What does 2017 have in store for Reserve Bank interest rates?

By Kelly Emmerton ·

In the midst of turbulent global conditions, the Reserve Bank opted to keep rates on hold at 1.50% in its first interest rate announcement of 2017. Most experts had predicted the February outcome - but what’s in store for the rest of 2017 has everyone on the edge of their seats.

Inflation predictions and Trump-economics at work

Although inflation remained stubbornly low at 1.5% over 2016, in his February cash rate statement, Reserve Bank Governor Philip Lowe predicted higher numbers for 2017.

“The December quarter outcome was as expected, with both headline and underlying inflation of around 1.5%... Headline inflation is expected to pick up over the course of 2017 to be above 2%, with the rise in underlying inflation expected to be a bit more gradual,” he said.

Despite positive predictions, ongoing low inflation can pose risks to the Aussie economy, including leaving it vulnerable to sliding into deflation due to outside influences. And in the current economic and political climate, the Reserve Bank will likely have a close eye on big global players, particularly the US and China, both of which Lowe mentioned in his statement.

“There are a lot of mixed economic indicators, that the RBA will be keeping a close watch on,” Mozo Data Manager Peter Marshall said. “The shake up between the US and China means the playing field has shifted for Australia, and we’re all waiting to see how the dust settles.”

ALSO READ: Rate cuts from 9 providers spell bad news for savers in 2017

But Marshall believes that when the RBA does eventually make a move, it won’t be until mid-year, and it will be a rate increase.

“I think the RBA will be very, very cautious for the rest of this year. Governor Philip Lowe won’t want to cut rates any further unless it’s entirely necessary. And if the RBA’s prediction that inflation will build to the desired 2% in 2017 proves true, they won’t have to.”

Will the banks play fair?

The short answer: it’s unlikely.

Although the RBA are holding rates steady at the moment, Mozo has already seen fixed rate home loan increases from at least fifty-five providers in 2017, including all four big banks. And after a prolonged period of low interest rates in Australia and with so much uncertainty in the global market, Marshall said banks will still be eager to pad their profit margins further.

“We can say with a fair amount of certainty that banks won’t be passing on any full RBA rate cuts for some time to come,” he said. “The opposite might actually be true - borrowers should brace themselves for further rate hikes from banks, regardless of what the RBA does.”

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Savers aren’t in a much better position - even if Marshall’s prediction of a rate rise proves true, he’s doubtful that bank customers will see any of the benefits.

What to do with your money in 2017

With the RBA likely to play it safe this year and the banks eager to bolster their margins, regular Aussies could wind up with the short end of the stick.

“Things are looking gloomy for both savers and borrowers so I’d say it’s about time to lock in a good rate with either a fixed rate home loan for borrowers or a term deposit for savers,” Marshall said.

Borrowers can expect rates to rise, and should plan for higher repayments in the coming year. Those looking for a new home loan or refinancing in 2017 should look for the best mortgage deal possible, and keep one eye on money saving features like offset accounts or an extra repayment facility.

As for term deposits, Marshall suggested savers needed to look at terms of at least 1 - 2 years in order to get decent returns on their money. “Shorter terms are more or less pointless at this stage, because you can still get a better interest rate with a good savings account.”

But will locking your funds away for longer mean missing out on any RBA rate rises in 2017? Marshall doesn’t think so. “I’d predict it will take a couple of years before we see any significant increase in savings rates from the banks.”

So what are you waiting for? If you’re looking to borrow, head over to our home loan comparison tool to find the best rates on the market before they’re gone. And if you’re looking for somewhere to stash your rainy day fund, use our tool to search for the best term deposit offers.