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Interest rates will rise again – maybe sooner than expected.

As everyone expected, the RBA did not increase interest rates yesterday, homeowners should be prepared and property investors should factor in rising rates in their property investment plans.

In their Statement the RBA indicated comfort with current interest rate levels.  But they reminded us quite
clearly that the next cash rate move will likely be up, even if it may be some time before this happens.

They said  “Through to mid 2011, underlying inflation is likely to be in the top half of the target zone”, and after that of course they will be higher.

Over the last week a number of economists have come out with forecasts of a strong economy, rising inflation and suggestions that  rates will rise significantly…

Bill Evens of Westpac expects three rate rises in the next year: “At present we are expecting rates to rise by 75 basis points during 2011”

NAB Economist Peter Jolly thinks we may get 4 rate hikes: “Our year ended GDP forecast has lifted to 3¼% from a little under 3% As a consequence, we debated whether the 100bps of tightening in our forecast starting February 2011 was enough. We think it is, but it did remind us that a 2010 hike remains possible should either a) Q3 inflation in late October be shockingly high or b) the economy grows above trend in the 2nd half and the unemployment rate (now 5.3%) plunges through 5% – quite possible.”

And JP Morgan expects inflationary pressure to grow and this will of course push up interest rates:

“ Another report of surging jobs growth, with August ANZ job ads survey showing 2.6% on-month growth, could make RBA thinking a little more difficult in months ahead, says Helen Kevans, economist with JPMorgan.

“Inflation is a big risk and it’s going to cause a headache for the RBA. On one side we have a deteriorating global outlook and on the other side, we have local outlook where inflation pressures are quite widespread,” says Kevans; tips strong corporate earnings, terms of trade, and even wages growth as all pushing inflation higher.

If our economy keeps performing as well as many expect these predictions of higher interest rates will eventuate. The take home lesson for property investors is to budget for higher rates. Factor in a bigger buffer in your financial and property investment plans to allow for rising rates. Of course the good news is that if the economy booms and inflation increases, so will the value of your property.

So there are still a few good years ahead for property investors until retail interest rates increase to about 9% and stifle this property cycle.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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