The Reserve Bank of Australia (RBA) has made it clear what it expects the monetary policy framework to look like in Australia for the next several years.
Ever since the COVID-19 pandemic shuddered the global economy last year, the RBA has insisted interest rates will stay at the record-low level of 0.1%. It says this will remain as long as it takes to get the economy running hot again.
Just this month, the RBA's minutes revealed it sees no reason to change its predictions, despite the strengthening economy, and signs of substantial inflationary pressures over in the United States.
Here's some of what the RBA said in a statement on 7 May:
The board is committed to maintaining highly supportive monetary conditions to support a return to full employment in Australia and inflation consistent with the target.
It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range.
For this to occur, the labour market will need to be tight enough to generate wages growth that is materially higher than it is currently. This is unlikely to be until 2024 at the earliest.
Will interest rates stay low forever?
Case closed, then? Well, perhaps not.
If economic changes force its hand, the bank could have no choice but to hike rates earlier than it had flagged.
Another big factor at play is what the rest of the world is doing. One of the reasons rates are at record lows is because they are also at record lows across most other advanced economies.
Europe, the United Kingdom, the United States and Japan all have an official interest rate that looks similar to ours.
And that includes New Zealand, which has an interest rate of 0.25%.
But our brothers and sisters across the ditch may be the first country to move on interest rates.
According to a report in the Australian Financial Review (AFR) this week, the Reserve Bank of New Zealand (RBNZ) has signalled it might start raising New Zealand interest rates far sooner than the RBA.
Rate hike across the ditch?
The statement the RBNZ released yesterday stated the following:
The Committee agreed to maintain its current stimulatory monetary settings until it is confident that consumer price inflation will be sustained near the 2 percent per annum target midpoint, and that employment is at its maximum sustainable level. Meeting these requirements will necessitate considerable time and patience.
However, the AFR report notes that forecasts released alongside this statement show the bank is pencilling in a cash rate of 0.67% by December 2022. And one close to 1.5% by December 2023.
Now that's a whole lot different from what the RBA is saying.
So if New Zealand does indeed hike its interest rates along these lines, it could well signal some pressure on the RBA's own timeline.
All investors should be watching these developments closely since interest rates have a very real effect on asset valuations like ASX shares.
The general rule is higher rates equal lower share prices. That's something we all might have to deal with if the RBA ends up following the RBNZ.
