Have interest rates gone as low as they’ll go?

For the first time in two years investors have started placing bets, albeit cautiously, that the next move in official interest rates will be up rather than down. If this happens, it will no doubt come as a bit of a shock to most homeowners as we’ve all become accustomed to rates either falling or on hold for the past five years.

It seems experts have done a backflip on their previous predictions that the Reserve Bank Board would likely make the call to slash another 0.25 basis points off the cash rate, creating a new historic low. Now it looks as though this isn’t going to happen. But don’t worry, the RBA is not expected to announce an increase this calendar year.

Another sign that the interest cycle is about to turn is what’s been happening in the fixed rate home loan market. Westpac and a number of smaller banks have begun to lift borrowing costs for customer taking out new loans in the last few months.

Some are going so far as to call this latest turn of events, the “Trump effect” (finance-speak for the belief that US President elect, Donald Trump will unleash higher inflation on the world economy) something many are saying has been “severely lacking”. This prospect has caused investors to sell US Treasury bonds in droves, a trend that started months ago but accelerated after Trump’s election win. When bond prices fall due to a sell-off, the result is a rise in yields, which has been the case all over the world, including here in Australia. The domino effect continues with the banks raising fixed rate mortgage pricing in an effort to protect themselves against future rate rises.

Another clue that we’ve seen the end of rate cuts is the fact that the Reserve Bank’s index for our top export commodities has increased 30% this year, due mainly to a surge in the price of iron ore and coal.

While official rates are not expected to rise in the near future, it is looking less and less likely that we will see any more falls.

Given that an increase of just 0.25% would add $50 a month to a mortgage of $300,000, it is best to factor in future rate rises into your budget rather than fall into the trap of complacency and push spending to the limit while rates are still at an all time low. Something to ponder as you get into the annual Christmas buying frenzy.

Post by ShelMarkblog 03 Dec 2016 0