I’m a most reluctant oracle,but the mansplaining is suspended and replaced by attentive ears,because if anything captures undivided attention in this country – – it is interest rates. It didn’t use to be,but so many of us have borrowed such that a quarter of a per cent in either direction means so much more than before.
Oh,AND in an Uber...iStock
This was abundantly clear when a couple of weeks back – a 30-minute summary of thousands of pages,but within five minutes there was only one thing we all wanted to know:what would it mean for interest rates? Had the treasurer over-spent or were cuts still on the cards?
Everyone is annoyed at the RBA. Even restaurateurs. Yet,this is where we find ourselves,packed to the rafters (even mid-week!) with cocktail prices we baulk at but are still prepared to sip while contending with the interest rate conundrum.
Like your $25 margarita,a bit of perspective might help.
People are applying old-fashioned thinking to a new-age problem by leaning on high school economics – fiscal and monetary policy – to predict where interest rates are headed. But let’s be honest,interest rate futures represent one of the most sophisticated segments of financial markets globally,so it’s not exactly high school algebra.
Nine’s finance editor Chris Kohler breaks down the impact of the 2024 federal budget on interest rates.
There are three main perspectives on interest rates. Inexact sciences are always about perspectives.
Perspective No.1 is that COVID sent the cash rate plummeting to an all-time low of 0.10 per cent in November 2020. It stayed there,like a drunk guest at a dinner party,until May 2022. The official cash rate is now,which is actually not that high when you consider the 20-year average at 4.1 per cent. It’s just high because of the average size of a mortgage these days.
Publicly announced interest rate decisions only. Back then,we treated them with the same reverence as a State of Origin match. But over the years,the cash rate has proven to be a blunt tool for managing our economy – a tool that’s as indiscriminate as a toddler with a paintbrush. Plus,remember that old joke that economists have predicted nine of the last five recessions – predicting the economy is harder than footy tipping.
Before you curse the Reserve Bank to whoever is listening,let’s remember that any future rate cut is unlikely to bring down the cost of living.
Perspective No.2 is that our economy is doing just fine. Unemployment remains at a,with wage growth outpacing it. A decade ago,unemployment was closer to 6 per cent,we were recovering from the Global Financial Crisis,and when I took a walk in the CBD there was no one drinking margaritas mid-week despite them costing 60 per cent less. The economy is as tight as a drum,people are still spending and our productivity is nothing to be proud of. None of these factors are conducive to low interest rates.
Which leads me to perspective No.3 – that our economy is complex and challenging to navigate. We are seeing more onshoring and protectionism as both businesses and governments rethink global supply chains. Indeed, vision involves billions in government subsidy funds to produce vital things like solar cells locally rather than relying on China.
There is also a surge in bureaucracy,with green and red tape tangles everywhere you turn. Artificial Intelligence is poised to revolutionise and disrupt most industries,and the demographic shift means our once youthful and enterprising population is ageing. Productivity isn’t picking up the slack,and complacency is creeping in – like another drunk pest – with the expectation that someone will always provide a safety net.
Enough with perspectives. Here’s the reality. The 10-year Australian bond rate is about the same as current short-term rates,keeping things pretty steady in the economic playground. So don’t bank (or borrow!) on any meaningful fall in rates unless you’re also wishing for a weaker economic environment.
Much like the price of dinner,the economy is ever-evolving. So,next time I’m asked what will happen to interest rates,I’ll remind whoever’s listening of what I know for certain:the are coming. But maybe don’t spend it all on $25 margaritas.
Jaki Virtue is chief operating officer of Soul Patts.
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