Have interest rates bottomed?

By keeping the official cash rate on hold yesterday, the Reserve Bank may be sending a message



The Reserve Bank’s decision to leave the cash rate untouched yesterday could be sending a message that interest rates have bottomed.

Since November 2011, the central bank has made 10 cuts to the official interest rate, bringing it to a historic low of 2% in May. However, after the board’s decision to keep the cash rate on hold yesterday, some economists are asking whether last month may have been the last cut for the current monetary policy easing cycle. 

“Borrowers have even more reason to question whether rates have bottomed,” Craig James, chief economist of CommSec said. 

“Despite some weak investment data (albeit old data, predating the May rate cut and budget stimulus) the Reserve Bank has decided against providing an explicit interest rate bias or leaning. 

“The hope is that businesses will now start to embrace the stimulus on offer, fearing that if they don’t, they will miss out on super-low rates.”

In the latest monthly Reserve Bank survey conducted by finder.com.au, almost two in three (62%) expect that the central bank will keep rates on hold for the rest of the year. After that, just over two in three (68%) are expecting the cash rate to start rising next year.

Michael Witts, treasurer at ING Direct believes that while the economy still needs accommodative monetary policy, rates are more likely to hold steady than drop further.

“We believe the Australian economy will continue to benefit from a low interest rate environment and accommodative monetary policy. It appears likely that there will be an extended period of steady rates which should contribute to further strengthening business and consumer confidence.

“An increase in interest rates appears some way in the future and then it is likely to be a gradual drawn out process, with the likely peak in rates well below peaks of previous rate cycles.”

Consumers are also questioning whether interest rates have bottomed out. A study of more than 1,100 Australians who have recently purchased a property or planning to buy in the near future, compiled by finder.com.au, found more than half of borrowers (56%) are concerned about rising interest rates – 33% more borrowers than last year.

Almost one in three (28%) of borrowers or those planning to buy a property are choosing to fix their home loan, while one in four (25%) are choosing to split their loan with part fixed and part variable.

The Reserve Bank itself has chosen not to declare its interest rate preferences in its statement of monetary policy, however. On cutting rates in May, the central bank decided against providing any guidance on the next move. That was part of a clear strategy to stop borrowers sitting on the sidelines in the hope that rates would fall even lower.

The lack of interest rate bias – the neutral stance – is again a feature of the June statement.

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