Fixed rates turn quickly

Don't say you weren't warned. In the space of a few days the direction of fixed interest rates has turned. After a continued slide this year which has seen fixed home loan rates approaching record lows, the onset of war in Iraq has seen an immediate turnaround.

Improving international market sentiment that has this week seen share markets rebound and the oil price fall. In keeping with this, bond yields have risen with a quick flow-on to fixed rates, a scenario InfoChoice foreshadowed earlier this month.

While smaller lenders are the first to move with some sizeable jumps, bigger lenders can be expected to raise their one to five-year fixed rates over the next week or two. As an indication, Fox Home Loans has raised its five-year rate almost half a percentage point from 6.15 to 6.63 per cent – from below the standard variable rate to above it.

The turnaround is based on the presumption that, now its underway, the war in Iraq will result in a swift victory for the US and Coalition forces. Of course, sentiment could turn negative again if it proves not so easy to oust Saddam Hussein.

But the long-standing uncertainty over Iraq weighed so heavily on financial markets for so long that it would now need significant hold-ups in the military campaign to see markets slump back to where they were in the short term. This means we may well have seen the bottom of the cycle for fixed rates and the best rates for sometime may quickly disappear.

The outlook for variable rates remains clouded and there appears little chance of a movement up or down in the next few months. Although a quickly prosecuted war will inject the world economy with renewed confidence and work to put a floor under official rates, there is still an underlying weakness in the global economy which pre-dates the Iraq crisis and has placed a drag on the Australian economy. If this proves difficult to overcome post-Iraq, there is a chance of more significant slowdown locally and falls in variable interest rates may result.

But so far, our economy remains fairly robust as the latest employment and housing finance figures show. Borrowing for property investment was down sharply in January but down only slightly for owner-occupiers, with figures still up on the high levels of a year ago. A rebound in the world economy may see a need to raise rates later this year but with the war just begun, there is a lot that can happen between now and then.