The heat’s building over interest rates as Australia leads all comers in the race no-one wants to win.
Australia is on track to set a world record as the advanced economy with the highest interest rates for longest.
New Zealand’s November 27 cut was the third reduction in four months by Australia’s near neighbour, with a fourth flagged for February.
The US is also deep into a rate-cutting trend, along with Europe and Britain, whereas Australians might have to wait until May, at the earliest, for rates relief.
Australian savers will be delighted with the higher-for-longer outlook, although that view is misplaced due to inflation’s depreciating effect on cash.
Homebuyers will be less pleased by the rates outlook because it means they’re stuck with high repayment obligations for longer than expected.
Just how much longer is a question that has sparked a vigorous political and economic debate, with politicians demanding that the Reserve Bank of Australia, which has rate-setting power, moves more quickly to take the sting out of high rates.
The bank, in turn, is telling the government it must control its habit of excess spending, which is the primary source of the current bout of inflation.
That standoff between the RBA and federal government is already generating heat in Canberra.
And the temperature is set to soar as the political cycle turns to elections nationally and in Western Australia.
At both state and federal levels, neither government nor opposition is likely to promise less spending if elected; that’s rarely a vote winner.
More spending of money a government doesn’t have means either an ongoing high rate of inflation or an increase in taxes.
Two schools of thought are currently developing around the challenge of driving interest rates down.
Neither is particularly appealing.
The first is that rates will not fall at all because Australia is stuck in a deep cost crisis caused by excess government spending, high wages and social welfare payments, and high energy costs associated with energy transition.
Easily the most disturbing recent event around the question of rates was an argument about inflation during which Treasurer Jim Chalmers seized on the headline rate of 2.1 per cent, which is within the RBA’s target of 2 per cent to 3 per cent.
The problem with that position is that the underlying inflation rate, which removes one-off items such as government power cost subsidies, is 3.5 per cent, and trending up rather than down.
The election cycle and its inevitable burst of spending promises is why some economic observers are starting to talk about no rates reduction.
ANZ offered cold comfort to homebuyers with its latest prediction of a rates decline being “later and shallower”; economist speak for two small cuts of 0.25 per cent next year, with the first delayed until May.
The forecast of two falls replaces an earlier expectation of three cuts during 2025.
Just how out of touch Australia is with similar countries can be seen in New Zealand’s three cuts, the same number as the Swiss National Bank, and a country mile behind Canada’s four rate reductions so far this year (with another expected).
A lot could change between Christmas and May so an early rates move by the RBA cannot be ruled out, especially if the international economy takes a turn for the worse if/when the US starts a trade war with China.
But it would be wise to assume that spending promises designed to win votes will push Australia over the line to take first place in the interest rates race, which is not a race anyone wants to win.
Great expectations
House prices, which are closely tied to interest rates, could be a big loser next year under the higher-for-longer outlook.
Hints of a downturn have already developed in the Sydney market, while Melbourne is well into a downward spiral thanks to Victoria’s weak economy.
The big surprise from the latest round of house price tips is that Perth is still travelling on the up escalator.
According to Sydney-based consultancy SQM Research, the base case for Australian capital city house prices next year is for a weighted average rise of 1 per cent to 4 per cent, a view based on rate cuts of between 0.25 per cent and 0.5 per cent from May.
Without a rate cut next year, the overall outlook is for house prices to fall by 3 per cent or a possibly achieve a tiny rise of 1 per cent.
The prediction from SQM, which leaps off the page, is that Perth prices in the base case could rise by 14 to 19 per cent.
The outcome could be lower with a forecast low point of 7 per cent, which is still close to double the national average, while the high point is for a rise of 20 per cent.
While SQM could be correct in its reading, there’s a suspicion this is another example of a Sydney research firm misreading the WA market.
Having seen Perth prices rise by at least 20 per cent over the past two years, and much more in certain suburbs, it’s almost impossible to see another 20 per cent increase next year.
Revival time
Investors seeking revival stories would be encouraged by two currently taking shape on the stock market.
Mineral Resources, the company sold down heavily because of mistakes made by its chief executive Chris Ellison, is slowly regaining support. However, it will do better when Mr Ellison leaves towards the end of next year, or sooner.
Qantas is an example of what can happen when an unpopular chief executive departs, with the stock up 65 per cent this year thanks to new management led by Vanessa Hudson.
But there could be more to come from Qantas, which has caught the eye of US investment bank Morgan Stanley, which likes the Australian airline’s focus on premium customers preferring business or first class.
US airline Delta is following the same theme of charging high prices for well-heeled flyers who like the front of the plane.
According to Morgan Stanley, rising private wealth, driven in part by soaring property prices that mainly benefit baby boomers (the over 60s), is flowing into premium travel, which the bank calls “the new luxury good”.
Rather than spend it on material goods such as jewellery or a new BMW, the comfortably wealthy older person is spending it on travel.
Morgan Stanley’s latest airline research note said Qantas’s international per-seat-kilometre-travelled revenue was up 40 per cent on pre-COVID spending.
Older travellers appear to have decided that COVID was a reminder of mortality, which meant it’s time to indulge; a view boosted by the planned government raid on self-managed superannuation funds.
Once spent, hard-earned cash is beyond the reach of the tax man.
