The decision by the Reserve Bank Board to keep interest rates on hold today came as no surprise.
Borrowers are being warned to keep an eye on their debt as credit becomes cheaper, despite the Reserve Bank keeping the cash rate on hold at 1.75% at this afternoon’s board meeting, according to one of Australia’s biggest comparison websites, finder.com.au.
To better understand their thinking behind this and the future direction of interest rates, here are 4 experts views:
Martin Lakos ( Macquarie) comment:
The Reserve Bank Board met on Tuesday 5 July and kept official interest rates on hold at 1.75%.
June was dominated by global financial market volatility with the lead up to the UK’s referendum on its EU membership.
This uncertainty impacted the US central bank’s decision to keep interest rates on hold in mid-June, followed by the recent surprise vote by Britain to leave the EU.
The next RBA board meeting will be held on Tuesday 2 August.
Tim Lawless (Corelogic) comments:
The RBA has looked through the fog of political uncertainty and global volatility to keep the cash rate on hold today.
From a housing market perspective there has recently been renewed heat in the Sydney and Melbourne markets where, according to the CoreLogic Home Value Index, the trend rate of growth has bounced higher over the past three months.
The reversal in what was previously a moderating trend in housing market conditions was likely to have been a concern to the RBA, however CoreLogic’s June data showed a slower pace of capital gains compared with April and May which may indicate the recent surge in dwelling value appreciation will be sort lived.
The chances of interest rates moving lower in August remain high; June quarter inflation data will be available late this month, providing a timely read on consumer prices prior to the August RBA meeting.
It is likely that the inflation figures will come in well below the RBA target range of 2-3%.
If that is the case, there is a high likelihood that interest rates will move lower next month.
The challenge for policy makers and regulators will be to ensure lower mortgage rates don’t refuel a higher rate of growth in the Sydney and Melbourne housing markets where affordability is already stretched and rental yields are pushing to new record lows each month.
Eliza Owen (Residex) comments:
The Reserve Bank of Australia has announced it will hold the official cash rate at 1.75% in July, following a recent 25 basis point reduction in May.
The decision comes as expected, as the Reserve Bank navigates layers of political uncertainty and awaits inflation results for the second quarter of 2016.
While rates have been kept on hold for two consecutive months now, many are expecting a further 25 basis point rate cut this year.
With the shock Brexit referendum result and a potentially hung parliament in Australia, the rate cut could come as soon as August.
Inflation is currently at a record low of 1.3% in the year to March 2016.
As discussed last month, this is likely the result of under-employment (8.71%) and historically low wage growth (2.1%).
As inflation falls, the RBA is increasingly likely to use the remaining ammunition it has in the official cash rate to stimulate economic activity.
Spending and inflation is affected by levels of business of consumer confidence, which may be shaken by recent political events.
Markets responded quickly and harshly to the results of the United Kingdom referendum on the 23 June, with the AUD down 1.2% by the following trading day.
Many markets have since rallied following the initial post-Brexit impact.
However, there are medium-term impacts on the Australian economy to consider that have increased the likelihood of future rate cuts:
Investing in Australia: Australia has less exposure to shocks from the European Union since receiving higher investment from China, however in April 2016 the EU made up 12% of the value demanded of Australian exports. In 2014, the EU contributed almost $170 billion in foreign direct investment into Australia with 51% of that foreign direct investment coming from Britain.
Threats to Free Trade Agreements: In November last year, the Australian government began negotiations on a free trade deal with EU. This process will now be hindered by the Brexit, which in itself is a manifestation of a more protectionist sentiment from the UK.
Indirect Impacts: China and the EU also have a trading relationship that will be complicated by Britain exiting the EU. If growth in China slows, demand for Australian exports from China may be affected. Alternatively, falling prospects in the EU could direct more investment into Australia.
A future rate cut by the RBA may not have a significant impact on the Australian property market, which is slowly entering a downswing.
The latest statistics show that the property market was steady over the May quarter, with 1.34% and 0.95% growth in Australia wide houses and units respectively.
The particularly strong performers were in regional markets such as Country NSW and Hobart, as investors and owner occupiers spill out to more affordable areas.
New lending to both investors and owner occupiers has fallen, with investor lending experiencing a sharper fall.
However, Australia’s property market is still outperforming many international stock and currency markets.
As ageing populations look to grow wealth before retirement in a climate of economic uncertainty, many people may still try to enter the Australian property market.
The impact of low interest rates on the property market has previously been somewhat ‘intercepted’ by regulatory authorities who have attempted to limit home lending to investors and increase capital held by banks.
However, irrespective of interest rates, recent events could still direct investors to property – the historically safe investment market – staving off the downswing for another few months.
Source: On the House
Bessie Hassan comment:
Today’s outcome was unsurprising, with 97% of the 31 economists and experts in the finder.com.au Reserve Bank Survey predicting this outcome.
Many experts believe that a rate drop is around the corner, however, with 67% (of the 30 experts who opted into this question) forecasting this will happen in August, while 17% believe this will occur in November this year.
This expected cash rate cut may be the final in the cycle, with 59% of experts forecasting the cash rate will fall no lower than 1.50%.
However, one in four economists (24%) predict the cash rate will fall to 1.25% this cycle before an upturn.
finder.com.au Money Expert, Bessie Hassan, says the current low-interest rate setting may entice people to borrow more than they can comfortably afford.
“In fact, the majority of experts (79%) surveyed are in agreement about household debt becoming a concern facing Australians over the coming months.
Australia’s average household debt is four times what it was 27 years ago, currently standing at $245,000 per household.
“Low-interest rates have exacerbated Australians’ debt appetite, and we’re in real danger of seeing this rise further and so households must plan for future financial shocks.
“Australia has enjoyed a low unemployment rate since the early 2000s, but if unemployment rose, if interest rates headed north, or if there was poor consumer confidence, Australian households could face financial hardship as this could have a flow-on effect through the economy.
“It’s unsurprising that borrowers are being tempted to take on more debt.
This is why it’s crucial to understand the difference between good debt and bad debt. While good debt can build wealth, bad debt can drain it”, she says.
Borrowing money to buy property has long-term benefits through capital gain if the property increases in value over time or equity by paying down your mortgage, Ms Hassan explains.
“The key is managing your debt; devise a clear long-term plan to pay down your debt.
This should involve factoring in a buffer of 2-3% on top of your current interest rate so you’re able to service future rate hikes.
“If you’re unsure about the amount you can borrow, then consult a professional such as a mortgage or finance broker”, she says.
A mortgage broker can help you understand your propensity to repay a home loan after assessing your financial position including your income, assets, debts, and liabilities including the number of dependents that you have.
Speaking to a professional can also help you eliminate emotion from your purchasing decision and prevent you from over-borrowing or getting into a debt spiral.
“A good way to take control of your debt is to pay off high-interest debt first.
If you have several accounts that you’re paying off, give priority to high-interest debt as this can help you minimise your interest payable”, she says.
Also published on Medium.