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“RBA hikes could push mortgage rates to 7%”
5 July 2017

Anyone else see this headline early July?  Predictions that the RBA could hike rates eight times over 2018 and 2019 have been touted by John Edwards, a former member of the RBA and non-resident fellow at the Lowy Institute for International Policy.

WHY?

  • The RBA considers its current rate to be exceptionally low – in fact, it has not moved from a record low of 1.5% since August 2016.
  • If the economy improves as the RBA predicts, the next move will be up.  The RBA predicts economic growth output of 3.5% with 2.5% inflation.
  • The RBA will want to policy rate increase to match the economic growth = 3.5% by end of 2019.
  • International players are raising their rates – the US, Europe and now Canada.

IMPACTS

  • Increased repayment on high household home mortgage debts will crimp consumer spending – ultimately leading to an Australian recession
  • Our dollar would probably rise as a result of offshore cash flowing into Australia to take advantage of our relatively high rates
  • A higher Aussie dollar would mean even lower inflation.

Other camps see financial markets leaning towards the likelihood of a rate CUT in the near future.  AMP chief economist, Dr Shane Oliver, has said that there is a rising chance that the RBA will cut rates by the end of the year.

WHY?

  • Housing markets in Sydney and Melbourne have slowed – the growth in these property markets is a big factor as to why the RBA haven’t cut rates for some time.
  • Other sectors of the economy can benefit from lower interest rates
  • Lower growth than forecast thanks to weak consumer spending and business investment – another rate cut would boost economy growth
  • Record low wages growth likely to keep inflation lower for longer – another rate cut could increase inflation

Others still, suggest we are unlikely to see any rate movement until late 2018 even into 2019.

WHY?

  • Banks have already raised rates on the RBA’s behalf
  • The new bank levy imposed on the Big Four by the Federal Government will likely be passed on
  • As global rates rise, funding for banks will increase and, guess what?  These will probably be passed on to us consumers as well.

Australia have just taken over the Netherlands for having the longest recession free run on record – that is 103 quarters in succession of avoiding two consecutive quarters of negative growth.  If Australia wishes to hold this record for a while longer, the RBA will need to perfectly time any future rate rises to avoid crippling the economy.  





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