Signals from the Reserve Bank suggest there will be at least one more rate rise this year, on top of the seven in a row we’ve had already.
The RBA raises interest rates when the economy is strong, in order to combat the inflation that comes with a growing economy. But sometimes the inflation is created by one sector; so the majority takes the pain with raised mortgages to offset the boom enjoyed by a few. That’s been the idea behind the Yellow Brick Road initiative to have people send their videos to the Reserve Bank, letting the decision makers know that their decisions about the cash rate have a real impact on people who don’t work in the mines and don’t have rapidly increasing wages.
The underlying call of these videos has been to reduce interest rates, because the economy may look pretty flash, but it is seriously hurting in some industries, such as retail and hospitality. The RBA hasn’t responded thus far. So I was surprised to see the Sydney Futures Exchange quotes for their bond futures market. The capital markets are currently buying January 2012 futures for three year bonds at a price that implies a cash rate of 4.5 per cent.
Yes, a .25 per cent reduction on the current cash rate of 4.75. This is the capital markets’ view of where things are going and it’s worth looking at it to see why the RBA is hinting at further rate rises while bond traders see it dropping in early 2012. There are two ways to see it: either the Reserve Bank knows of some bad news that could come through in late 2011, and they are waiting for it to eventuate; or, the capital markets are taking a more global approach than the RBA.
That global approach is bound to be a sovereign event. A sovereign event is when a government does – or fails to do – something that triggers fear and panic in the markets. In the early 1970s, it was the OPEC leaders deciding to radically alter the price of oil, creating bear markets and credit squeezes. The current fear is that Greece will default on loans and be unable to fund the business of government. There’s another potential scare looming and that is the short term future of the US economy. The US economy relies on credit and therefore, it relies on employment. That country probably can’t produce many more quarters of poor data before global markets react. So, we have an interesting six months in front of us: the RBA is confident enough to be hinting at more rate rises; the bond market says the cash rate will drop by January 2012.
Whatever you do, be circumspect and get expert advice.