Although many experts are now predicting the Reserve Bank will leave interest rates on hold for the rest of the year, Mozo Data Manager Peter Marshall says a rate hike in late 2017 is still a strong possibility.
The official cash rate has been on hold at 1.50% since it dropped to that record low in August last year, after a long downward slide. But according to Marshall, further rate decreases are more or less off the table now, “mainly because of the cost of housing - the RBA won’t want to exacerbate that situation.”
“Debt has been rapidly increasing in Australia, while wages have stayed stagnant. I daresay the Reserve Bank will be keeping a close eye on this imbalance when making future rate decisions,” he added.
Marshall says there are instead a range of factors that point to the RBA raising interest rates in late 2017. At home, we’ve seen improvements in trade thanks to a recovery in commodity prices, inflation numbers that are pushing back up to the RBA’s desired 2-3% target, and a GDP that recovered in the December quarter, after contracting in September.
“Underemployment is an ongoing issue,” he mentioned, “but all in all, there are a building set of positive indicators signalling that a rate increase could come sooner rather than later.”
Another significant factor is that US Federal Reserve is expected to hike rates at its meeting on Wednesday. This will be the third rate rise for the US since the financial crisis, and any doubts that it would happen this month were recently quashed by strong employment data from the US.
“This is likely to be just the first in a series of rates hikes from the US Fed, and that gives the Australian Reserve Bank the space needed to raise rates here without risking an undesirably strong Aussie dollar. So as long as the underlying economy supports it, a rate hike in the US is a good indicator that we’ll see the same move at home,” Marshall said.
The good news is that a rate rise might provide some much needed relief for beleaguered savers - although Marshall cautioned against rushing into a fixed-term deal.
“Although it might take a while for savings accounts to bounce back, with a rate rise on the horizon, it’s probably not the right time to lock into a term deposit. I’d be waiting to see if the banks raise rates in line with the RBA before locking in,” he said.
In order to secure the best rates on a term deposit, Marshall explained, Aussies generally need to lock in for a term of 12 months or more. But with a competitive savings account, they could snag the same rates - as high as 3.05% - without the risk of missing out on future rate hikes.
On the other hand, things are not looking very cheery for borrowers. When the US Federal Reserve increases rates, the cost of funding increases for Aussie banks - which means they will need to raise loan rates to maintain their profit margin.
“You can find home loans with fixed periods of 3-5 years only slightly higher than for 1-2 fixed years. So with rates on the rise over the next few years, it may be a good idea for borrowers to settle into a longer fixed term to ride it out,” Marshall said.
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