It appears the Reserve Bank of Australia (RBA) likes the game of interest rate limbo it’s playing.
The June minutes revealed that the central bank is likely to keep interest rates low.
The RBA noted in the minutes:
‘…low interest rates were working to support demand, although it was difficult to judge the extent to which this would offset the expected substantial decline in mining investment and the effect of planned fiscal consolidation. Those uncertainties were likely to take some time to resolve.’
In other words, the RBA is telling you that unless all the economic numbers they love so much return to mining-boom levels, they’ll keep on fiddling with interest rates.
However, the cut in interest rates has been felt in the Aussie property sector.
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Broking and research firm Morgan Stanley recently released a report suggesting that the RBA need to cut interest rates further, as without the cuts ‘the current housing cycle is in danger of gradually fading.’
Or as The Age bluntly put it:
‘…galloping house prices will soon run out of puff unless the Reserve Bank cuts rates again this cycle.’
That ‘cycle’ the Morgan Stanley report is talking about is the massive 15.2% growth in Aussie House prices since the last RBA cut in November 2011.
They’re playing similar monetary games over at the US Federal Reserve Bank.
Without a housing market to fiddle with (the Fed did that at the turn of the century, and look how that turned out), they’re focusing all their efforts on ‘fixing’ unemployment.
The central bankers confirmed this week their steady-as-she-goes interest rate policy is here to stay.
According to the Wall Street Journal:
‘Signalling their confidence that the economy is on track for growth strong enough to keep reducing unemployment, Federal Reserve officials nudged up their projections for short-term interest rates in 2015 and 2016, though they slightly reduced their outlook for rates in the longer run.’
The reduction in the monthly bond buying programed continued. They’ve lowered the purchases by another US$10 billion to US$35 million. A signal to the market that this form of QE will be over by the end of the year.
Regardless of whether central banks use interest rates to support a fading mining boom or boost employment numbers, they are telling you one thing: Low interest rates are here to stay for the short term. Until the numbers are just right — whatever that actually is.
However, Phil Anderson, who has launched his own trend forecasting service this week, has a completely different take on interest rates.
He says interest rates are all part of a cycle.
Phil says you should put aside all the market noise that is central bank updates and price data, and just look at the past cycles.
You see, when Phil talks about cycles, he’s not just talking about 10 or 15 years. Most of his data uses hundreds of years of information to determine if a larger cycle is forming.
And as central banks twitch with their hands hovering above the interest rate button, Phil argues that historically, interest rates fall into 30 year cycles.
Going over the data, he believes we are actually at the beginning of a low interest rate cycle that will last for years to come.
Above you can see that bond prices have been rising. However, yields and prices are inverse. Simply put, a rising bond price means falling interesting rates.
As Phil Anderson explained during the week using the bond chart below, interest rates have been trending down for years now. In fact, they started trending down in the US in 1981.
However, it’s only when you expand the data over hundreds of years, you discover interest rates tend to stick to a 30 year pattern.
But in order to determine the next part of the cycle, Phil applies data from the mid 18th century to explain the full cycle of interest rates.
As Phil notes:
‘This chart [above] of bond price history shows us that the very high interest rates of the early 1980’s were actually a historical anomaly and exceedingly unlikely to be repeated again. And quite often in markets, when things do go to extreme highs, the next thing that follows is extreme lows.’
In fact, Phil thinks we are just at the start of decades of low interest rates.
He’s convinced that this cycle is the tipping point for major growth in world stock markets:
‘So for those investors waiting for interest rates to spike up again sometime soon, and so cause chaos once again in markets and another broad sell-off, you might be waiting a long time…’
You can find out more about Phil’s trend theories here.
He focuses on the cyclical nature of markets. See his unique theories for yourself.
Shae Smith+
Editor, Money Weekend
