Where to for Australian Interest Rates in 2010?
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Interest Rates have risen dramatically in recent months on the back of the RBA increasing rates by 0.75% upon stronger economic conditions in Australia.
What does 2010 have in store for the home owner and the average investor dependant on interest rates? Well one thing would appear certain, we are headed for higher interest rates again in 2010 as the economy looks set to continue the miracle of the last 20 years.
With the RBA rate set at 3.75% and the focus on moving towards a non-inflationary rate (around 5.00% at least as conditions improve) then we can expect to test 4.25-4.50% in the first six months of the year. A big early year trigger will be holiday consumption and Christmas sales figures that will influence any decision by the RBA in February.
Meanwhile, the banks appear hungry to increase rates in excess of the RBA rate as evidenced in the November rate increase. With banks keen to maintain or even increase margins to offset increased funding costs this will be another clear trend in 2010.
Expect interest rates to tick higher early in the year and as the world economy rebounds, the UK and US will be pivotal, the RBA will have little option to increase rates. All this means that 2010 will be tough year for homeowners and will give pensioners and those dependant on fixed interest rates some solace after the last few years of low savings account interest rates.
It is hard to see home prices showing any real growth in 2010, at the top end expect decent rises as the wealthy once again impose themselves on the top end of the property market after a restrained period in recent years.
What do you think 2010 has in store for interest rates and the Australian economy, share your thoughts?
RBA keep rates steady
The Reserve Bank of Australia (RBA) kept rates steady at a near 50 year low of 3.00% yesterday amid increasing levels of positivity about the state of the Australian economy.
Glenn Stevens the Reserve Bank Governer indicated the RBA still had room to reduce interest rates should the need arise due to the marginal impact of inflation in the current forecasts. While Glenn Stevens indicated the RBA still had scope to cut rates the general tone was positive and the state of the Australian and global economies would have to further deteoriate for the RBA to consider a cut.
It is highly likely we have either seen the bottom or are with 0.25% of the bottom of the cycle. Some forecasters are already looking at an increase in early 2010 as the uptick takes hold.
ECB & Bank of England cut rates
The ECB and Bank of England both cut rates this week in response to the deterioration of demand and consumer confidence in the European economy.
The 16 country ECB cut rates by 0.50% to 1.50% while the Bank of England took the unprecedented step of of slashing rates in half to a record low of 0.50%.
The future of the European and UK economies are on a knife edge as consumers are failing to spend instead hoarding available cash with expectations the markets will further deteriorate. This logic however is the worst option as consumers will need to lead the economy out of this malaise.
With the banking system in tatters and nationalism of UK banks on the government agenda, the Euro zone as a long way to go till they can pick themselves up from this crisis.
RBA decision to keep rates stable raises questions
The RBA this week announced that interest rates to stay on hold this was met in some circles with applause and others questioning the logic of RBA governor Glenn Stevens.
Despite the economic performance of Australia faltering it is still comparing very well against fellow OECD countries and has arguably stood up as one of the best in the current downturn.
It is this performance while still a contraction in economic growth that helped determine the RBA board decision to keep rates the same at 3.25%, a 45 year low. Interest rates have been forecast to fall to around 2% this financial year but we are unlikely to see any big cuts like 0.75% and 1.00% as the RBA expects the stimulus to support the market in due course.
Do you think the RBA made the correct decision in not cutting rates in March? Share your thoughts by adding a comment.
What will the RBA do in March?
Well March is just around the corner and the next RBA meeting will decide on monetary policy for another month. Since September 2008 the RBA have cut rates by 400 basis points, what does March have in order for home owners, investors and the economy?
Glenn Stevens perhaps has one of the hardest jobs in Australia. Stevens has to decide if enough liquidity has been pumped into the local economy with recent interest rate cuts or if more is required to stimulate domestic demand.
The result by Harvey Norman and the halving of profit is an omen for the consumer hed Australian economy and an indication that things are likely to get much worse before they get better.
Consumer demand despite government stimulation before Christmas has failed to bounce post Christmas as households tighten belts with increasing job losses and negative sentiment affecting the economy.
The RBA boss has already indicated that he would like to sit back and assess the economy in light of all the recent economic stimulants announced by the government and any future rate cuts are unlikely to be as big as recent cuts.
I suspect we will see a cut of 50 basis points in March that will take us to a cash rate of 2.75%. Future cuts will likely continue to occur and could take us down to 2.00% in the coming months but Stevens will be monitoring the economy for worsening economic news before he pulls the trigger for big future cuts.
RBA signal slowdown in major rate cuts
The RBA have given a clear indication that future cuts will be much more moderated and the chance of major cuts may be over with the release of their quarterly statement on monetary policy.
The rate cut this week took the RBA rate to a 45 year low. With the fiscal stimulus of recent rate cuts and the Government’s stimulus package the economy the RBA is likely to sit back and monitor the impact on the domestic economy before further cuts.
The RBA expects growth of 0.25% in 2008-09, while forecasting 1.25% in 2009-10. Perhaps even this estimate could be excessive in the global malaise continues.
Bank of England & ECB slash rates
The Bank of England and the European Central Bank (ECB) have slashed rates to respond to faltering global demand as the world economy balances of the edge of the abyss.
The Bank of England cut rates to 1.5% down from 0.50%, the lowest rate in 314 years in an attempt to stop the economy from contracting. The English economy is in a dire position as the economy is set for it’s worst year since 1946 as the economy continues to contract at a record pace.
Meanwhile the ECB cut rates to 2% down from 2.50% as the economy continues to struggle and indicated more cuts could be on the way in an attempt to stimulate economic demand.
Is Deflation set to rise?
Inflation seems dead in the leading world economies with the US announcing that inflation grew at it’s slowest price since 1954. The falling inflation rate leads to fears that deflation, one of the most feared concerns for financial watchers is set to re-appear.
Japan have been struck with deflation on and off for the best part of 20 years and the Japanese market has not reached anywhere near it’s highs of the late 1980s. With consumer prices falling heavily along with the price of oil driving the price of goods and services lower the leading world economies could soon be looking over their shoulder at the rise of deflation.
Deflation is an economy destroyer and not only destroys confidence but can lead an economy into a very deep recession or even a depression with the price of goods tomoorow being cheaper than today. This flows through into job cuts and lack of wage increases. It slowly tears out the heart of the economy.
If your looking at the impact of deflation in the economy then closely look at the impact it has had on Japan in the last 20 years. On the surface Japan may not look to be that bad but the damage deflation has done to the psyche of the economy is stark.
Let’s hope we are not seeing the signs of deflation emerging in the global economy.
ECB & UK Central Banks cut rates again
European Central Banks slashed rates overnight as the European Central Bank (ECB) cut rates by 0.75% to 2.5% while the UK Central Bank lowered rates by 1% to 2%.
The cut by the ECB was the biggest in the near 10 year history of the ECB, the cuts have now amounted to 1.75% in the last two months.
The UK Central Bank’s rate of 2% is the lowest since they were foundered in 1694 and reflects the pain being experienced in the UK.
Both the ECB and UK Central Bank have indicated further cuts are likely in coming months.
Inflation plummets
Inflation fell by it’s biggest amount in six years further locking in hopes for a 100 basis point cut by the Reserve Bank this week.
Economic data also confirmed manufacturing fell each of the last six months to a record low as the declining economic growth further confirms a sharpening contraction.
Some economists are now predicting levels around 2.50% to 2.75% by the middle of 2009 as Australia verges on recession.