One of the primary indicators keeping interest rates on hold here in Australia with a consistency never before seen, is the economic standing of countries like America and the UK.
In much of the developed world, as with the local status quo, general fiscal conditions have prevented various monetary policymakers from moving anywhere but down when it comes to interest rates.
Official cash rates have hovered close to zero for more than five years now in the US, while the Bank of England’s Monetary Policy Committee has hinted that they will not be raising the current 0.5% cash rate for the remainder of 2014.
In Australia, the RBA has repeatedly referred to the “low probability to any rise in global interest rates…over the period ahead” in its official statements immediately following their decisions to maintain the local 2.5% rate.
This then begs the question, if and when interest rates start to rise in other global economies, will the RBA be forced to follow suit? Although it may not be as black and white as all that, chances are when the financial health of other nations improves enough for their central banks to consider an increase in official cash rates, Australia won’t be far behind.
Given that our fortunes increasingly hinge on what is happening elsewhere in the world, it’s perhaps timely to take a closer look at where the likes of the US and UK stand around local monetary controls and when fortunes might change.
Is the US ready for a rate rise?
Reports out of America indicate that a liftoff of policy interest rates is anticipated around mid-2015. However, this is far from set in stone, with the Federal Bank repeatedly emphasizing that timing of such a move hinges on the overall state of the economy.
Should things pick up quicker than expected, rates will begin trending upwards sooner. Conversely, weaker overall data could see rates maintained well into 2015 and possibly beyond.
Analysts in the US suggest that continuing low inflation and a weak labour market will see the Fed continue to sit on its hands well beyond July next year, and say their decision as to when monetary policy shifts depends on two main factors:
1. How much labour market slack is there in the economy?
It’s no secret that the labour market in America has been an issue for some time now. And while the unemployment rate has declined much quicker than expected in recent times, sitting at 6.1% in August this year, almost 3 million Americans have remained without work for at least 27 weeks, while close to 2 million have given up the job search entirely.
Experts predict that at the current rates of job growth, it could be another three to four years before the economy has a place for these would-be workers.
2. The extent to which job market slack translates into future wage and price inflation.
The Fed’s preferred measure of inflation – personal consumption expenditure – is on an upward trajectory (sitting at 1.6% in July). But given one of the ways policymakers are attempting to simulate the local labour market – with many suggesting a possible abolition of minimum wages – chances of this indicator meeting its 2% target anytime soon could be slim.
Much like Australia’s regulators though, the Fed Bank finds itself in a bit of a quandary, as lower interest rates create heightened investment activity across some riskier, less liquid credit markets. This has commentators on edge, with concerns over similar financial imbalances that led to the Great Recession.
They suggest an unexpected reassessment of interest rates, or an abrupt unwinding of investors’ current high risk tolerance could lead to a sudden surge in asset sell-offs and the re-pricing of same. This, of course, could have serious flow on macroeconomic effects, both in the US and overseas.
Much like here at home, some analysts believe the Fed will be forced to consider macroprudential policies, such as more demanding underwriting standards for banks that extend intermediate leveraged loans and a tightening of limits on larger exposures to riskier assets.
Commentators admit that the timing of an interest rate rise in the US is not the easiest thing to predict right now, but a much-anticipated solid period of economic growth is expected to spur the Federal Bank into action.
Meanwhile…in the UK
Experts predict that an interest rate rise is on the cards for the UK some time in 2015, giving rise to concerns as to how the many first homebuyers who have been enticed into the British property market by low rates and the government’s shared equity scheme, will cope with higher mortgage repayments.
Data reveals that first time buyers spent nearly 20% of their monthly income servicing mortgage debt in July this year, with an increase in first timer market activity of 25% from July 2013.
Additionally, despite stricter lending criteria for UK borrowers, the average loan to value ratio of new mortgages rose from 80% in June to 84% in July this year.
The government’s Help to Buy package (similar to our first home owner’s grant), pent up demand and an improving economy have all exerted upward pressure on Britain’s housing market over the last year. Not to mention cashed up parents who’ve enjoyed triple digit appreciation on their property assets since 1991, giving their kids a boost onto the property ladder.
Recently though, activity has started to decelerate across London and regional parts of England, with speculation of a looming interest rate rise putting a dampener on buyer enthusiasm.
It will be interesting to watch proceedings in other parts of the world over coming months, with changes to the status quo in the likes of the US and UK being a relatively good indicator that our own Reserve Bank may feel the need to follow suit. As always, in this increasingly interconnected global economy, it’s a case of wait and see as we approach 2015.