Will the RBA rise the cash rate in 2018?

For the past seven years, the Reserve Bank of Australia (RBA) has either left interest rates alone or decreased the rates. At their recent meeting in November 2017, they announced that the cash rate would continue to remain steady at 1.5%, so as the old saying goes – no news is good news!

Some people in the industry however, are predicting that this steady state will change during 2018, resulting in a slow accumulating increase in the cash rate. This of course, will depend on the Australian economy and whether the RBA believes that there is enough stimulus to carry one or more hikes to the cash rate over the next 12 months.

 

There is no firm commitment to one course or another at the moment, but overall it seems that if we do see rate rises in 2018, they will be slow to appear. The RBA Governor, Philip Lowe, has said that the Board judged the gradual decrease in unemployment over the past 12 months, along with the accompanying rise in labour participation and low level of inflation was the reason for holding the cash rate steady at 1.5%.

Westpac chief economist Bill Evans, believes that there is currently no good reason to raise rates in 2018, whilst Credit Suisse believes that we could see more rate cuts next year. This means that the nominal easing we have seen in 2017 could well be reversed in 2018, and along with weak inflation figures and low economic growth, seem to make rate cuts more likely than rate increases in 2018.

Whilst there are a number of factors that come together to influence the cash rate, the most notable predictors are unemployment, inflation, economic growth, wages growth and household debt. As you can see below, only the rise in household debt would benefit from a rise in the RBA cash rate.

  • Unemployment: For the cash rate to increase, we would need to see a bigger drop than the 0.1% we saw last month in the unemployment rate (from 5.6% to 5.5%).
  • Inflation: With inflation falling from 1.9% to 1.8% last quarter, a rise in the cash rate is unlikely, not when the preferred level of inflation is 2% to 3%.
  • Economic growth: Whilst trending upwards at 2.1%, economic growth is too low to warrant a rise in the cash rate.
  • Wages growth: Steady at 1.9%, any rise in the cash rate would reduce consumer spending and reduce inflation even further.
  • Household debt: Continuing its steady climb, household debt rose from 190.0% to 193.7% last quarter, which is worrisome and might benefit from a rise in the cash rate to reduce household debt ratio.

What does all of this mean?

If all indictors remain the same, then there does not appear to be any good reason to increase rates in 2018. This is good news for home owners and those who want to enter into the real estate market. Remember however, that none of these indicators prevent the banks from increasing their rates for one reason or another, mainly to cover their ongoing costs.

As we all know, rates can increase unexpectedly and the amount you can borrow from your lender is determined by many factors, not the least being the cost of living indicators. You also shouldn’t forget that if the interest rates do rise in the future, your payments will increase accordingly, so it is always best to discuss your financial situation with an expert, before signing on the dotted line.