6% Interest Rates

It takes a big man to admit when he’s wrong.

But at least Reserve Bank Governor Philip Lowe was able to do that this week.

For the past two years since interest rates were dropped to 0.1%, he’s constantly assured us that rates wouldn’t go up until 2024.

I for one never believed it because since late 2020, inflationary red flags have been surfacing like teenage acne.

The problem is, his rhetoric has lulled waves of borrowers into a false sense of security thinking rates wouldn’t go up for ‘years’.

It was reckless at best.

But now we have a potentially bigger problem.

Instead of tapping the breaks on interest rates last year, the RBA (and the US Federal Reserve) may end up slamming them this year.

You see, the latest trading of bank bill futures suggests the RBA cash rate could be 4% by early 2023 due to inflation. It’s currently 0.35%.

If that happens, mortgage rates will go to 6%.

Do I think this will happen?

I hope not!

It will hand break the property market, spike mortgage defaults, and hike us straight into a recession.

But I can tell you this much…

For the past eighteen months, I’ve been watching the bond market as closely as I’ve been watching the stock market and if my read on both is correct, what’s coming is not nice.

That’s how much things changed this week.

And that’s something I don’t like to admit.

Happy Mother’s Day!

Adam