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Where are interest rates headed?

March 12, 2019

March 12, 2019

This is a question that pops up a lot.

Last Tuesday, the Reserve Bank of Australia (RBA) left the official cash rate unchanged at the record low of 1.5%, the same figure it’s been at since August 2016.

So where to from here?

Going back say 6 months, the general consensus seemed to be that the next interest rate change would be an increase. However, the economy can turn quickly (for better or worse), and the favoured prediction from many economic commentators now seems to be rate cuts over the course of this year. Westpac’s Chief Economist, along with a few other financial commentators, has predicted 2 rate cuts before the end of 2019.

A good indicator of where banks think interest rates are headed is often the fixed interest rates they offer to the market. If the banks thinks interest rates are likely to fall in the coming months, fixed interest rates will tend to head in the same direction, and vice-versa. Everything we’ve seen has indicated a softening in fixed rates in recent times, indicating that most lenders are leaning toward interest rate cuts (or at worst, stability) in the short-medium term.

What drives interest rate movements?

Typically, the RBA uses a number of economic indicators such as economic and employment growth, inflation and consumer confidence to determine the current strength of the economy, and then subsequently adjusts interest rates accordingly to maintain economic momentum. For example, if job growth or consumer spending is decreasing, the RBA will consider interest rate cuts to reinvigorate the economy.

How do these numbers actually look?

Getting a read on current conditions is tricky, as so many of the economic indicators are inconsistent. For example:

- Economic growth for the September quarter was a lacklustre 0.3%, and yesterday the government announced December quarter growth of just 0.2%

- Positively though, while the January consumer confidence figure came in at 99.6, down from 104.4 previously, it rebounded to 103.8 in February

- Further, the Australian labour market remains strong and unemployment is stable at a ‘reasonable’ 5%

- Then we look at house prices. While these have fallen recently in most capital cities, this is really the result the RBA desired, as the markets were deemed to be overheated

So all in all, it’s a bit of a dog’s breakfast, and makes it tough to get a read on exactly where rates are headed.

What’s the RBA view?

In their rates announcement this week, the RBA advised that they expect the labour market to remain strong, with unemployment predicted to decrease and wages to rise due to skills shortages. Economic growth for 2019 is still predicted to be 3%, supported by rising business investment, spending on public infrastructure and increased employment. Inflation remains low and stable.

Overall, the RBA are comfortable that “the low level of interest rates is continuing to support the Australian economy”. Further, “the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

So basically, they RBA board seems relatively comfortable with how the economy is tracking, but as we know, conditions can change quickly, especially with the uncertainty that comes with a federal election.

The full RBA rates announcement can be viewed here

My view?

I wouldn’t like to bet on this! If I had to, I’d probably favour a rate cut (maybe two) over the next 9 months, but with so much economic uncertainty, fuelled by volatile indicators and an upcoming federal election, the actual outcome is difficult to predict. An unchanged rate wouldn’t surprise, any rate increases probably would.

Watch this space!

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The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should consider your own financial position, objectives and requirements and seek personalised advice before making any financial decisions.