Whatever the result of the upcoming consumer price index (CPI), homeowners should be prepared for an official interest rate rise on Melbourne Cup day.
The latest readings of CPI and underlying inflation at 1130 AEDT will determine the likely pace and size of interest rate increases by the Reserve Bank of Australia (RBA) over coming months, economists say.
The RBA holds its next monthly board meeting on November 3.
“Even if (CPI) comes in on the low side they are still going to do 25 basis points next week,” Nomura Australian chief economist Stephen Roberts told AAP.
The RBA has made it clear that it feels that it would be “imprudent” to keep the official cash rate at “emergency” low levels when the economy is in recovery.
It raised the cash rate to 3.25 per cent from 3.0 per cent early this month, and a further 25 basis point increase would add another $45 to monthly repayments on an average $300,000 mortgage.
Economists’ forecasts centre on an annual CPI rate of just 1.2 per cent as of the September quarter, remaining below the RBA’s two to three per cent inflation target.
However, annual underlying inflation is expected to remain stubbornly high at 3.45 per cent.
Rate swaps slip
Australian rate swaps fell and bond futures rose on Tuesday, as markets pared back expectations for a 50 basis point interest rate increase next month and as caution prevailed ahead of price index data.
Australian three-year futures rose 0.06 points to 94.61 while the 10-year contract was 0.025 points up at 94.275.
Interest rate swaps also fell on comments from influential columnist and central bank watcher Terry McCrann which were taken by the market to mean the Reserve Bank of Australia was unlikely to make an aggressive rate increase.
“The writer now sees a 50 basis points (bps) hike as less likely, really not a surprise given the lower PPI reading and the wobbles that are appearing in equity markets,” said Sean Keane, director of Triple T Consulting and former money market trader at Credit Suisse.
The 5-year interest rate swaps fell by two bps to 6.05 per cent.
Implied cash rates, based on money market and swap rates , are fully pricing in a 25 basis point hike and factoring in around a 25 per cent chance the central bank will raise rates by 50 basis points on November 3.
That compares with a 30 per cent chance of a half percentage point increase factored in last week.
“People are squaring up ahead of tomorrow’s consumer price index data and equity markets were not impressive today and that probably helped bonds and fixed income products,” said JPMorgan rate strategist Sally Auld.
Slow superannuation recovery
While households consider the implications of rising interest rates on their major asset, their second biggest investment - superannuation - is showing a slow recovery after the shock of the global financial crisis.
A report by the Organisation for Economic Co-operation and Development (OECD) shows that Australian super funds recovered 1.0 per cent in the first six months of 2009 after a drop of over 20 per cent in 2008.
This compares with an average 3.5 per cent recovery among pension funds across OECD countries and returns of 10 per cent in Norway and Turkey.
“The impact of the crisis on investment returns has been greatest among pension funds in the countries where equities represent over a third of total assets invested,” it said.
“In 2008, Australian pension funds were the most exposed to equities at 59 per cent of total assets.”
The Paris-based institution said funds in other countries benefited from having a large proportion of their assets invested in bonds, whose rates of return tend to be lower but more stable than those in equities.
Still, an analysis by Commonwealth Securities chief economist Craig James shows that the value of the Australian share market has now risen by over $500 billion to $1.4 trillion since March.
“It has been a great rebound, but it was a humongous drop from the highs of late 2007 and we still have some work to do to prepare the damage to superannuation and to wealth levels,” Mr James told AAP.
“But certainly from all the developed share markets and economies, you would have thought Australia was in the best position to claw its way back to those highs (of late 2007),” he said.
The S&P/ASX 200 share index closed at 4,753.5 on Tuesday compared with around 6,800 in late 2007.
Australia is the biggest the beneficiary of China’s industrialisation and has a strong banking and corporate sector.
Mr James defended super funds’ investment weighted towards shares.
“Over a long period of time domestic shares have outperformed other asset prices by a very significant magnitude,” he said.
“You could take short-term strategy and opt for safe haven bonds or cash, but really that’s not the strategy we advise for individual investors and it shouldn’t be what super funds take on either for the broader masses.”