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Australia May Raise Rates as Soon as May: Ellerston's Gillespie

  • Housing price growth to slow to 0%-5% as rates rise, he says
  • Gillespie spent 11 years at Tudor before joining Ellerston

Australia’s central bank may start raising interest rates from a record low as soon as May, putting the brakes on house-price growth, according to hedge fund manager Brett Gillespie.

A drop in the unemployment rate to 5 percent in the second quarter of next year will be the trigger for the Reserve Bank of Australia to start lifting rates, said Gillespie, who runs a global macro fund at Ellerston Capital Ltd. The RBA will raise rates twice every 12 months for a cumulative 1.5 percentage-point increase over the next three years, he wrote in a note posted on the firm’s website.

That is a more hawkish view than most economists, with the central bank expected to sit tight until the fourth quarter of 2018, according to the median forecast of 24 analysts in a Bloomberg survey. Australia has held rates at 1.5 percent for the past 16 months to help the economy transition from the end of the mining investment boom.

The drop in unemployment will give the RBA a “green light to ease back on super low interest rates as the mining states recover,” said Gillespie, who spent 11 years at Paul Tudor Jones’s Tudor Investment before joining Ellerston last year. The firm managed almost A$5.4 billion ($4.1 billion) as of November.

Gillespie said his bet on Australia rate hikes next year is now the fund’s second-largest risk position after its view U.S. rates will rise in coming months. The macro fund returned 0.6 percent last month, narrowing losses since inception to 0.5 percent, according to its November newsletter.

Housing Slowdown

Housing prices, which have more than doubled since the turn of the century, will go sideways for the next few years, Gillespie said.

“Don’t expect a property crash, at least not until you expect a recession, which we don’t,” Gillespie wrote. “Property prices aren’t a bubble about to burst. But it is also an asset class that won’t be a good investment.”

Property prices will rise between 0 percent and 5 percent a year for the next few years, he said.

“The spectacular returns in property the last 25 years is almost entirely due to moving from a high inflation/high interest rate environment to a low inflation/low interest rate environment,“ Gillespie wrote. “Low rates have been capitalized into prices. It has happened. It won’t happen again.”

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