This is what’s going to happen to interest rates in 2018

One of the common questions I’m asked by the media as well as many investors is – “What’s going to happen to interest rates this year?”

And considering how our property markets are very interest rate driven and that currently many households have taken on considerable debt, the answer to this question is very important. 

And of course no one really knows what’s ahead as Australia’s economy is dependant on what happens overseas, but recently the economists at the ANZ  Bank changed their view on what they think will happen to rates.

Previously they felt that we would experience 2 rate hikes this year.

Now ANZ believes that the RBA’s recent commentary most likely rules out a rate hike in 2018.

Here’s what ANZ said:

• This is a shift from our previous expectation of two rate hikes.
• In a speech on the evening of 8 February, the RBA Governor set out the requirements for a rate hike more explicitly than previously.
  Specifically, the Governor highlighted the need “to make further progress in reducing unemployment and having inflation return to the midpoint of the target range.
  If we do make that progress, at some point it will be appropriate for interest rates in Australia to also start moving up.” 
  
  Critically, “a lift in wage growth is likely to be necessary for inflation to average around the midpoint of the 2-3 per cent medium-term inflation target.”
• We think it important that Governor Lowe specifically referenced the “midpoint” of the target range.
• Of further importance, the RBA is much more comfortable with the risks around financial stability, with the Governor saying that “on balance then, from a macro stability perspective, the situation looks less risky than it was a while ago.” This is in part a consequence of the measures taken by the regulators to “improve the quality of lending in Australia”, as well as slower house price growth.
• For now we will leave the precise timing of the RBA’s first move open – at least until we get the Q4 WPI in a couple weeks – other than to rule out any move in 2018 and pencil in a couple of rate hikes for 2019.
• We will also closely monitor developments in the housing market. Our expectation of further slowing in house price growth was based, in part, on two rate hikes this year. The impact of macro-prudential controls also tends to wane over time; so with policy now firmly on hold, house price growth is likely to slow less than we had expected. A re-acceleration of house price growth would likely put macro stability back in focus for the RBA.

Source: ANZ Bank