Interest Rates – Where are they headed now?

with 6 Comments

Opinion piece by Adrian Stagg

This question of where interest rates are heading is on many peoples lips right now and in truth it hasn’t been too far out of mind for at least the past 3+ years. I recall a fair amount of discussion in mid-2013 about potential interest rate rises anytime soon. Of course, as we all know now, they didn’t happen.

So, the question remains! Still without the aid of a crystal ball, I’ll stick my neck out again. Where are they headed now and what will be the effect on the property market?

For mine, I do think that there is a greater chance of official interest rate rises now than back in 2013, but not by much. If they do occur at all this year, they will be modest in my view  – 25 basis points at most – [ barring ‘left field’ international shock] for the following reasons.

 The Aussie Dollar

The value of the Australian dollar [at 75 cents US+ ] is still higher than preferred by the RBA and most Australian exporters, and any rise in the official interest rates would likely push it up – the RBA wants to see it go the other way.

Housing Affordability

On the home front the issue of housing affordability, which has been around for some time now, is unlikely to be ignored for much longer. Both major political parties recognise the problem, although they have a different approach to offering solutions.

It seems that the RBA also recognises the problem and has made public suggestions about fiscal policy [rather than on monetary policy] as to how the problem can be solved, at least partially. This suggests a reluctance on the RBA’s part to use monetary policy – read interest rate increases.

I think this issue will still be around at the next federal election. What’s more, it mostly applies to just Sydney & Melbourne. The huge increases in property prices that have occurred in those cities have not occurred elsewhere with many parts of the country still a little depressed – or certainly not buoyant anyway. Interest rate increases will not only exacerbate that making any recovery difficult, they will also potentially cripple large numbers of borrowers in Sydney & Melbourne. This wouldn’t be the first time that large parts of the country have been held hostage by the goings on in Sydney & Melbourne.

Official rates Vs Bank rates

In recent years, the major banks have shown a preparedness to move on rates without the lead of the RBA. I believe that there is a greater chance of this occurring than official interest rate increases. In fact it’s not entirely unlikely that the RBA reduces rates, particularly if there are wholesale changes in fiscal policies relating to tax treatments of Super, negative gearing and capital gains.

Banks are facing some small increases in offshore borrowing costs as world markets adjust which they may [will] seek to pass on if market conditions allow. As the USA tightens their monetary policy it does increase the likelihood of these increases further admittedly. Never the less Banks are currently offering steep discounts on their standard variable rates to volume quality borrowers and they will continue to do so to protect market share despite what the published headline rate is in my view. So increases may be in name only for some.

 To Fix or not to Fix?

Just a week or so ago I received an attractive offer to fix interest rates on some of my loans. I can only speak from my own experience but in my memory over more than 20 years the only times I’ve been approached to fix loans was just before interest rates fell. Could that be the case again this time? My thoughts on fixed interest rates haven’t changed since my comments made in July 2014 and I’m pleased that I didn’t jump into fixing my rates then. [the discussion following  that article was especially pertinent]

6 Responses

  1. Georgio
    | Reply

    I am regular reader, how are you everybody? This paragraph posted at this website is genuinely fastidious. I hope you are right

  2. Edward H
    | Reply

    With havin so much content and articles do you ever run into any problems of plagiarism or copyright violation? Do you know any ways to help prevent content from being ripped off? I’d definitely appreciate it.

    • Adrian Stagg
      | Reply

      Hi Edward,
      We don’t mind them copying our information if they acknowledge us – with this particular article however it’s really just an opinion piece so it doesn’t really matter

  3. It’s actually a cool and helpful piece of information. I am glad that you shared this useful info with us. Please keep us informed like this. Thank you for sharing.

  4. Benny K
    | Reply

    Well it looks like you were right about this again. Any more thoughts you can share with us?

  5. Adrian Stagg
    | Reply

    I very much doubt that official rates will increase this year, i.e. Reserve Bank cash rate, however we are increasingly seeing the commercial banks charting their own course so you may find that they adopt a more fragmented approach, offering different rates for different loan types, e.g. owner occupier vs investor, interest only vs P&I, that continue to vary dependent on market forces. Keep an eye on what’s happening overseas, particularly in the USA and the value of the $AUD. Even when rates do start to rise it won’t be by much & I very much doubt that they will get to the giddy heights of bygone days for a very long time, if ever.

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