The AFR is reporting Westpac’s chief economist Bill Evans has said the RBA will keep interest rates on hold until 2021.
A number of factors are at play in Mr Evans’ call including…
– Falling house prices. With the RBA’s cash rate already at just 1.5 per cent, the RBA has no firepower left to cut interest rates to stop the rot in Sydney and Melbourne property prices.
A report earlier this month from Endeavour Equity Strategy said the largest regulatory credit crunch in 30 years could see Sydney and Melbourne house prices fall by 15 to 20 per cent.
– Confidence. Courtesy of the Liberal party’s leadership spill, uncertainty around the electoral process has already begun.
With Labor now shortening in the betting to win the next election, and that party’s policies including changing negative gearing and capital gains tax, Mr Evans says the uncertainty will discourage new entrants from entering the housing market.
– Slow wages growth. Mr Evans thinks the RBA’s inflation and growth prospects are too optimistic.
The RBA expects the economy to grow at around three per cent per annum, something that would require solid wages growth. That seems unlikely, given the impact the aforementioned falling house prices would have on an already highly indebted consumer.
Earlier this month AMP’s Shane Oliver said he sees no interest rate hike until the second half of 2020.
Mr Evans’ call comes on the day RBA governor Philip Lowe advised borrowers to prepare now for higher interest rates.
Mr Lowe said “if we continue on this current improving track, as we expect we will, it is likely that the next move in official interest rates will be up, not down.”
My guess is Mr Lowe is hoping that move up will come before 2021.
While the focus of the RBA is on borrowers, forgotten in all this are savers. Interest rates have been falling for the past eight years, and although a further cut in interest rates is unlikely, it could be many years away before you can expect to see term deposits paying three per cent or above.
Bruce Jackson is the founder of The Capital Club. 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.