Australians have take out record amount of debt to double down on housing given the low interest rates. The million dollar question for Australian property investors this year is when will the mortgage rate rise? This is an important question as evidently the east coast property market has slowed materially. For example the Brisbane Residential markets is really struggling given the low job growth and the slowdown in the mining/construction industry.
Based on current consumer and mortgage debt levels any rise in rates will put further pressure on retail sales and broader economy with flow on implication to the share and fixed income markets. We are watching several factors which will pre-empt any moves by the RBA to raise interest rates.
Australia Inflation Outlook is the critical factor
To understand when the interest rate will rise means we have to understand why the RBA change interest rates? One of the key factor is not only the rate of inflation today but its future outlook. The current inflation rate is sub 2% which is below the RBA target band. What we need to have an lookout for is when the inflation rate rises above 3%, then investors should worry about potential future rate rises as the Reserve Bank would be under pressure to carry out its mandate of price stability.
The existing low inflation is a positive factor for future interest rates but the rise in oil prices would put upward pressure on inflation going forward.
Unemployment and Jobs will keep pressure on rates
Concurrently RBA also takes into consideration of the impact of its decision on the broader job market. Paradoxically if job growth is strong which could feed into inflation then the RBA will act earlier rather than later. If the job outlook is weak then then even with temporary rise in inflation there will not be as much pressure to act. It is a delicate balancing act with tremendous political pressure if the unemployment rate is rising.
Financial stability is the third pillar
The continuing crackdown on mortgage lending by APRA have tamped down the froth in the housing market. The market commentary on potential housing bubble in Sydney has died down however if there is any pick up in house prices then rate rises will be inevitable. We think the RBA will err on the side of caution by raising rates to slowdown housing if the current macroprudential regulations fails.
What is happening to other economies?
Geographically Australia is an island (the correct term is continent) but economically we are very much plugged into the performance of the global economy. The performance of the economy is linked to other major economies for example 28% of Australia’s export is to China and the United State is still a very important trade partner. Therefore the Australian Domestic interest rates will follow movements overseas with the exchange rate acting as an automated stabilization mechanism. If AUD rates remain low while the US (or European rates increase) then the Australia dollar will depreciate accordingly.
The Reserve Bank of Australia will make their decision on interest rates based on a combination of factors above. Change in interest rates will not be a mechanical decision but from qualitatively based on the economic context.