Monday 06 February 2017 by Opinion

Rising or falling rates in 2017? Forecasts from every major economist

We’ve said why we think Australian interest rates will fall in 2017, but what do other researchers think?  For once we are pretty close to the middle of the pack, although the range of forecasts is amazing

middle of the pack

The table shows forecasts of the top banking, academic and other industry economists in Australia, giving their view of the RBA’s cash rate by December 2017.  Middle of the pack is somewhere between no change 1.50% pa and one rate cut to 1.25% pa.  But there are some heavy hitters with a view of rising rates and also equally heavy hitters forecasting two cuts.  We look at some of the factors driving these forecasts to help you make up your own mind.  

Interest rate forecasts for 2017

interest rate forecasts

Source: FIIG Securities

The top three reasons of those forecasting rate cuts

  1. Underlying inflation to weaken due to wage growth weakness
  2. Housing construction slowdown
  3. Weak business investment

The top three reasons of those forecasting no change

  1. Hot housing market, so regardless of the economic weakness the RBA will be wary of causing the bubble to expand further by cutting the cash rate
  2. Rising US rates so the AUD likely to fall, taking pressure off the need to cut rates
  3. Return of inflation

The top three reasons of those forecasting rate rises

  1. Higher commodity prices leading to higher trade surplus and incomes
  2. Sharp rise in inflation when the AUD falls against the USD
  3. Public sector spending, particularly on infrastructure, will boost the economy

What did they agree on the most?

The RBA will be less keen to reduce rates, as long as housing markets remain buoyant.

What did they differ on the most?

The relevance of commodity prices and the trade surplus. For example, Goldman Sachs opined that rising commodity prices would boost GDP and therefore interest rates. Capital Economics and Macquarie, on the other hand, note that iron ore exports do little for domestic demand – and as that is what the RBA is targeting with monetary policy, they will cut rates sharply.

As for our humble FIIG team, we are more aligned with Capital and Macquarie – the riches from iron ore exports do little for employment growth, wage growth, inflation or overall domestic growth.  This means – with inflation low and employment still weak – the RBA is likely to cut. 

However, we feel that the current strength of the housing market and the level of the AUD exchange rate will impact their decisions. If housing keeps rising they will be more reluctant to lower rates; if the AUD remains stubbornly high, they will be more likely to cut. We think on balance that housing will hold on for the next few months, so the RBA will only cut rates once in 2017 to 1.25%.

Conclusion and investment strategies

There are two things to take from the forecasts:

  1. On average, rates are more likely to fall than rise, according to the economists.  This means adding a little more duration risk in Australian corporate bonds is a reasonable strategy where you can find value.
  2. The range of forecasts is as large as I’ve seen since 2009.  Volatility is therefore likely to increase for all asset classes. This is a typical sign of a year in which it pays to time the market carefully, buying on the panic and being wary of the hype.

For more information on increasing duration in your portfolio, please call your local dealer.