Low interest rates can exist with low unemployment rates
Is Australia’s tight job market a cause for the RBA to hike interest rates?
There is a lot of speculation, both here and in the US, that Australia’s wonderfully low unemployment rates and growing business investment will mean RBA will have to lift interest rates.
They say that our unemployment rate has fallen to 5.1%. so it’s time to raise interest rates. The markets have responded by factoring high rates as a done deal. But is this true?
Mr Mortgage says no to higher interest rates any time soon.
Mr Mortgage’s reasoning on interest rate rises.
Interest rates are good as they, and maybe a little higher than they should before the moment because:
Jobs are only part of the low interest rate equation.
The two fundamentals the RBA concerns itself with are
- Low unemployment.
- Low inflation.
This is not low inflation OR low employment. Its a balance between the two. So as long as inflation stays under 3.0%, then interest rates should stay low.
The myth of lower unemployment.
Let’s talk jobs. we have reduced the unemployment rate from 5.3% to 5.1%, or have we? Mr mortgage says no, its been that rate two months ago.
Two months ago the unemployment rate was 5.1%, if you recall. Then we had Rudd disposed and an election which dragged on longer than than business would have liked with a hung. So we have returned to where we were a couple of months ago.
Full time employment is replacing part time jobs.
Yes the full time jobs are replacing part time jobs. Conclusion? Businesses don’t need “Work Choices” to grow employment. Allowing cheapskate employers to prosper at the expense of fair go employers was a bad idea for everyone except bad employers. Yes, it works in the US, but have a close look at the US. Its not want we want for Australia. We have something much better here. Why sacrifice that for a notion of having to compete with nations who allow their workers to be paid a dollar a day?
Productivity and innovation the key to low interest rates.
Productivity and innovation are the key to low inflation with high demand, hence my conclusion that productivity and innovation will actually lower interest rates, because higher demand can be met with higher production, not shortages.
So we need to keep business investing in productivity, and that means keeping interest rates [and the cost of capital] low.
Creating a savings culture will reduce interest rates
If we can get more people saving more instead on spending, then that will reduce inflation. We have to make saving money a goal and a offer tax incentives for that.
Keeping inflation low and interest rates low should be the role of Government outside the scope of the RBA.
As long as inflation is under control there is no reason to raise interest rates.Successive Governments have warned the RBA not to raise interest rates, but don’t create the environment where low inflation occurs with low interest rates and high growth.
Major Banks want to lift interest rates above the RBA official cash rate.
The major banks lead by the CBA want to raise rates independently of the RBA to improve margins. The major banks suddenly have enough customers and want to milk higher profits from them.
This will help the non bank sector to grow as they already have better offers than the banks. And get more people to move their loans to non bank lenders and the regional bank home loan lenders.
What we need from Government is law that makes it easy for home loan customers to switch lenders.
In summary Mr Mortgage believes that:
- low unemployment should not automatically trigger higher interest rates if inflation is under control.
- That the actual unemployment rate has come back where it was two months ago, but full time jobs are replacing part time jobs.
- That we have a long way to go before full employment is reached, and the Labor Government is aware of that and needs to deal with regional and age related unemployment [young and old].
- That low interest rates and low unemployment rates can go together if demand is moderated by higher saving rates, and higher productivity and innovation meet higher demand.
- More housing is the key to moderating house prices, not increasing interest rates.