Don’t listen to the media if you’re trying to forecast future interest rates. In the last 7 days, I’ve seen a respected news organisation publish the complete opposite views – rates have three more hikes, and no more rate hikes to come.  

FFS, who do we listen to?

I’ve long said that 100% of economists get interest rates wrong 100% of the time (when looking further out than sometimes just a few months). The proof is found by looking at their constantly updating opinions. 

And don’t listen to me, I can’t predict the future of rates either.

The most reliable way to work out where rates might be headed over the next 1-3 years is to look at what’s happening with fixed rates.

This is, after all, where billions of dollars are invested by banks and other multinational organisations.

Right now the 1 & 2 year fixed rates are higher than the 3 & 4 year fixed rates. Maybe the market is pricing some minor increases near-term, with some softening.  

It’s not rocket science, but I’m just saying this because it can be helpful to turn off the sensationalism on the news. Just check what the recent movements with fixed rates are doing – that’s all the news you need. 

Except when the RBA says rates will stay low until 2024. The fixed rates were a bit deceptive then. Although the fixed rates did become the canary in the coalmine, when starting to move up quickly.  As it turned out, these increases in fixed caused a lot of people to stay variable, not wanting to fix for 3-5 years in the 3’s or 4’s when the variable was still around 2%. 

This screw up by the RBA has led to a raft of changes announced on Wednesday, with the way interest rates in Australia are managed getting an overhaul from January 2024. 

Major announcement this week by the RBA on the future of interest rates

Summary of new changes to how the RBA manages interest rates from January 2024

• RBA Board meets 8 times per year instead of 11. 
• Board Members to do a liiiiiiittle bit more work – I was surprised to learn most of the people on the board are just part time and spend not much time with the RBA staff or other board members. 
• You can read all 10 of the changes here. 

Most people I asked don’t really care and are more concerned with what’s going to happen to interest rates this year.  

But I think it’s important, because it feels to me like they overcooked the rates going down and they could easily overcook the changes on the way back up – mostly due to the fact they don’t seem to be using any other tools in their toolkit to slow down inflation (like the superannuation example we discussed a few weeks ago). 

In Wednesday’s speech, RBA Governor also addressed the more pressing issues, with what they think needs to be done about interest rates right now. 

The more immediate concern regarding interest rates during the second half of 2023

Our pirouetting interest-rate-genius had this to say about what they might do with interest rates next… 

I’m still not certain this dude knows anybody with a mortgage, so perhaps doesn’t care a great deal (I think it’s hard to find a lot of empathy in what he says)… He rattled off a bunch of reasons rates may or may not go up. 

• Changes to interest rates operate with a lag and that the full effects of the tightening to date have not yet been felt.  
• It takes time for households and businesses to adjust their spending and investment plans, and there are still significant resets of low fixed-rate loans to come.  
• Economic growth is expected to be subdued over the next couple of years and it will take time for inflation to return to target. 
• Uncertain whether more interest rate rises are required, but it is possible that some further tightening will be required to return inflation to target. Whether or not this is required will depend on how the economy and inflation evolve.  
• At its next meeting, the Board will have an updated set of economic forecasts… The Board will also have new readings on inflation, the global economy, the labour market and household spending to help inform its decision. 
• Our priority remains to ensure this period of high inflation is only temporary. High inflation hurts all Australians and damages the functioning of the economy…. it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment. It is for these reasons that the Board is resolute in its determination to return inflation to target within a reasonable timeframe and will do what is necessary to achieve that. 

You can read the actual announcement over here (it’s easy to read). 

After his failed “promise with caveats” that interest rates would stay low until 2024, he’s leaving his options open to do another stunning pirouette whenever he damn well feels like it. He is, after all, the governator. 

High inflation is a big problem long term, something they played a very big role in creating, and hopefully they are now getting on top of it. Time will tell.