‘Big call’: rates to remain stable for a decade

Speaking at the La Trobe Financial Q1 2014/2015 investor briefing yesterday, La Trobe head of funds management Chris Andrews made the bold prediction that interest rate stability would continue into the foreseeable future.

Mr Andrews said the current low interest rate environment is “without a doubt” a tailwind for the Australian economy.

In his October rate announcement, RBA governor Glenn Stevens flagged continued accommodative monetary policy over time, suggesting that rates would remain unchanged for some time.

“We would go one step further than most would at this point,” Mr Andrews said.

“The global economy is so fragile, and with all the pressures of the Australian economy, the RBA’s scope for policy action is most likely now extremely limited,” he said.

“If you look at interest rate movements as far out as the eye can see, even to a decade-long horizon, [they] will be constrained to a 50-basis point band, plus or minus.”

Mr Andrews admitted that the prediction was a “big call; it does emphasise the lender’s current house view of where the Australian economy is in a global context”.

“There are always possibilities that could break this base case, but we have a strong house view here of a long period of interest rate stability,” he said.

La Trobe’s prediction is at odds with the majority of Australian economists who are forecasting rates increase by 150 basis points from next year.

The monthly Reserve Bank Survey of 20 leading experts by comparison website finder.com.au – including senior economists from all four major banks – found the majority of respondents expect the cash rate to increase in 2015.

Earlier this year, the survey showed five respondents expected a rate rise by the end of this year.

The 17 experts who expect the cash rate to rise in 2015 are split on timing, with seven betting on an increase in the first half of the year while six believe it won’t start until the second half.