Experts struggle to predict rate movements

Experts struggle to predict rate movements


Opinion
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One of the aspects of my business life I really enjoy is working with some top rate agribusinesses.

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One of the aspects of my business life I really enjoy is working with some top rate agribusinesses.

I learn a lot from these people and feel energised after spending time with them.

Another one of the benefits is that I get to sit in on meetings with people that provide expert external advice to these agribusinesses.

Most recently, it was a meeting with the interest rate specialist of a large bank.

This particular client has had a long relationship with the bank, and they operate their relationship on a very professional, courteous basis. The interaction goes both ways, and I am sure is mutually beneficial to both parties.

I also recently attended a function where two speakers discussed commodity prices, including livestock and grain. Another speaker discussed the topic of interest rate risk and what is going on globally. They were all entertaining speakers, and knew their topics well.

While I have a pretty good understanding of the drivers of interest rates, I am in no way an expert on the subject. All the banks have interest rate specialists, and are quite happy to meet with clients to discuss interest rate options.

For me, the most interesting part of the meeting was the discussion on interest rate spreads and what is driving this. As everyone knows, interest rates are at historical lows. It would seem rates are not going up anytime soon either, going by the commentary from the Reserve Bank of Australia governor Philip Lowe.

As Australia is part of the global business community, our interest rates do not act in isolation to the rest of the world. Other economies, particularly the United States, play a big part in what our cost of money is.

The graphs in the meeting were quite telling, and it was plain to see the way the rates have decreased steadily in the last five years in particular. This trend is apparent with the RBA cash rate, the 90-day variable rate, and three- and five-year fixed rates.

The RBA cash rate is sitting at 1 per cent, with the 90-day variable rate sitting at about 1.17pc. Historically, this is a very small difference, and the RBA cash rate is forecast to be cut further.

One thing I learnt from attending these two recent events, was that even the experts cannot accurately forecast interest rates, or where the Australian dollar is going to be in six months, let alone 12 months.

Also, if you are aware of base rates (freely available information), it is easier to have a conversation with your bank about the bank's cost of doing business, and the customer margin. Banks tend to maintain their margins by increasing other costs. I'm not saying this is right or wrong; just an opportunity to have this conversation.

It is important to garner information about interest rate risk, and actively review this, but maybe leave this to the experts and get on with controlling what you can control. After all, yield and price are the factors that will drive profitability for the vast majority of agribusinesses.

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