Economists at Commonwealth Bank of Australia (ASX: CBA) believe that the RBA is going to increase the interest rate in 2022.
What is CBA saying about the interest rate?
Australia’s biggest bank has put out a call that the Reserve Bank of Australia (RBA) is going to increase the rate as early as next year.
According to reporting by the Australian Financial Review, CBA has forecast that the RBA will be forced to increase the interest rate to 0.25% in November 2022 – up from 0.1%.
CBA also believes that another rate increase will come in December 2022 to 0.5%, with three more increases in 2023 to be at 1.25% by the third quarter.
The AFR reported this tightening scenario is conditional upon fiscal policy remaining expansionary, and the border opening to immigrants in mid-2022, although at a slower rate than pre-COVID-19.
The newspaper quoted CBA’s boss of Australia economics Gareth Aird, who said: “We still believe that abandoning yield curve control at the July board meeting is the most appropriate policy decision given the strength of the Australian economy. But the RBA has taken that option off the table.”
Could this mean bad news for asset prices?
There are widespread impacts that could occur. For starters, Aussies with cash in the bank might like the sound of earning a bit more from their money.
Magellan Financial Group Ltd (ASX: MFG) has this Warren Buffett quote from the 1994 Berkshire Hathaway annual general meeting (AGM):
“The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature … its intrinsic valuation is 100% sensitive to interest rates.”
Mr Buffett also has this quote comparing interest rates to gravity: “Interest rates are to asset prices what gravity is to the apple. When there are low interest rates, there is a very low gravitational pull on asset prices.” That means higher interest rates theoretically mean lower asset prices.
As interest rates rise, I think it’s likely that volatility will increase. Assets probably probably won’t be priced as highly.
The prospect of buying shares at lower prices sounds appealing, though it may not be so good for the existing portfolio. There could be some good opportunities in the ASX growth shares space in the coming months and years.
