At a media briefing in Sydney on Friday, Steve Miller, the Head of Fixed Income at Blackrock says the strength of Australia’s economy has taken him by surprise. In early 2015 Miller was quoted saying that he was alarmed by the declining terms of trade and the outlook outside of mining was “abysmal.” However, Miller is highly sceptical the strength can continue given two key growth drivers: residential construction and a strong housing turnover are both likely to slow. Miller says that the RBA will be forced to cut rates “Probably once, maybe twice” in the second half of 2016. Miller also tips the AUD to decline into the 60-65c range this year.
Miller was wrong on the Australian economy last year and he may well be wrong again in 2016. The looming problem for Australia and many other Western countries over the next few years is unlikely to be a rising unemployment rate, but the opposite: a shortage of workers due to the en-masse retirement of the post war baby-boom generation.
I can't remember a time where views on the direction of interest rates have been so polarized. RBA seems to be a reluctant cutter - rates already at record lows... cost of funding probably isn't a major concern for businesses so lower rates would have a limited effect there and households are already heavily indebted. Maybe there is a case for lower rates, I'm just not sure how much impact it would have.