Which way for interest rates even the economists are confused.

Up or down? When and why?  Panic or don’t believe the hype? When it comes to interest rates and just what the Reserve Bank have in store for us as home owners and property investors, the conflicting opinions of experts has most of us reeling in confusion.

While Westpac bank recently came out with its predictions of interest rates falling over the next year other bank economists are suggest we could be in for more increases in the future.

Last week, Westpac shocked financial markets by forecasting that interest rates will be cut by December. But many other banks still expect the RBA to nudge rates higher over the next year, although the conviction behind those forecasts appears to have waned.

And cracks continue to appear in the veneer of the Australian economy, with the Westpac-Melbourne Institute Leading Index, which is a leading indicator of economic growth, falling to its weakest level since September 2009, providing further evidence emerged of a slump in consumer demand.

This indicator, which attempts to forecast economic growth over the medium term, has been pointing to a below-par performance of our Australian economy since February.

Coming on top of warnings by the Reserve Bank of Australia this week that the central bank’s economic growth forecasts will have to be revised lower, the soft data have cemented views that interest rates are on hold for now.

Earlier this week the Daily Telegraph surveyed a number of banks for their interest rate forecasts.

The Commonwealth Bank tipped the Reserve Bank will leave rates on hold for most of the rest of the year with the current standard variable rate on mortgages to remain around 7.8 per cent.

Its economists believe rates are more likely to rise next year, a prediction at odds with Westpac, which forecast a 1 per cent fall by the end of 2012.

“If rates are going to move anywhere, it is still more likely to be up rather than down. It is going to be more a period of stability rather than anything else,” CommSec’s Craig James said yesterday.

Mr James said Westpac had taken a gloomier view of the state of retail and consumer confidence and debt crises in Europe and the US.

Futures markets also showed an 80 per cent chance of a rate cut in 2012 late last week as confidence faltered.

Only a “full blown crisis” in Europe, where debt riddled Greece and Italy have teetered, would spark a rate fall, Mr James said, before adding it was unlikely those economies would fail.

He said the retail sector had faltered, but he reignited the debate about applying the GST to goods bought online from overseas, saying local shops needed to be given a “level playing field”.

ANZ’s Ivan Colhoun told the Telegraph that interest rates were still more likely to rise but had become “more of an each way bet” with some sectors of the economy performing poorly.

He said the ANZ job advertisement series had fallen for the past two months which has signalled rate cuts in the past when the downward trend had been prolonged.

HSBC believes rates will rise by 25 basis points in the last three months of the year and by half a per cent next year.

“We expect the Reserve Bank will need to lift interest rates. It might take a little longer than we previously thought, but we still expect the move to be up,” HSBC economist Paul Bloxham said.

ING Direct chief financial officer Glenn Baker said their predictions of a 25 basis point rise in August and again in November had changed.

But Mr Baker said a rate cut was unlikely. “We expect the Reserve Bank to stay on the sidelines until next year,” he said. “The change comes as demand and confidence in the economy falters.

“However, while the weakening non-mining economy is certainly enough for the Reserve Bank to pause the rate tightening cycle, unemployment is still below 5 per cent and the mining investment boom continues unabated.

“As a result, we are not expecting the Reserve Bank to cut rates in the foreseeable future.”

Source: Daily Telegraph


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