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Australia’s frozen Financial Markets Defrost: Interest Rates to Rise Soon?
Boy, are we ever ‘The Lucky Country’. Rudd and Swan followed the IMF, Reserve Bank and Australian Treasury advice to pour stimulus into the mouths of consumers. With a few hiccoughs and burps, we swallowed the cream and the economy responded.
Fortunately, RBA Governor Glenn Stevens kept his head and resisted the world-wide rush to nil interest rates, leaving ours at over 3 per cent while our peers headed for zero.
Why does this matter?
Like a good chess player, Stevens looks several moves ahead. The RBA knows rates must eventually return to long term averages. A more normal but still low six per cent requires a doubling of the interest rate settings. Ouch!
But consider moving from 0.25 per cent to six per cent. They must double to 0.5 per cent, double again to one, again to two, again to four and finally rise another 50 percent to six.
At each of those giant steps, more families and businesses in zero rate countries will be consigned to oblivion. They have a lot of pain ahead of them, and the longer these ultra-low ‘accommodative’ rates apply, the more difficulty their reversal will impose.
And before the conservative L/NP coalition claims credit for these fortunate policy settings, I remind all that these nasty stinkers gave the richest Australians deep tax cuts –THREE TIMES! They repeatedly eased the taxes from the broadest shoulders, not from the strugglers. Not one bit! Never! Never! Never!
Risks remain. We could easily be derailed from our rosy path by a widely-predicted collapse in residential real estate prices. Aussie house prices are stuck at a punishing six to seven times earnings, a heroic undertaking for anyone signing a 30 year contract today. House prices in US, Britain, Ireland, Canada and New Zealand hit these multiples and recoiled. Not Australia.
Only time will reveal if our economic leaders can engineer an economic soft landing for real estate. Failure here will cause untold hardship.
Tags: australian treasury, chess player, collapse, economic leaders, giant steps, hiccoughs, house prices, imf, lucky country, oblivion, policy settings, residential real estate, richest australians, seven times, stimulus, stinkers, term averages, untold hardship, zero rate
