7 May 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
Real interest rates
Sources: Australian data: RBA cash rate and Australian Bureau of Statistics (ABS) Consumer Price Index; US data: Federal Reserve, St Louis.
Global growth and share markets have benefitted from ‘cheap money’ over recent years.
A measure of how cheap money is can be seen in the real interest rate. This is measured by taking the cash interest rate and then subtracting inflation. The real interest rate is used by central bankers to gauge whether their policy stance is easy or restrictive for economic growth and financial markets.
US real interest rates (red line) have actually been negative since 2008 with the US interest rate being set well below inflation. Since 2015, the US central bank has been gradually raising interest rates to tighten policy. Essentially this is ‘withdrawing the punchbowl’ for Wall Street’s exuberance.
The Reserve Bank of Australia (RBA) had been less generous to Australian shares with Australia’s real interest rate (blue line) being closer to 0%. However Australia’s cash rate at 1.5% is now 0.4% below the 1.9% annual inflation rate. The RBA Governor signalled on 1st May that it’s “reasonable to expect that the next move in interest rates will be up”1. So even for Australia, the ‘end of cheap money’ is looming.
1. RBA Governor Philip Lowe’s comment comes from: https://www.rba.gov.au/speeches/2018/sp-gov-2018-05-01.html
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