Interest rate hike likely in 2015
Interest rates remain low around the globe; New Zealand may be the only relevant country where they have risen. 2015 will almost certainly be different, with rates likely to heading higher in the US, Australia and the United Kingdom.
The US has reached the end of its unconventional monetary policy (QE), with GDP growth doing well and the unemployment rate falling by 1.4 percentage points in the year to October, the steepest decline in 30 years.
Speculation persists as to the likely timing of the first rate rise, probably around mid-2015, as well as to the likely speed at which rates will be increased.
The Fed's own long-run estimate of the Fed funds rate is 3.5-4%; up considerably from the current level of 0-0.25% but still a long way below its historical levels.
Taken at face value, the economic data suggest that rates should already be rising; the "real" economy is a lot closer to its normal level than are interest rates!
Of continued concern, however, is the relatively low level of inflation, with the Fed's preferred measure-the core personal consumption deflator-tracking close to 1.5%, significantly less than the target of 2%. Japan showed us the perils of deflation (or disinflation). The Fed is correct to be concerned.
In Australia, the cash rate has now been unchanged for 15 months.
The Australian economy remains in a soft spot, best exemplified by the recent labour-market data.
The unemployment rate (currently 6.2%) is still rising. If this were the only thing that mattered, rates could well be cut again. But the RBA has raised a warning flag about housing, expressing particular concern about the pace of investor borrowing in Sydney and Melbourne, with the former seeing a 90% increase in just the past two years. Rates are likely to remain on hold as long as this concern remains.
The next move is still likely to be up, but not until-mid 2015, and then only gradually.
Investors should factor higher rates into their decisions, and even look forward to better returns on their time deposits. The rise in rates is likely to be gradual enough to have little effect on the share market.
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