RBA governor says next move in interest rates “likely higher”

Speaking before a parliamentary committee this morning the Reserve Bank of Australia governor Phillip Lowe claimed the market had “misinterpreted” the bank’s recent comments about the “neutral interest rate” being 3.5%.

The term “neutral” can be interchanged with the term “appropriate” in this context in describing the RBA’s thinking as to a targeted rate to stimulate the economy and manage inflation in the context of expected macro-economic conditions.

Currency traders interpreted the talk of a 3.5% neutral rate as meaning that the RBA intended to hike rates more aggressively than expected over the 24 months ahead, and lifted the Australian dollar to buy more than 80 US cents in response.

Today the governor confirmed his hawkish outlook in stating that the next move in cash rates was “more likely higher than lower”, although cautioned this was assuming macro-economic conditions played out as forecast.

For property owners or investors then the debt-fuelled boom in property prices looks over, as higher borrowing costs mean buyers are able to extend themselves less a lot less.

While share market investors may also want to forget about predictions for the Australian dollar to fall below 60 US cents in the year ahead.

Companies with significant U.S. earnings set to report soon include Amcor Limited (ASX: AMC), CSL Limited (ASX: CSL), Cochlear Limited (ASX: COH) and QBE Insurance Group Ltd (ASX: QBE). Investors will look to their outlook statements as to how currency swings may impact FY 2018’s Australian dollar earnings or dividend payouts.

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Motley Fool contributor Tom Richardson owns shares of Cochlear Ltd. and CSL Ltd.

You can find Tom on Twitter @tommyr345

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.

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