One of the biggest questions on most economists’ minds these days is when the Reserve Bank of Australia will raise its rate.
The RBA hasn’t changed its interest rate since 2016, which is breaking records for being the longest unchanged stretch.
Everyone outside and inside the RBA would acknowledge that a 1.5% interest rate is not where the rate should be. The problem is that it’s going to be extremely hard to put the rate higher again.
Aussie households are the most indebted they have ever been. This hasn’t been a big issue as rates have steadily fallen, reducing the interest cost and making people’s budgets better off. However, huge debts could be a massive problem if rates do start to rise.
It’s not good for indebted households and it won’t be good for many cyclical stocks either. Will retail stocks like Nick Scali Limited (ASX: NCK), Harvey Norman Holdings Limited (ASX: HVN) and JB Hi-Fi Limited (ASX: JBH) hold up in interest-fuelled recession?
The RBA governor, Philip Lowe, said that an interest rate increase will be a shock to many people considering a raise hasn’t happened in seven years. When growth and incomes lift, which Treasurer Morrison has forecast, the rate will rise.
Mr Lowe recently said “While some other central banks are raising their policy rates, we need to keep in mind that their economic circumstances are different and that they have had lower policy rates than us over the past decade.”
Investors shouldn’t base their decisions purely on interest rates, but it’s something to keep in mind. I wouldn’t want to be holding cyclical stocks at this point.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Scott Phillips.