Have we hit peak interest rates?

Posted by Gavin Chau

It’s 12:33 pm on Monday the 6^th and writing about the RBA’s decision tomorrow feels like Groundhog Day. By the time you read this, the RBA would have made their announcement. Our views really haven’t changed since last year, but it takes time for these things to play out. The RBA will almost certainly raise rates by another 0.25% tomorrow marking the 10^th consecutive rise. This will bring the cash rate up to 3.6% and our base case is that this will be the last raise before a pause while the RBA waits for the effects to flow through to the economy…. Well, at least that would be the most sensible course of action.

This is an unpopular opinion though, and if we are to believe the futures market it looks as though there will be another two rate rises. It’s important to note that the futures market is effectively the collective opinion of a small number of big-name brokers and investment banks. If we look at the interbank cash rate futures compared to the actual path of the cash rate over time, we can see that while they can be a useful tool for prediction when the market is moving in a clear direction, they are far less useful in picking inflection points, having the tendency to predict continued rises at the top and continued falls at the bottom.

This is the same way asset markets react over the course of a cycle. At the peak of the market, everyone expects prices to keep rising forever and at the bottom of the market, everyone expects prices to keep falling. It’s like our collective consciousness is pre-programmed to behave in a certain way – which is what makes a market cycle a cycle.

As we have been saying we’re now living in opposite world where bad news for the real economy is good news for asset prices since rising unemployment levels and demand destruction is what the RBA is aiming to achieve to bring inflation down. This will signal the all-clear for a pivot in their stance on interest rates. While it feels weird to be cheering on rising unemployment levels and falling consumer confidence, it’s now clear that they’re achieving what they’ve set out to do.

Consumer confidence levels have been on a steady downtrend and are currently at lower levels than both during the GFC and the Pandemic. The unemployment rate has turned the corner from its low of 3.4% in October 2022 and has risen to 3.7% in January 2023. All of this slows demand down and reduces inflation. In addition, the base effect of dividing the current prices by a higher denominator will likely see inflation fall off a cliff by mid-2023.

One interesting thing to note is that the property market seems to have found a floor as we predicted in the pop-up presentation. The combined capital prices were down only 0.1% in February. The Sydney market, which has traditionally led the cycle among the capital cities increased by 0.3% with the top end of the market beginning to recover. The shrinking market seems to have put a floor under property prices. Now the timer is ticking down – we’re getting close to a pause in the rate hikes which will usher in the second part of the bull run in the housing market. As with other bull runs the smart money moves first and rather than panic and start to chase the market as prices are moving, it’s always better to be in position and simply wait for the market to come to you.

Stay informed about the latest property market research and make well-informed investment decisions by reading our article on whether we have hit peak interest rates – take action towards securing your financial future with Blue Wealth.

Posted by Gavin Chau, on 7th Mar 2023