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RBA ready to put up interest rates in October

The Reserve Bank is more likely than not to raise interest rates in2 weeks time at its October meeting.

Speaking in regional Victoria yesterday, RBA Governor Glenn Stevens explained that higher interest rates will probably be needed to cool the effects of Australia’s biggest mining and energy boom since the 19th century.

Governor Stevens told financial markets that the RBA may have to raise interest rates in the near future as inflation starts rising again. This is because Australia’s economy is on track to grow at above average rates in 2011 and the mining boom could overwhelm Australia’s strengthening economy.

However interest rate rises are not a certainty. He said, there were risks to this outlook – a double-dip recession in the United States, a bigger than expected slowdown in China, or the resumption of financial market turmoil that damages confidence.

Leading economic commentator Terry McCrann reported today:
“The Reserve Bank is now more likely than not to raise its official interest rate in two weeks.

But if it doesn’t, that does not make a rate rise on Melbourne Cup Day a – what else would you expect me to write? – racing certainty. But a rate rise in a fortnight could just as equally be followed by another rate rise on Cup Day. That’s to say, three scenarios are possible over the next few weeks. Two rate rises, one – at either of the next two meetings – or none at all. The reason is the tantalising conundrum facing RBA governor Glenn Stevens – that he really has to start raising rates to head off rising inflation before he really knows if there is going to be rising inflation.”

What is the impact of this outlook for our property markets and for your property investments?

A robust economy, rising wages and rising inflation are all positive for our property markets. On the other hand, rising interest rates are not.

As interest rates rise, some sectors of our property markets will suffer more. In fact some sectors of our economy will suffer more –interest rate rises are a blunt instrument, yet it’s all the RBA has to slow down inflation.

What this means is that over the coming year as the RBA puts speed bumps in the road to slow our economy, it will exacerbate our 2 speed property markets. The lower end of the market that is more interest rate sensitive will suffer more.  New home owners and people on fixed incomes will be hurt by rising interest rates.

At the same time, those living in our more affluent suburbs and who’s income will improve as our economy improves, will not be as concerned by rising interest rates. If you think about it, their incomes are not dependent on rises in the CPI and the booming stock market and the successes of their businesses in a rising economy will give them more disposable income.

Putting all this together property values in our more affluent suburbs are likely to rise and prices in the lower valued suburbs are likely to languish if interest rates keep rising.



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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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