When will we see a rise in Interest Rates?
It doesn't matter which economist you listen to. Each will give you a different perspective on how the future looks for the world and Australian economy.
I'm not an economist - but given their predictions are all over the shop, I'm going to offer my opinion too. I reserve the right to say i told you so, just like some economists who are lucky enough to have their theories proved correct.
Interest Rates. One of the more emotive set of words - powerful enough for even the most news averse people to pay attention. Australia has a very high rate of home ownership of around 70%. That is, those who are buying or who have paid off their home loan mortgage. Its one of the largest rates of home ownership in the world - and therefore we can be very affected by movements in interest rates.
So what is going to happen over the next couple of years? I have said previously that higher interest rates will hit soon, but when exactly will that be?
I'm predicting that by March 2010, interest rates will be on the rise again. And if the RBA are concerned about an overheating economy, it could be an aggressive strategy of rate rises. My tip would be a 2% increase from their current levels by the end of 2010.
I'm taking a lead from the banks on this one. Following their refusal to pass on the Reserve Bank's official cut to interest rates, the major banks have started to raise their mortgage fixed rate.
Firstly, not cutting their rates in line with the RBA indicates that they may be at the end of the downward movement. This is despite what the RBA does over the next few months. Even if the RBA cut interest rates for the remainder of 2009, the cut is unlikely to be passed on in full or at all by the banks.
Secondly, the increase to the long term fixed rate mortgage option suggests that the banks are betting that interest rates are headed up soon. Its a common strategy by banks when they forecast higher interest rates in the medium term. When official interest rates are falling, fixed rates are the bank's best friend. But not now.
The RBA will be looking at a range of factors before they start raising rates again. The most important of these will be inflation and unemployment. If they see inflation on the rise, and unemployment start to dip, they will be very keen to raise interest rates very quickly. If that is followed by strengthening retail sales and increased commodity prices, they could well take a very aggressive approach.
In theory, a quick upward move from historic lows shouldn't be a problem. But there will be a concern that new home buyers have overcommitted themselves with unaffordable home loans. They can thank the banks for that problem, its our own predatory lending crisis.
There is also the fact that the longer interest rates stay at low levels, the more people become accustomed to more money in their pocket every month. Some people will have used this extra money to commit to other purchases, some of which will be unsustainable with even a moderate interest rate hike.
Even if the Rudd Government will be worried, the RBA wont be factoring these personal issues into the equation when they decide to raise rates. They will be more concerned with an overheated economy.
The influx of massive new money from government stimulus packages around the world could well come back to bite us in the form of inflation. The inflation genie was out of the bottle in 2008, having a rest in 2009, but will be well and truly sunning itself on the beach in 2010.
For the mortgage holder, that means higher interest rates. If the RBA gets the mix right, you are likely to see home loan variable rates at around 7%. If they get it wrong, don't think for a moment that variable rates wont hit close to 10% again. If you have a home loan or are thinking of getting one, please be mindful of that fact.
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