We here at Edge Financial Services are wondering why the local credit market has decided that the Australian economy is set to recover by the end of 2009. And on what facts are based the predictions that by the time pyrotechnics herald the arrival of 2010, the Reserve Bank will need to ‘slow things down’ by increasing interest rates.
There seems to have been an incredible outpouring of optimism at the same time as both the global and domestic economies are sliding. And this at a time when even Treasurer Wayne Swan is warning of a big-stick budget, and gloomy times ahead.
Whatever the cause of the wild optimism, we believe it is having the result of pushing up the banks’ fixed term rates.
Key interest rate strategists agree with us that it is up to the Reserve Bank to fix this problem by spelling out to the market the direction that it sees its cash rate taking.
At a time when the Reserve Bank is attempting to loosen monetary policy, and in line with most credible economic forecasts, it seems incredible to us that anyone would predict interest rate increases any time soon. It’s barely a month ago that credit market players agreed that the RBAs cash rate was heading to 2% in 2009, with little prospect of it rising more than 5 points in 2010.
We believe that the Reserve Bank should release a policy statement following its 5 May Board meeting that clearly states that the need for tighter monetary policy is unlikely to occur in the next 12-18 months and that the expected the cash rate will remain at or below its current level of 3% at the end of 2010.
Such a statement should create a rally in our local interest-rate markets. In turn this will minimise lending rates and bank funding costs. In short, the Reserve Bank needs to become more transparent in its outlook for interest rates.
One of the main reasons for the banks’ fixed-term rate increases is that overseas three-year money costs are increasing as existing lines expire. In the view of the Edge team, another is this weird interpretation of RBA thinking that’s being taken by the credit market.
A key result of interest rate speculation is an increase from 3.4% to 4% in the 3 year swap rate – and this higher cost of funding is sure to be passed on by the banks.
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