THE BIG PICTURE: Will low interest rates usher in a new golden period?

The last time that money market interest rates were at current levels was 53 years ago. In March 1960, the minimum interest rate applied on loans accepted by authorised dealers on the short-term money market was 2.69% with the maximum rate of 3.38% and an implied weighted average rate of 2.70%.

Certainly, very low interest rates were common through the 1940s, 1950s and most of the 1960s. For instance in 1952, the three-month commercial bank deposit rate was just 0.71% and even in 1956 it had lifted to only 1.25%. Housing loan rates held at 5.00% through 1959 and 1960. Trading bank overdraft rates were between 5.00-6.00% in the late 1950s/early 1960s.

All these gems of information are contained in the hardcopy Reserve Bank Statistical Bulletins of the era and the forerunner – the Commonwealth Bank of Australia Statistical Bulletins.

Of course, a key reason why interest rates were low was because wages and prices were under control. In the 1958/59 year, wages rose by 2.5%, retail prices rose by 2.6% and the consumer price index rose by 1.9%.

Do these growth rates seem familiar? Wages are growing by 3.4% currently with inflation around 2.5%. Certainly other indicators are a bit different, with the economy growing 7.0% in 1958/59, but slowing to 4.4% in 1959/60. And unemployment was hovering near 1-2% in the late 1950s/early 1960s.

So could a cash rate near 3.0% become the ‘new black’? If inflation sticks near 2.5% and if Aussies continue to apply a conservative approach to taking on debt, a new economic glory period could be ushered in, similar to that which existed in the 1950s.

The week ahead

In Australia, the coming week is dominated by data on lending, wages and the federal budget. In China, top shelf economic data like retail sales and production are issued. And it is the same story in the United States. Not only are sales and production figures released but also inflation – consumer and producer prices.
In Australia, the week kicks off with data on housing finance, Reserve Bank statistics on credit and debit card lending and the NAB business survey. Reserve Bank Board members may wince if the March home loan figures print in line with expectations. Based on Bankers Association data, we expect that the number of loans to owner-occupiers rose by a super-strong 6.9% in March while the value of investor and owner-occupier loans is tipped to have lifted by 8.0%.

The NAB business survey should show an improvement in confidence levels in April although we wouldn’t expect much change in the measures business conditions and activity measures.

Also today, the credit and debit card lending data should show that consumers are reluctant to take on credit card debt and prefer to use debit cards to make purchases.

The federal government hands down the latest budget tomorrow. Unfortunately, despite all the advances in technology, the budget is still released after a media “lock-up” period at 7.30pm Eastern time. But the presentation of budget measures has certainly improved over time. Economists are generally expecting a small budget deficit around $10-15 billion (0.7-1.0% of GDP) in 2012/13 with a similar deficit in 2013/14.

Also tomorrow, broad figures on lending in the economy are released, covering new housing, personal, business and lease finance commitments. Recent data shows that lending is trending sideways.

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