Andrew Bell’s Market Update: 2017 Interest Rate Forecast

MARKET WRAP
Issue 10   |   May 11th, 2017  |  2017 Interest Rate Forecast

Interest rates were put on hold yet again last week, but there is increasing conversation about rising interest rates. I do not believe anyone thinks for a minute that official interest rates are likely to go any lower, and if they were to do so, it would be quite an alarming statement about our economy. The Reserve Bank is holding in reserve lower interest rates only for emergency situations.

We all also know that the Four Major Banks, and many of the second tier banks, have already started to put interest rates up independent of the Reserve Bank settings. We are getting increasing questions, certainly amongst buyers, about what the landscape looks like for the next couple of years.

When Would We See Interest Rates Rise?

Interest rates fundamentally are a lever to either stimulate or slow down an economy. We are at record lows at the moment because of the consequences of the Global Financial Crisis that has had significant effects around the world. They are down at these historically lower settings to try and stimulate the economy, and particularly generate more jobs to get unemployment lower. Designed to get us out and spend money and pump the economy.

What would make the Reserve Bank want to increase interest rates is inflation getting to the upper level of their comfort zone. Their comfort zone is inflation between 2 – 3%. Well, for the first time in quite some time inflation has ticked up. Prior to that it had been dropping for quite some time in this low growth economy, but as well all know the cost of living has been rising, particularly around energy costs and also because of household costs including the rising interest payments.

A real concerning feature in the economy at the moment is that inflation is now outpacing wages growth and this is going to lead to real issues. It will certainly restrict the Reserve Bank from putting up interest rates, but I think the Government will be looking to see how they can stimulate some wages growth, which in turn leads to higher inflation.

The Reserve Bank will also be watching housing activity closely. They do not want to see a housing bubble and that is starting to be evident in many parts of Sydney and Melbourne, but very little signs of it elsewhere in the country. A bit of a juggling act on this front.

They also have an eye on the international scene. As the US raises their interest rates there will be a shift of money out of countries like Australia to capitalise on higher interest rates in the US, and so we are likely to see the Australian dollar fall and that will feed through to inflation. This is likely to put some upward pressure on interest rates.

Why the RBA Will Keep Interest Rates on Hold

It certainly says for me that rates will not be falling unless there is a significant slowdown in the Australian economy; rising unemployment or a massive economic jolt probably triggered from overseas. The most likely scenario is that we will continue in the pattern we are, with interest rates on hold for the foreseeable future. But as the Reserve Bank watches all those features I mentioned above, we can expect the official rate to rise somewhere perhaps later this year.

With a pretty positive report on our economy by the International Monetary Fund, and some evidence that our economy is really starting to pick up, it is more than likely we will start to see rises in interest rates later this year.

Once again, for those looking to buy real estate, interest rates play such a significant factor. If you are borrowing money there has never been a better time than now. Making a move to lock in great interest rates will give you benefits for many years to come and this opportunity should not be missed.

I hope that might be of some benefits. I look forward to catching up with you in a fortnight’s time.

Kind regards,
Andrew Bell, OAM
Chief Executive Officer
The Ray White Surfers Paradise Group

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