The Reserve Bank of Australia (RBA) has kept Interest Rates on hold at 1.5% for the 19th consecutive month at its monthly board meeting on Tuesday – but this is not a time to be complacent even though rates are likely to stay low for the time being.
Australia’s central bank has signalled on several occasions that the next cash rate move is likely to be up. Whilst we agree, we believe the “lower for longer” interest rate environment will continue until around the end of the 2018 calendar year.
There are competing core factors in the current market place that make it unlikely that the official RBA rate will change before then.
On one hand, high business confidence, strong jobs growth and the RBA’s own growth and inflation forecasts argue against a rate cut.
However, on the other hand, downwards pressure on consumer spending, weak wages growth, low inflation, the slowing Sydney & Melbourne property markets and the stubbornly high Australian dollar argue against a rate hike.
The eastern coast residential property market (particularly Sydney & Melbourne) is also showing signs of a soft landing. A controlled slowdown in the housing sector will be a welcome outcome for the RBA. In addition, the current rate of unemployment, although lower than a year ago, only crept higher from 5.4 per cent to 5.5 per cent in February 2018.
Even though these counterbalancing factors have created remarkably steady interest rates for 19 consecutive months, this is not a time to be complacent about the future impact of rising interest rates.
We are advising clients to start preparing for interest rate increases from the end of the 2018 calendar year. This is particularly important for clients with high levels of debt against residential property who are making fixed ‘Interest Only’ repayments right now.
This is because the Australian Prudential Regulation Authority (APRA) – who oversee the banks – restricted the ability of the banks to provide new ‘Interest Only’ loans to investors and homeowners more than a year ago. These macro-prudential policies were put in place as an alternative to rates being increased and to curb the rate of lending in the property sector. Prior to this, an increased number of 1 – 5 year fixed term ‘Interest Only’ loans were established, given the lower level of repayments required. When these come to an end, they will typically be restructured to ‘Principal & Interest’ loans.
This means that the size of repayments investors will have to make to service the principal & interest loans will significantly increase. On top of this, interest rate increases in the future will add more cash flow pressure to them. We are advising our clients to review their incomes and cash flow to ensure they are able to stay liquid and grow their wealth during this change in the long term interest rate cycle.
The only good news in this scenario is for those investors looking for a better rate of return on their cash at bank or term deposits; as interest rates rise.
Please contact our office if you wish to discuss any of the above further in relation to your specific circumstances.