It's a given that interest rates are rising and will rise further unless there's another major international crisis. While there are reasonable concerns about the sovereign debt of most developed countries, the emerging countries are looking sound and thus the global economy seems to have dodged the economic bullet for this cycle.
So let's assume that the global economy is going to be OK, but not great, while our part of the global economy - the emerging nations plus Australia - is going to be good, continuing to grow at a reasonable clip.
From the various speeches, board minutes and odds and sods statements, the Reserve Bank wants us to think that it thinks the present 4 per cent cash rate is close to neutral - neither accelerating demand or retarding it. Personally, I think current rates are still expansionary and the RBA is doing a little jaw-boning, talking it up. If you're a real estate developer, the massive margins being demanded by banks are restraining activity, but for the average citizen who qualifies for a loan, money is not expensive on any sort of historical basis.
Some people will want to argue with this scenarios, but let's run with it a bit further. Let's assume that unemployment will continue to fall, that economic growth will continue to improve and the RBA is right in forecasting that we're running about at about our trend rate for this year. The RBA also believes the resources boom has much further to run, Asia in particular is a major growth story over time and that Australia urgently needs more housing.
Therefore, as unemployment falls and resources boom, at some point interest rates have a job to do in keeping demand in check so that we don't start pushing inflation out of the comfort zone. And that's where the story gets interesting.
It's the usual story with economists: lots of opinions and no certainty, which is fair enough. No credible forecasting offers certainty because it can't. It's always a matter of a "best educated guess". (As a rule of thumb, anyone promising a "sure thing" vision of the future tends to be a charlatan.)
Which finally gets back to the opening question that might have encouraged your to read this column: how far will interest rates rise? I've chosen three forecasts over the past week from three credible sources
First up, the AMP's Shane Oliver, who tends to be on the more optimistic side of the economic fence. He reckons that inflation isn't a problem and that the high level of household debt means that the RBA doesn't have to lift rates much to have a big impact. And Oliver's best educated guess is that the RBA cash rate will be 4.75 per cent by the end of this year. That puts him at the lower end of the spectrum.
Next is the NAB's Alan Oster. Over the years, I've found Oster to be a cautious sort of economist, much influenced by the NAB's business surveys. He thinks the cash rate will peak at 5.5 per cent in the middle of next year.
And then there's Macquarie Bank's Rory Robertson, who arguably is about the best of the central bank watchers. (He had a particular run of success last decade in getting the Federal Reserve right when most American economists were hopelessly wrong.) Rory thinks that, if nothing goes particularly wrong, the RBA could have its cash rate in the 6 to 6.5 per cent range by the end of next year. In other words, add 200 or 250 points to your present rates.
Ouch. That could hurt. Robertson basis that forecast on unemployment continuing to fall and the way the RBA was treating rates before the GFC hit. With our present productivity, unemployment below 4.5 per cent or so becomes inflationary and the RBA puts the foot on the brake.
So which of the three economists is right? I don't know - but as individuals, it pays to organise your finances to handle all of the possibilities. If you can't handle the possibility of your mortgage being 250 points higher, you need to take action now so you won't be sent broke at the end of next year if Rory is right. If it turns out at that rates only peak at 5.5 per cent, the rest is a bonus.
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