Will interest rates rise this year?
While Australian housing is on the radar when the Reserve Bank of Australia meets monthly to set rates, our central bank also looks at all other aspects of the Australian economy.
If economic growth gets too strong, they will need to start increasing rates, even if a lot of Australians have large mortgages.
Almost everyone expects that rates will need to rise at some stage later this year, however right now, conditions are not quite right to do so.
On Tuesday, the RBA had their first monetary policy meeting for the year and decided to keep interest rates on hold, with the official cash rate remaining at 1.5%.
What will need to change for the RBA to increase rates this year?
Consumers need to cheer up
Businesses are feeling pretty good in Australia and have for quite some time now, but the biggest problem Australia’s economic growth faces is consumers who are not spending. Faced with high debt levels, low wages growth and rising energy costs, it’s not really surprising.
Towards the end of last year, conditions started to turn around and this is beginning to very slowly flow through to consumer confidence. Jobs growth in 2017 was the highest it has been in a decade which will hopefully funnel through to wages growth. If consumers start to spend more, then the RBA will have more reason to raise rates.
Global growth will continue to drive Australia’s economy
China, the US and Japan are our three biggest trading partners, so when their economic growth is strong, it increases demand for our goods and services. While China’s economic outlook isn’t expected to be vastly different in 2018, the US is expected to see big changes to conditions over the next two years. The US economy is growing quickly and this is increasing demand for Australian exports. Expect to see our economy grow in 2018, which will give more reason to raise rates.
Could there be a cut?
At the end of last year, I would have said yes, however the jobs growth numbers coming in show that finally there is some good news for consumers. That is not to say that a large economic shock couldn’t occur that would vastly change the outlook. Trump continues to pose a political risk to the US and our reliance on China means that any change to that outlook could be a big problem. With residential construction winding back, this may have a bigger impact on employment than expected. Right now, everything is on track for a late 2018 rate rise, with no cut on the radar.
Mortgage rates are steadily on the rise
Even though the RBA is unlikely to increase the cash rate any time soon, mortgage rates continue to rise, driven by a lot of other factors including rising wholesale costs, regulators urging banks not to lend too much and potentially the Banking Royal Commission.