Where to for Australian Interest Rates in 2010?
Welcome back!
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?
Should you fix rates on your mortage?
Well do you think you should fix your mortgage now? Well with interest rates near the low point in the cycle then it could be the perfect time to fix your mortgage.
Traditionally when the economic talk is still negative and the rumours in the market are for the RBA to make further cuts it is almost perfect time to lock in rates. The markets have all kicked higher with the hope of the economy recovering through 2009 but home owners should not wait till the economy improves as the RBA will but trying to slow the rapid growth that low interest rates will generate.
While interest rates are still low by historical standards it’s hard to imagine they will be at or near similar levels in two years time as the economy is likely to be back in full gear by then.
If your happy to take your chances and ride the cycles stick with the variable rate but if you want any mortgage certainty consider locking in now. Remember it has been along time since the official cash rate was anywhere near current levels.
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.
NAB surge in bad debts amid profit announcement
The NAB commenced the Australian bank reporting season with a surge in bad debts to indicate the recession is finally taking a big toll on the Australian economy.
NAB’s bad debts rose from $726 million to $1.8 billion as the worsening business and consumer conditions start to show considerable strain on the banking sector. Cash earnings fell to $2 billion (down 9.4%) with rising impairment charges and higher funding costs. The net profit was only down 0.9% to $2.66 billion.
The NAB also announced a dividend cut as previously foreshadowed, the cut of 24c per share took the dividend to 73c per share. The cut will preserve capital and the dividend will also be partially underwritten by a $500 partially underwritten dividend reinvestment plan.
NAB shares retreated 76c to $21.82, as the bank slashed its dividend by 24c to 73c to preserve capital, and backed it up with a $500 million raising through a partly underwritten dividend reinvestment plan.
The result did nothing to soothe the markets expectations of further pressures on the banking sector and accordingly NAB and the other banks were sold off amid concerns of continued hard economic times.
Banks cut rates in response to RBA decision
With the RBA cutting rates by 0.25% in April to 3.00%, a 49 year low, the bank gave a clear indication the market is nearing its low in the interest rate cutting cycle.
The RBA is likely to lower the offical cash rate by only another quarter to a half percent before it reaches the bottom of the rates cycle. From that point it will only stay low for a short period it would seem until rates start rising if previous recessions are anything to judge.
In response to the bank cuts Westpac, St George, Commonweath Bank and ANZ all cut their rates by 0.10%, NAB failed to pass on the cut. The decision by the banks gives the RBA some additional margin to cut further in a time when the economy is about to start the early phase of what is expected to be a short and sharp recession.
While all the banks have been under considerable funding pressure the majors have all come through this with a massive increase in market share as the expense of the second tier banks and the non-bank lenders. The majors now have easliy in excess of 90% market share and margins considerly higher then previosuly. Despite the rise of loan defaults the additional margins by the banks have given them a tremendous position of strength that few global banks share.
One thing is certain that the Australian banks are world leading and banks like ANZ who are looking to expand now into Asia are doing so from a position of strength that will setup growth for the next decade.
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.
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 rates now 1.5%
The Bank of England cut rates by 50 basis points to 1.5% in what is becoming the worst economic slowdown since the Great Depression of the 1930s.
The UK has been harder hit than most amid a dramatic slowdown in consumer spending, negative economic growth and falling housing prices.
NAB, Commonwealth & St George join in cutting rates
The National Australia Bank (NAB), Commonwealth Bank and St George joined Westpac and ANZ today by announcing rate cuts to their standard variable rates.
All major banks have now passed on the full 100 basis point cut to consumers.
NAB and Commonwealth have slashed their rates to 5.74% while St George have lowered their rate to 5.89%, the rate changes are effective from 13 February.
NAB and Commonwealth were at pains to point out that future interest rate cuts by the RBA may not be passed on in full to consumers as the demands and pressures on bank margins continue.