In this segment of "What in the World" on Motley Fool Live, recorded on Feb. 4, Fool Australia's MJ Baldock and chief investment officer Scott Phillips give an update on interest rates in Australia.
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MJ Baldock: I'm wondering if we can kick off today's episode by updating the Fools on what's going on with interest rates. Because here in Australia, our central bank has decided to keep them on hold. So keen to get your take on all things interest rate-related here in Australia, please.
Scott Phillips: Good day MJ and good day Fools. We're not going to spend too long on this. We talked about most weeks, it feels like the macro things are changing so quickly. But RBA, the Reserve Bank of Australia, left rates on hold. That was no surprise. What the market was expecting was possibly some sign that sooner, rather later, they would start increasing those rates as the U.S. Fed has done making an announcement might be as soon as March.
At this stage, the RBA is a little bit more sanguine. They still want to see wages growth, which is what they've said for ages they want to see and inflation is high each year, but nowhere near as high as the U.S. for now. They've got a little bit of breathing room. They have taken it, they are immediately stopping though the bond-buying program with a quantitative easing, QE effective Feb. 10. That's much quicker than was expected and it is really the first move. If you want rates to go up, you start by letting medium-term rates start to rise. That's going to happen because the RBA is no longer in the market buying those bonds.
Of course, eventually, we'll see the short-term rates, the official cash rate as they call it here, that will start to increase in due course. They want to hold that as long as they can. They want that wages growth first. But if prices beat them to it, they might have their hand forced, unfortunately.
