How soon before the RBA lifts interest rates?

April 20, 2018

 

Yes the Reserve Bank of Australia (RBA) is actively discussing interest rate rises but no, they won't be lifting them any time soon. These are the confusing headlines you'll hear from pundits talking about the direction for interest rates.

 

So what's going on? 

 

At their last policy meeting, the RBA concluded with similar comments it provided in previous months. It did, however, raise one new point about interest rates: they're likely to move up rather than down. That doesn't seem to be news to anyone. The central bank would be loathed to to move rates from the current, long-term record lows, to a new record low. 

 

With this, the RBA is warning borrowers that the low-interest-rate environment will not stay stuck in the doldrums forever. The question is when? When will rates rise?

 

According to Westpac chief economist Bill Evans, it will actually take years before the central bank gains the courage and confidence to introduce a rate hike.

In an interview with Business Insider Australia, Evans remarked that RBA's signal for the movement of the interest rates is not at all significant.

 

“While the RBA’s rate outlook is consistent with their forecasts [for inflation and unemployment], the risks to that outlook continue to accumulate," he said. He added: “Emphasising that progress towards lower unemployment and higher inflation will ‘be only gradual’ appears to be a clear signal that the Bank is undecided at this point and will require quite some time before it can be confident with its view.”

 

In summary Evans is referring to evidence of low wage growth and other indicators that will slow the decrease in unemployment, putting further brakes on inflation. 

 

In addition to economic weakness, many industry experts cite the level of household debt in Australia as the biggest area of concern. In previous reports, industry watcher Graham Cooke said while mortgage repayments are still the major reason why households in Australia have high levels of debt, other costs also account for a huge chunk of household expenditure. 

 

Regardless of what might be happening in overseas interest rate markets, commentators believe that the combination of high household debt and a weak economy will keep the RBA sitting on its hands on an interest rate rise here.

 

(Source: Your Mortgage 20 April 2018; Business Insider 20 April 2018) 

 

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