“Interest rates set to hit 1% in 2017!”
When you hear bold statements such as the one above, it pays to remember the old finance joke that ‘economists have predicted nine of the last two recessions’.
While the economics behind economists make sense on a whiteboard, so much of the time, financial forecasts are just far too difficult to be completed with any accuracy.
Will interest rates fall in 2017?
Nonetheless, despite their failings, the research that goes into financial forecasts can reveal investment opportunities you may have otherwise missed.
In the year ahead, the futures market and most economists are forecasting official interest rates will remain roughly in-line with where they are now, at 1.5%.
However, Credit Suisse is tipping the Reserve Bank of Australia (RBA) to cut official interest rates twice, to 1%, before halfway through next year. Imagine your mortgage with even lower repayments!
Credit Suisse strategist Damien Boey goes so far as to say that interest rates should be 0.8% (nearly three typical interest rate cuts lower than today’s levels) in order to stimulate the economy.
As quoted by Fairfax, Mr Boey said debt and labour markets are two important factors that the RBA must carefully consider. “Excessive debt is a real dampener on the economy,” he said. “It’s a delicate balance, you don’t want to help them out completely. You don’t want to encourage moral hazard.”
Across the sea in the U.S. interest rates are on the rise with some commentators calling for up to three interest rate increases in 2017. That follows the U.S. Federal Reserve’s decision earlier this week to increase interest rates for only the second time since the Global Financial Crisis (GFC) of 2008.
If interest rates in the U.S. rise aggressively in 2017 and the perception is that the RBA will lower interest rates in Australia, it is almost a given that the Australian Dollar ($A) will fall. That, by itself, could stimulate the Australian economy since it boosts our exporters. Ultimately, that could stave off the chances of any aggressive interest rate cuts locally.
In my opinion, holding off cutting Australian interest rates could be a good thing since a 1% interest rate would see borrowing costs plummet and more Aussies take on loans they otherwise couldn’t afford.
As My Boey said, “You don’t want to encourage moral hazard.”
If RBA interest rates fall in 2017 you can bet shares of companies like Commonwealth Bank of Australia (ASX: CBA) and Telstra Corporation Ltd (ASX: TLS) will receive a lot of attention from investors. Whether or not that is a good idea is another question entirely.
Personally, if I were to gaze into a crystal ball for long enough I think I would see the RBA doing nothing in 2017 and expect that they would be happy to rely on the U.S. Federal Reserve to depreciate our currency.
But don't rely on crystal balls! I think investors should be looking for rock-solid growth stocks, not yesterday's dividend yielders. That is how the best investors make their fortunes.
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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.