What’s the new “normal” for interest rates?

While the Reserve Bank is likely to sit tight on the cash rate next Tuesday and competition between lenders heats up, one of Australia’s biggest comparison websites finder.com.au is urging borrowers to plan ahead for interest rates to hit a “new normal” level, with the cash rate expected to increase by 1.5% from next year.

Their monthly survey of 20 leading experts unanimously expect the cash rate to remain on hold at 2.50 percent at The Reserve Bank’s board meeting on Tuesday (August 5, 2014).

Forecast has changed, with majority of experts now betting on rates to rise next year.

Money ExpertThe forecast is clearer than three months ago, with the majority of respondents in the survey now expecting the cash rate to increase in 2015.

Michelle Hutchison, Money Expert at finder.com.au said borrowers can expect a “new normal” level with interest rates likely to increase by 1.50 percentage points from next year.

“While lenders are competing harder to lock in borrowers with a fixed home loan, the survey shows that we can expect to see interest rates rise to a new normal level of 150 basis points higher from next year.

“Most of our experts believe the cash rate won’t reach the historical average of about 5 percent, but rather reach around 4 percent, which is 150 basis points above the current cash rate of 2.50 percent. And with 17 out of the 20 respondents betting on rates to start their way up from next year, borrowers need to ensure they can afford the extra cost.”

“Interest rate hikes are on the horizon and look set to start rising very soon, so borrowers need to start preparing now before it’s too late. For instance, variable rate borrowers with a $300,000 mortgage will need to factor in an extra $300 per month to keep up with repayments should their interest rate increase by 150 basis points.

“Fixed home loan rates are among the lowest levels we’ve ever seen so if you are concerned about rising rates and higher repayments, it could be worthwhile locking in before these potential savings are gone.

“We calculated that borrowers with a $300,000 mortgage who switch from the average variable rate of about 5.50 percent to the lowest five-year fixed rate of 4.95 percent, could save almost $16,000 in five years if variable rates rise by 150 basis points.

Insights from the latest finder.com.au monthly Reserve Bank Survey:

Insights from the latest finder.com.au monthly Reserve Bank Survey

What the experts had to say:

  • Garry Shilson-Josling, AAP: “It’s a virtual certainty that the RBA will leave the cash rate at 2.5 per cent… the economy’s not weak enough to justify a cut, nor strong enough to bring a rate rise into play… It will most likely stay where it is until well into next year…”
  • Shane Oliver, AMP: “…Recent comments from the RBA governor Glenn Stevens is clearly signalling that rates will stay on hold… The next change will probably be a rate hike around June quarter next year.”
  • Warren Hogan, ANZ: “RBA to leave cash rate on hold at 2.5%. The economy playing out as expected… the higher AUD is acting as modest constraint on the economy… Next rate change will be a hike in May 2015…”
  • Steven Pambris, Bank of Sydney: “…The economy has yet to find its way, unemployment is on the increase and inflationary pressures are palatable for the moment… Level interest rates at least over the term of this Government will remain at lower levels even if some increases are seen late in 2015…”
  • David Bassanese, BetaShares: “On hold. The Economic Outlook is mixed, with soft growth yet stubborn price pressures despite weak wage growth. Base case is a rate hike in May 2015… But based on current interest rate margins, the cash rate should average no more than 4.5 percent over the long-term. This is the ‘new neutral’ rate.”
  • Richard Robinson, BIS Shrapnel: “RBA will leave cash rate unchanged. Domestic economy is soft employment growth will remain weak for 6-12 months at least… This means unemployment rate will rise, and the RBA has a track record of not raising rates when the unemployment rate is rising… Unlikely to need to lift rates back to 5% for next 5 years.”
  • Michael Blythe, CBA: “…The Reserve Bank continues to indicate it wants a period of stability in interest rate sittings… Seeing how the economy evolves and then deciding what to do when we’ve got some more indicators under our belts, so to speak. We have the next change in November but that will depend on the coming months…”
  • Savanth Sebastian, Commsec: “On hold. Economy still in transition phase from Mining to other sectors. Housing leading the recovery but Federal budget and higher Australian dollar hindering rebalancing efforts… The Reserve Bank will not lift the cash rate as high as it has been in the past.”
  • James Bond, Financial Services Council: “No change. With the mining investment boom coming off and the transition to other drivers of growth uncertain, rates should be on hold into 2015… The next rate change will be in the second half of 2015, but the RBA will take its time getting back to the post 1990s average.”
  • Don Magin, Greater Building Society: “The RBA won’t change the cash rate on Tuesday. There was some indication of pricing for a rate cut in the marketplace recently but two factors eliminated that possibility last week… That has taken pressure off the RBA to make any change because the marketplace is already doing it. Our prediction that the RBA will not change rates for at least 12 months stands…”
  • Paul Bloxham, HSBC: “We think rates will be on hold at this stage. Monetary policy is still expecting the thing that they expect it to do. Monetary policy is still working… We think the new reasonable cash rate will be from 4% to 4.5%.”
  • Michael Witts, ING Direct: “The RBA is expected to leave the cash rate unchanged… nothing has really changed over the past month. If and when the RBA moves the cash rate, most likely early 2015 and an increase of 25 bps, it will be a gradual process with several small adjustments over an extended period…”
  • John Caelli, Mebank: “We don’t expect rates to change in August. The RBA has clearly indicated it’s comfortable keeping rates on hold, and we think that is likely to be at least for the next six months… We expect the RBA’s next move will be to raise rates in the first quarter of 2015.”
  • Glenn Levine, Moody’s Analytics: “The RBA will leave the cash rate unchanged at 2.5%. The recent deterioration in mortgage quality linked to the housing boom will also have the RBA worried… The new neutral interest rate is 4% to 4.5%. Assuming some overshoot, the RBA will likely pause at around 4.5% during the next tightening cycle.”
  • Alan Oster, NAB: “The Reserve Bank will do nothing at this meeting. They’re basically sitting and waiting to see what happens… They’re starting to get a bit worried that their rates haven’t got enough traction to offset what’s been happening in mining investment. The next move will be in first quarter of 2015 and will be upward.”
  • Jonathan Chancellor, Property Observer: “The August meeting will see no change, so a year since the last cut to 2.5%. The RBA simply likes to let the economy look after itself as much as possible… We probably won’t see any shift until 2015 when it will most likely be upwards.”
  • Janu Chan, St. George Bank: “We’re expecting rates will remain on hold. They’ve continued to signal a period of stability in interest rates… There’s a lot of commentary on what is the neutral cash rate… it is probably the case that the neutral cash rate is lower than we’re used to seeing in the past – and I think the fact that we’ve had a slow interest rate for such a long time is a reflection of that…”
  • Nicki Hutley, Urbis: “Leave the cash rate unchanged at 2.5%, marking one year at this low rate… consumers still remain a little wary of the impact of the Federal Budget…The next rate change will be an increase around Christmas time this year. The first rise, if properly timed, will most likely be 25 basis points… a real official rate of around 2.5% will be targeted, implying a nominal rate of 5%.”
  • Bill Evans, Westpac: “…Despite market pricing now pointing to a rate cut over the next six months there’s no evidence in the minutes to indicate that the Board is seriously considering this option. The best way to assess the current policy stance is that the Bank is quite comfortable to await further developments before committing to any policy option..”

Please note: The above respondents are ordered alphabetically by name of institution or group. These quotes are derived from a full comments.

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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


'What’s the new “normal” for interest rates?' have 3 comments

  1. Avatar for Property Update

    July 31, 2014 Hector

    Is that where James Bond retired to? Financial Services Council? I have my faith in 007!

    Reply

  2. Avatar for Property Update

    July 31, 2014 Simon Roberts

    I can’t see how these bank representatives can say that interest rates are about to go up when their own institutions are lowering fixed rates, effectively telling us that they think that rates will go down on average over the next five years. To say that the RBA will react to local conditions ignores the fact that the US still can’t even afford the interest bill on its interest payments, let alone make any dent in its international debt and that the Euro is a failed experiment which disadvantages many member countries and only benefits a few. If we raise interest rates, our dollar will skyrocket against these currencies, particularly the greenback. That will have a large negative impact on our already struggling export market. The only reason to raise interest rates at present is to put a lid on the ridiculous climb in Sydney house prices. But if the RBA waits a little longer, which it likely will, it will see that other forces such as affordability, unemployment and world issues will cause these to settle. I wouldn’t be surprised if these experts get it wrong and that the next move in interest rates is down or at least that any increase is limited to 50 basis points before heading down again. It’s not often that the banks lose on fixed rates!

    Reply


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