until 2023 or maybe 2024 before they’re ready to start pushing the cash rate up. But the economy might surprise them and the rest of us and be stronger sooner than is currently forecast.
A key factor will be the ending of JobKeeper at the end of this month, which the big banks will need to take on board. That’s where their call on interest rates and on our economic future will, in time, be seen to be right or wrong.