Pulling rate trigger could lead to disaster

by Julia Corderoy08 Oct 2014
One industry pundit has said that the economy needs “significant improvement” before the Reserve Bank decides to raise the cash rate.

A recent Reserve Bank survey of economists and industry figures found that all respondents forecast a rate rise next year, with many betting on a gradual rate rises for the next three years, until it reaches a “new normal” of about 4%.

However, John Kolenda, managing director of 1300HomeLoan said it may be some time before we see the cash rate hit a new normal.

“There are some economists forecasting the cash rate to head north to 4% within the next few years, but we would need to see some significant improvement in the economy before the RBA returns the official rate to that sort of level.”

Despite concerns over rising house prices, Kolenda said if the RBA prematurely lifts the cash rate it may have a detrimental impact on the economy.

“It would be a serious mistake by the RBA to lift rates in response to house price rises, which are mainly occurring in the Sydney/Melbourne property market. There are already early signs of prices easing in those markets,” he said.

Regardless of how the property market performs, rate hikes may not be the preferred course of the RBA, according to ME Bank general manager of markets John Caelli.

“The RBA has flagged that measures other than interest rates may be more appropriate to address the issue of house prices," Caelli said.

Caelli agreed that the RBA would most likely leave rates untouched for the forseeable future.

“The RBA minutes continue to refer to a period of stability in interest rates and so we expect any rises in rates won’t occur until the first half of 2015.”

Kolenda warned that any rise before then could scuttle consumer confidence.

“Creating a more confident consumer climate required numerous rate decreases over the past few years and pulling the trigger too early could have disastrous consequences,” he said.

 

COMMENTS

  • by MCC 8/10/2014 10:22:57 AM

    Fair call from Kolenda & Caelli. Remember the resi property market will account for less than say 10% of total Oz GDP & playing around increasing the cash rate with other parts of the economy exhibiting 'fragility' is not a great idea! The economists are probably hanging their hat on the back of QE being wound back in the USA which will place downward pressure on Oz dollar & possible upward pressure on rates as other parts of Oz economy become more competitive. However for me, it still comes down to 'underemployment'