Interest Rates Rise to Pause
Following the historic home loan interest rate lows of 2008/9 the Reserve Bank of Australia (RBA) said it would bring interest rates back to more normal levels as the economy improved. The question now no doubt must be considered; what is a normal level these days?
Before deciding to drop interest rates and before the threat of the Global Financial Crisis (GFC) becoming real, the official rate in Australia was 7.25 percent, placing the average home loan interest rate close to 10 percent. It is to be hoped that is not the level considered as being normal, although it was the cost of official money presided over by the previous Liberal government when treasury was dominated by Peter Costello. A better indication as to what the RBA considers a normal level for interest rates to pause at, comes from a statement made by the RBA governor Glenn Stevens at a business forum in Toowoomba, Queensland. He said then that the bank considered normal levels to be the average rate experienced over the last 10 or 12 years. This being so, the normal official rate must be pretty close to the mark right now.
Glenn Stevens defended the RBA’s decision to increase interest rates five times in the previous seven months, pointing out that at the time of the GFC recovery, interest rates had only been increased at a third of the speed rates were cut when the RBA presided over rate decreases. The last RBA increase in rates was in November 2010 and any further increase in 2011 will largely depend on the inflation rate, especially that of the first quarter.
By the end of 2009 the RBA was predicting the inflation rate would drop to 2.5 percent by June 2010, well within the bank’s safety zone of 3.0 percent. This has largely occurred although the inflation rate is bordering on 3.0 percent, the reason for the last rate rise in November.
The situation in 2011 is still not clear
As we enter 2011 many probabilities have entered into the RBA’s thinking that was not possible to predict at the close of 2010. One of the major considerations will be the effect on the economy of the floods in Queensland, NSW and Victoria, over the holiday break. Most experts seem to believe that such a disaster will result in a price blow out in the price of fruit and vegetables, not to mention insurance premiums. It will also result in decreased taxation coming into the government coffers, particularly from the resource rich state of Queensland. The cost of fruit and vegetables may be delayed with imports but with loss of income so widespread in the resources sector, an imbalance likely to last for several years appears to be a certainty. Where the RBA considered the economy as being finely balanced at the end of 2010, it is not quite sure where it will see things at the start of 2011.
Most pundits had been forecasting home loan interest rates to continue rising throughout 2011, despite the RBA governor’s statement that the official rate would only be increased to normal levels based on a 10 or 12 year average. The same people had been forecasting increases every month throughout 2010, when in fact there were only six increases in the 12 months. The big unknown this year however will be the effect of the floods on the economy generally, and how the RBA perceives the recovery taking place. Will it be inflationary nationally or will it stifle growth going forward. We were having trouble handling what was termed a ‘two speed’ economy, with the resource rich states of Western Australia and Queensland threatening to enter into another ‘boom’ growth period of development, but much of this anticipation could have lessened over the last month.
There had been a lot of discussion taking place regarding demand indicators in the Australian economy being moderate, credit growth was reported as being subdued and there is still uncertainty regarding the global economic situation, particularly in Europe. Australia’s headline consumer price index was growing at an annual rate of 3.1 percent over much of last year while underlying inflation was held at about 2.7 percent on most occasions, according to Australian Bureau of Statistic (ABS) figures. Underlying inflation removes volatile price movements. Interest rate increases or decreases are a month by month proposition based on inflationary trends in the economy but so is the value of the Australian dollar, another factor that must be taken into consideration by the RBA board. The strength of the currency may well be enough to allow the present pause on increasing rates to be continued until later in the year.
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- Will the Queensland Flood Freeze Interest Rate Rises?
- St.George Home Loan rates to rise by the RBA 25 points
- If Rates Rise, Should I Move to a Fixed Rate Mortgage
- Don’t Get Caught Out With Interest Rates Increases
- The RBA Exchange Rate
- How Will The Recent Interest Rates Rise Affect You And Your Home?
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