Interest Rate Update (November 2024)
The following graph shows movements in both the 6 month and 3 year Bank Bill yield rates, for the period Jan 2006 to date.
These rates are wholesale rates which are net of any margin charged by financial institutions. It is not uncommon for retail premiums for 3 year fixed rates, to be 0.30% pa or 30 basis points above the wholesale rate.
Currently the 6 month wholesale Bill rate is 4.66 % pa and the 3 year wholesale Bill rate is 4.08 % pa, a discount of 0.58% pa or 58 basis points for the longer term. The discount for the longer term has almost halved, since the negative basis of 1.15% experienced in September. This negative basis of 115 points was the greatest discount in the 18 years of RMS’ records. The market leading up to September had been predicting significant reductions in interest rates in the medium term, creating this significant negative basis. However, those expectations have now been seen as premature, as domestic inflation rates remain above the RBA’s target range, unemployment rates have remained particularly low, plus likely pork barrelling prior to the looming federal election, will lead to additional pressure on inflation. Internationally, the volatility regarding the impact of a Trump presidency, particularly around the US-China relationship, plus other ongoing conflicts, particularly in the middle east impacting energy markets and shipping, is also leading to uncertainty in global markets. The volatility of all these factors is limiting the ability to predict rate changes in the medium term.
However, there is still a significant negative basis, which is an indication that the market may see a modest reduction in interest rates in the medium term. Many analysts are predicting one or two 25 basis point reductions, starting in early-mid 2025.
The graph below charts interest rates back to 2006, a period which includes the end of the mining boom, the GFC, a slowing Chinese economy and COVID-19. The impact of these events, makes identifying what long-term average rates should be without these major influences, difficult. While current interest rates are above the long-term average in the 18 year data set, they are not substantially higher. As a result, clients should be aware that interest rates would not be expected to fall dramatically in the medium-longer term, in the absence of an unexpected severe economic downturn. Therefore, clients need to be prepared to manage the current level of interest rates into the future and ensure their business can support the associated interest expense from cashflow.
