Cash rate will start to rise but not for long, according to survey

by Julia Corderoy03 Nov 2014
While the cash rate is expected to remain on hold at the Reserve Bank’s next board meeting tomorrow, the market can expect rates to rise next year followed by a downward cycle as soon as 2017.

According to Australia’s largest Reserve Bank Survey conducted by finder.com.au, all 33 economists and industry experts surveyed are betting the Reserve Bank will keep the cash rate at 2.5% on Melbourne Cup day. 

The most common reasons for a hold on Tuesday were regarding the economy not strong enough to warrant a rise, high unemployment and the Australian Dollar, global uncertainties particularly in the Middle East and Europe, inflation is on target and pressure on house prices.

Ninety-one percent (30 out of 33) expect the cash rate to start rising next year, while two respondents forecast rates to rise in 2016. Just one of the 33 economists – Andrew Wilson, Senior Economist at Domain Group – predicts the next cash rate move will be a drop in the first quarter of 2015, due to falling house prices, low inflation, high unemployment and Australian dollar and a weaker share market.

The average prediction for when the cash rate will start to rise is August 2015, according to the survey, with the average forecast finding it is likely to hit a peak of 4% in 2017.

However, Michelle Hutchison, money expert at finder.com.au, said interest rates won't rise for long before dropping again.

"Our economy is under pressure to perform better, and all 33 experts in the finder.com.au Reserve Bank Survey believe that the cash rate won’t rise for very long before it will start to fall again.”

Almost half of the respondents (13) are expecting the cash rate to start falling again in 2018, while three are forecasting a drop as soon as 2017. Four expect to see it to drop in 2019 and 10 are expecting it to reduce beyond 2019.

Paul Bloxham, chief economist at HSBC, predicts the cash rate will hit a peak of 4% in 2017 and will start to fall again beyond 2019.

“Growth is still below trend, the labour market is still loose and inflation is still well contained – so they don't have any reason to think about hiking but at the same time I can't see them cutting rates while the housing market is still booming.”

Steven Pambris, head of credit at Bank of Sydney, predicts the cash rate will reach a peak of 2.75% in 2017 and will start to decrease again in 2018.

“Economic factors remain weak, however with current pressures on residential prices especially in Sydney, reduction will not be considered due to fear of fuelling the residential bubble further. Rates will remain steady for some time.”

Paul Williams, chief treasury and business strategy officer at Heritage Bank, expects the cash rate to hit a peak of 5% in 2017 before starting to decline again in the same year.

“The RBA appears happy to remain on hold while the domestic economy tries to build some momentum. The RBA will be keeping an eye on the trends in unemployment, inflation levels, developments in key offshore economies and geo-political tensions in Middle East and Europe.”

 

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