Not since Irish rock band U2 declared it to be a ‘Beautiful Day’ in late 2000 have US interest rates been higher than Australia’s.
As widely expected, the US Federal Reserve raised the Fed funds rate by 0.25 per cent to a new target range of 1.5 to 1.75 per cent after this week’s two-day central bank committee meeting.
It marked the sixth increase since December 2015 and the first under new Federal Reserve chairman Jerome Powell.
Furthermore, it expects to raise the rate by two further 0.25 per cent increases in 2018 and a further three in 2019 as it ratchets up its economic growth forecasts for this year and next.
It slashed interest rates during the heat of the 2008-2009 global financial crisis to near zero as the world’s largest economy slumped into recession.
But now the economy is on a roll, more recently fuelled by expansionary policies of the Trump administration, such as hefty corporate tax cuts.
In contrast, the Reserve Bank has kept its cash rate at a record-low 1.5 per cent since August 2016 with no immediate sign of following the US.
Australia was one of the few economies to avoid the world recession triggered by the GFC but has repeatedly failed to fire on all cylinders since and wasn’t helped by the end of the mining investment boom, which only now seems to have flushed through the system.
Market Economics managing director Stephen Koukoulas expects the Reserve Bank could be on hold for a further a year or more, and even when it does eventually hike, it will be less marked.
Recent comments by the central bank suggest economic growth may not be as robust this year as first thought and it still needs to see both wages growth and inflation picking up before it moves.
‘They have scaled back any near-term thoughts of hiking, they are not going to do anything for quite a while,’ Koukoulos told AAP.
However, ‘at the margin’, Koukoulos says retail banks may need to independently lift their lending rates in the future as their funding costs in world markets increase because of the upswing in global interest rates.
‘I think their funding costs have edged up a little. But I don’t think it is an automatic pass-through, I don’t think it is quite that mechanical.’
Independent rate hikes may not be such a good look while the banks are under the spotlight for past misdemeanours at a royal commission.
Still, former Liberal treasurer Peter Costello warned households this week to brace for the ‘painful’ consequences of falling property prices and rising global interest rates.
‘It’s going to be slow and it could be painful … if money is more expensive, asset prices must fall,’ he told a conference in Melbourne.
But when quizzed on the topic earlier this month, Reserve Bank governor Philip Lowe was confident households would find higher interest rates ‘manageable’.
He told a conference when banks have been making loans over the past year or so they have been required to assess the serviceability of a loan on a seven per cent interest rate.
The average interest rate at the moment is 4.25 per cent.
‘If lenders have done their job there is a reasonably sized margin there,’ Lowe says.
The last time the US had a higher interest rate than Australia was between mid-1999 and December 2000 following the Asian financial crisis and heading into the hi-tech dot com boom.
Australia was shunned by investors during the latter phase because it was deemed to be an old economy that was still ‘riding the sheep’s back’ and digging holes in the ground for its wealth.
That simplistic thinking fell flat on its face when the dot com bubble burst and Australia subsequently enjoyed the fruits of the mining boom sparked by the urbanisation of China.
Indeed, Australia can boast the longest run of uninterrupted economic growth in the world spanning over 26 years, which, to quote U2, is the ‘Sweetest Thing’.