Why the RBA might increase interest rates much sooner than the ‘experts’ think!

In an October 2018 survey of over 30 economists, 87% believed the next rate move by the RBA will be an increase. No surprises there really, after all we have had an extended period of historically low interest rates. Interestingly though, the vast majority of the same economists believed that such an increase was a long way off - most likely sometime in the first half of 2020.

On the surface, there are a number of factors that can be used to justify such a prediction - falling property prices, low wages growth and tightening of credit to name a few.

However, these things cannot be viewed in isolation of the whole and much larger economy.

In its most recent November announcement, the RBA upgraded is economic and inflation outlook - both predicted to increase of the coming year. As stated in their press release of 6th November “The Australian economy is performing well. Over the past year, GDP increased by 3.4 per cent and the unemployment rate declined to 5 per cent, the lowest in six years. The forecasts for economic growth in 2018 and 2019 have been revised up….”

The Australian economy has navigated through the decline in the mining boom relatively smoothly. The RBA cited business conditions were positive and stated that “higher levels of public infrastructure investment are also supporting the economy”.

The bottom line is, the key economic indicators show the Australian economy is humming along pretty nicely and there is not much either nationally or internationally (aside from growth in China slowing a little) to suggest this will not continue. Indeed, the RBA predicts not only for the economy to continue to grow but the rate of economic growth to increase. Also predicted to increase is the rate of inflation.

And therein lies the rub. If the economy starts getting too hot too soon and/or inflation starts to run away, then the RBA may act sooner than the experts think. My moneys on the third quarter of 2019. But I’m no expert!

With some good two and three year fixed rates available in the market at present, it may be the time on the not too distant future to consider a partial rate fix for your clients.

Written by Grant Bailey (General Manager, Deposit Power)