Low cash rate will be the norm, predicts director

by AB11 Apr 2014
The current low interest rate levels could be the “new normal” for interest rates over coming years, says the director of a lead generation company.

A mixed bag of economic data has highlighted how the Reserve Bank of Australia's current policy of interest rate stability has helped maintain positive consumer sentiment in an unpredictable market, says 1300HomeLoan managing director John Kolenda.

The RBA has kept the cash rate at a record low of 2.5% since August last year, when historically standard variable rates have averaged between 7.5% and 8%, he said.

“While there is pressure on rates to increase over the short to medium term, too many adjustments could have a material impact on the ongoing economic recovery.

Kolenda predicts the current low rates could be the “new normal” in future. “We are likely to see interest rates below the average for the next few years.”

While house prices had improved over the past year and the March labour force figures were encouraging – with the unemployment rate falling to 5.8%, other sectors of the economy are still struggling.

“While we have seen the housing market benefit from lower interest rates, there are other fragile elements of the economy with retail trade also flat and the resources sector slowing down,” said Kolenda.

“The RBA hasn't lifted its cash rate for almost three and a half years and we believe the lower interest rate strategy has helped to restore some confidence among consumers in challenging economic times.”

An increase in house prices usually prompts a slew of predictions of rate rises from economic hawks.

But there has been a two speed housing market, with price growth in Sydney and Melbourne significantly outpacing other capital cities.

“We have consistently warned about the potential detrimental impact of the RBA lifting its cash rate prematurely in response to factors such as house prices,” Kolenda said.

“Creating a more confident consumer climate required numerous rate decreases over the past few years and pulling the trigger too early could have serious consequences. We could easily see the positive gains in consumer confidence quickly evaporate and the overall economy slow down. This would be disastrous considering it took five rate decreases to change consumer sentiment.”