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Rate cut prospects grow as more jobs are lost

Australia lost 12,600 full-time jobs causing a surprise rise in the jobless rate last month building the case for the Reserve Bank to cut interest rates sooner rather than later.

The unemployment rate hit a 10-month high in August of 5.3%, up from 5.1% in July, according to the Australian Bureau of Statistics

In The Age ex-RBA economist Paul Bloxham, now with chief economist with HSBC, suggests that the central bank may actually welcome a slight increase to the jobless rate to the extent it eases inflationary pressures that would other incline it to lift lending rates. Still, a sudden surge in unemployment in coming months would force the RBA to consider a cut to the current 4.75 per cent cash rate.

“The August employment numbers show that the economy has slowed into the third quarter and the unemployment rate is trending upwards,” Mr Bloxham said.

“The key question now is whether (the unemployment rate) keeps going up or not. If it only shows a modest rise, then rates will remain on hold. If the increase picks up pace, the case will build for a cut.”
On balance it is likely that interest rates will fall in the next few months to help stimulate the economy.

Interestingly, fixed rate mortgage products have already dropped below the average standard variable rate, which remains unchanged at 7.45 per cent.

Now, borrowers can secure fixed term mortgages below 7%.

Of course by opting to lock in your loan, you are essentially calling the lenders’ bluff and hoping the official cash rate doesn’t drop too much in the next two to three years, taking the average variable rate along with it.

With the economic outlook so shaky at this point in time, you might be tempted to lock in your rates, but the experts I’ve been speaking with expect rates to fall further.

Rolf Schaefer of Metropole Finance suggets only considering locking in to a fixed rate when the 5 year fixed rate drops below 6%.

And then only fixing portion of your loans.

What do I think will happen to interest rates?

I think rates are likely to fall by the end of the year and again a few times over the next year, as the RBA attempts to stimulate our economy.

But then over the next few years, rates are likely to rise again as inflation increases. It seems that we are bound to enter an inflationary period, with our resources boom fuelling the economy, the Australian dollar dropping (which imports inflation) and America trying to work its way out of it’s recession through inflation



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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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