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What can we expect from interest rates this year?

With 2018 now well underway, the one question that many people want to know is: what is going to happen with interest rates this year?


Throughout 2017, the Reserve Bank of Australia thought it prudent to leave the official cash rate at the historically low setting of 1.5%.

But will they do the same thing again this year, or can we expect the Reserve Bank to adjust its current stance on monetary policy?

Unfortunately, no‐one has a crystal ball, so it is impossible to predict exactly what the future may hold.

That said, we can make some educated assumptions based on what is happening within the domestic and global economies, because we know that will have a direct impact on the Reserve Bank’s cash rate decisions.

So, what’s the current economic landscape?

On the home front, 2017 marked the 26th year of economic growth in Australia.

The Australian dollar surpassed US 80 cents while non‐mining investment improved and our export volumes were strong. In addition, consumer sentiment rose thanks to continued low rates and strong growth in employment.

Data from the Australian Bureau of Statistics1 found the unemployment rate hit 5.5% by the end of 2017, which is notionally full employment.

And while there is plenty to be optimistic about, it isn’t all sunshine and roses...

IMF’s 2017 Global Financial Stability Report2 found household debt within Australia has risen to 100% of GDP, which is well ahead of other advanced economies where the ratio is much lower at 63%.

On top of this, the Australian Prudential Regulation Authority made it clear in March 2017 that Australian households were becoming too reliant on interest‐only mortgages. As a result, lenders were told to limit their level of interest‐only lending to 30% of all new loans written. This resulted in changes to interest only pricing and policy, which hit some borrowers hard.

In addition, Australia’s inflation consistently trended below the Reserve Bank’s target band range of between 2% and 3%. According to the latest Consumer Price Index from the Australian Bureau of Statistics3, the quarterly inflation rate is currently sitting at 1.9%.

And while the Reserve Bank will definitely take the above data into consideration each month, the Board would also be forced to consider what is happening in the global markets.

In the US, the Federal Reserve decided to lift their cash rate (the Federal Funds Rate) three times throughout 2017, taking the rate to 1.5%.

Moving forward, The Federal Reserve4 has made it very clear that it will continue to increase the Federal Funds Rate throughout 2018 and into 2019. Why? Well, according to the Federal Reserve, the US economy is showing signs of improvement.

No doubt, the Reserve Bank of Australia will be buoyed by the US Federal Reserve’s decision to lift the Funds Rate three times in a fairly short time frame, and they may be encouraged to follow suit.

So, from this economic position above we can summarise:

  1. Both the global and domestic economies are enjoying strong growth;
  2. Australia has strong employment, which has helped improve consumer sentiment; and
  3. Our ongoing low inflation continues to be a concern.
So where to from here?

Knowing what we now know about both the global and domestic economies, it is fair to say a rate increase could well be on the radar for 2018.

That said, interest rates are very unlikely to skyrocket and instead should continue to remain lower for longer.

Why? Well, the simple answer is sudden and several rate rises could put a lot of unnecessary pressure on household debt and further slow inflation growth.

Meanwhile, any cuts to the cash rate could encourage more people into the property market, resulting in higher property prices and higher debt levels.

It’s safe to say that whatever approach the RBA takes, they will tread cautiously.

The great news for anyone with a mortgage or looking to buy in 2018, is that interest rates are still sitting at historic lows. And, even if rates were to rise slightly, home buyers can still expect to enjoy a low cost of borrowing.

If you would like more information about the state of the market, what may happen with interest rates in the future, and how any changes could likely affect your situation, make sure you give your local Mortgage Choice broker a call today.

 

You might also be interested in:

 


1 Australian Bureau of Statistics, Labour Force, December 2017

2 IMF Global Financial Stability Report October 2017, October 2017

3 Australian Bureau of Statistics, Consumer Price Index, December 2017

4Federal Reserve issues FOMC statement’, December 13 2017 https://www.federalreserve.gov/newsevents/pressreleases/monetary20171213a.htm

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