Which way are interest rates going to head next year?
While more economists are beginning to suggest the next movement may be down, recently the Organisation for Economic Cooperation and Development advised that the RBA should raise interest rates in the first half of 2015 to stop house prices rising to risky levels and prevent them “unwinding sharply”.
Now this is interesting because it comes at a time when Australia faces sluggish economic conditions, possibly until 2016, weighed down by cooling commodity prices and declining investment in the resources sector.
The OECD forecasts the Australian economy will expand at a below average rate of 2.5% in 2015, before picking up slightly to 3% in 2016 in line with consumption and exports.
However despite these forecast of below average GDP growth, the OECD recommends the Reserve Bank should begin lifting interest rates from the second quarter of 2015, saying persistent low rates are causing a “search for return” among property investors.
It also supports the Reserve Bank considering imposing borrowing restrictions on investors, after median capital city house prices jumped 9 per cent in the 12 months to September 30.
The OECD suggests:
“Short of negative surprises, withdrawal of monetary stimulus should start in the second quarter of 2015,”
“The booming housing market and mortgage lending will require continued close attention by authorities.
“There is room for both fiscal and monetary policy to provide support in the event of unexpected negative economic shocks.”
I’ve recently given 2 good reasons why I think interest rates will remain low in 2015.
Australia’s housing prices have increased by more than 11% in the year to August with prices in Sydney and Melbourne markets growing more than 16% and 12%, respectively.
A lot of the growth is being driven by investors, a trend which has been noted in the rise in investment loans written causing the OECD to say:
“This requires close oversight of asset-market developments, particularly rising housing credit, which is now being driven by investors,”
The following OECD charts show how Australia’s economic environment is changing, with falling mining investment and weakening commodity prices, coupled by rising house prices and lower household saving:
Here are the OECD’s economic outlooks for Australia over the next two years.
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