Why AMP says interest rates won't rise next week

What is the RBA going to do with interest rates next?

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AMP Ltd (ASX: AMP) economists have revealed what they think is going to happen with interest rates next.

Inflation continues to be stronger than central banks would like, in both the US and Australia. The market recently heard from Judo Capital Holdings Ltd (ASX: JDO) chief economic adviser Warren Hogan, who suggested the RBA interest rate could see three hikes this year to 5.1%.

However, AMP is not so sure that rates are going to rise in Australia, particularly after seeing the latest retail numbers from the Australian Bureau of Statistics (ABS), which showed seasonally adjusted retail sales fell 0.4% month on month (but was up 0.8% year over year).

AMP's cautious view on interest rates

According to reporting by The Australian, AMP doesn't think there will be any more rate rises, even though some market analysts think there's a chance of one by November.

AMP deputy chief economist Diana Mousina and economist My Bui suggest the March retail figures demonstrate consumers are under financial strain and that is "not consistent with an economy that needs higher interest rates." In a note to clients, the two economists said:

After last week's stronger than expected March quarter inflation data, financial markets (and some economists) have started debating the risk of further RBA rate hikes. Market pricing has taken out any expectations of rate cuts this year and now even has a ~30 per cent rate hike priced in by November.

We see a rate rise by the RBA at next week's meeting highly unlikely, although the central bank is likely to debate the need for a rate rise and may shift its neutral bias on interest rates to a tightening bias. Although you could also argue that Michelle Bullock's comments that the RBA is not ruling 'anything in or out' is consistent with the board debating the options to hold interest rates steady or to hike.

We think that the next move in rates will be down, but it will come later (probably around November) than we initially expected.

Time will tell whether the next move by the RBA is a hike or a cut. It seems unlikely that the RBA wants to increase rates in the current environment, so we'll see if it's necessary.

While a hike may not be certain, it does seem a rate cut in Australia has been delayed for many months, if not the rest of this year.

Why are rates so important?

They play a key part in the value of assets. In theory, the higher the interest rate, the stronger it pulls down on asset prices. When interest rates are lower, it pushes up asset prices. As Warren Buffett once said:

The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Judo Capital. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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