How long can the RBA keep interest rates low?
The Reserve Bank of Australia cut rates twice in 2016, to take the cash rate down to 1.5 per cent, from 2.0 per cent in 2015. The RBA board has now made a statement of direction for official interest rates going into 2017. The RBA board met on Melbourne Cup Day, the 2nd November and decided to keep the official cash rate unchanged at 1.5 per cent. The RBA cash rate has been low and getting lower since 2011.
The Reserve Bank seems to be indicating that it is more likely to consider further rate cuts, rather than raising interest rates in early 2017. Low interest rates are supporting the economy said the new RBA Governor Philip Lowe. He warned of complications if rates were to go up.
What is the outlook for rates in 2017?
The RBA Governor Philip Lowe said a higher Australian dollar could complicate Australia’s economic post mining-boom adjustment. Higher interest rates could result in a higher Australian dollar. All indications to date are that the new governor of the RBA is, like the old governor Glenn Stevens, determined to encourage economic activity with cheap money. That would mean he wants to keep interest rate low, or going even lower, in early 2017.
However, low rates mean a generally weak economy and there is some good economic news for Philip Lowe that might make him consider raising interest rates in 2017. The RBA’s commodity price index is showing signs of rebounding from a five year slide. Inflation is under control at 1.5 per cent and wages are flat. It is possible that the RBA could end up moving rates higher if conditions improve. On balance, many economists expect Philip Lowe to resist changing the official cash rate from 1.5 per cent in the near future.
The RBA’s surprise Cup Day message to borrowers
The new governor of the Reserve Bank, Philip Lowe, said the economy needs low rates but he also indicated that there is plenty of opportunity right now for borrowers to find a good loan. Banks, credit unions and other lenders are not restricting credit because of fears about the economy.
“Financial institutions are in a position to lend for worthwhile purposes,” said Mr Lowe, which, in the careful language of central bankers, is a clear statement to the market. Lenders are lending at the moment.
Organise your own rate cut today
The average standard variable mortgage rate in Australia right now (November 2016) is 4.61 per cent. The lowest rate in the market right now is 1.22 per cent below that. A one per cent rate cut on an average home loan translates to tens of thousands of dollars of savings over the life of a home loan. If you are refinancing an existing home loan, use the Infochoice Refinance Calculator to estimate how much you can save by switching loans.