What’s the outlook for interest rates?

Investors and homeowners were spared another interest rate rise when the Reserve Bank board met last week, but a swag of mixed messages is causing confusion about which way interest rates are heading.

On the one hand we have our volatile financial markets caused by problems in European and American economies.

Economic commentator at The Australian, Terry McCrann told Peter Switzer on Sky News Business Channel program that he’s not confident “at all” the global recovery can avoid a double dip recession. “I seriously worry that we’re going to see a double dip in the US in the second half of this year,” said McCrann adding that China is a concern also.

On the other hand other new data suggests future rate increases remain on the cards. This week’s data showing three per cent-plus annual inflation, solid demand for workers in an already strong labour market, and a record number of monthly car sales will give Reserve Bank of Australia something to think about as the strength in Australia’s economy could lead to inflation.

Are interest rates already too high?
McCrann thinks the Reserve Bank has not increased interest rates too many times. In his interview he said that they’ve been spot on and are the only major central bank in the world that can move rates up or down at the moment.

So which way are rates heading? 
They could go either way, as there are so many factors influencing our economy. A major factor influencing the RBA’s decision whether to raise rates again will be the quarterly inflation data, which is due at the end of July.

Nine of the sixteen economists surveyed by AAP predict that the RBA will lift the cash rate by 0.25% (to 4.75%) in August, after inflation data for the June quarter is released on July 28.

Westpac is forecasting 0.25% increases in both August and November, and NAB senior economist David de Garis predicts that the central bank will lift the cash rate twice in the December quarter, to 5%.

Remember that even if the RBA doesn’t increase official interest rates, the banks could increase their rates as their cost of funds increase due to overseas lending tightening up.

When doing their budgets investors should factor in another rate rise later in the year and then if this doesn’t eventuate, they will have a bonus surplus in their cash flows.


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