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 MARKET REPORTS |
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Economic commentary
Interest rate cuts on the way
December 17, 2007
Dr Ron Woods, Econoclast
Official interest rate cuts are on their way not that the RBA knows it just yet. Today’s Housing
Finance data (for October) supports this view. Finance for virtually all purposes has turned down
again, beginning around June this year, two months before the latest two rate rises (August and
November).
As these additional interest rate restraints impact conditions in this core industry, it
will tend to drag the rest of the economy down with it. Several, at least, of the last few official rate
rises will have to be reversed to mitigate an economic downturn.
Lower cash rates over the medium term is what the inverted yield curve has been saying for some
time. For some people the yield curve is an esoteric concept, so let me express it another way also
using today’s data to demonstrate.
In contrast to the yield curve “the chatter” says that more cash
rate rises are on their way. If so that would seem to suggest it would be rational to lock in today’s
relatively low rates by refinance existing loans. But action speaks louder than words: refinancing
has also been headed south for just on one year now and is 17% lower than this time last year (this
trend has been in place before any “credit crunch” issues came along).
Refinancing is often a desire
to “lock-in” rates. As demand for refinancing falls it is likely because the expectation that over the
medium term rates are likely to be lower not higher. These actions indicate an expectation of lower
not higher rates over the medium term, precisely what the yield curve is also saying.
Official rates
have gone up because of a phantom the RBA call “inflation”. It doesn’t exist and the rate rises are
unnecessarily pulling down the economy and will have to be reversed. The longer that takes, the
greater the risk of a more severe downturn in the economy; and the more wary investors should be.
Dr Ron Woods, regarded as one of Australia's leading market economists, has a knack for being far ahead of the curve in assessing the direction of the economy. With a PhD in Economics, Dr Ron Woods is a well-known commentator on economics and interest rates, and has worked for the Commonwealth Bank, Bankers Trust, NM Rothschild and Challenger. Dr Ron Woods produces the newsletter Econoclast, a fresh look at Australian economic events.
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