It was no surprise that the Reserve Bank of Australia (RBA) didn’t increase interest rates on Tuesday, but property investors should factor in rising rates in their budgets for the next year or two.
By MICHAEL YARDNEY
In its statement the RBA indicated comfort with current interest rate levels. Governor Glenn Stevens said the RBA’s official rate was “appropriate for the time being”.
This suggests to me that the next cash rate move will likely be up, even if it may be some time before this happens.
And even if the RBA doesn’t increase the official cash rate for a while, now that the election result is clear local banks may increase their retail interest rates.
So what’s likely to happen to interest rates in the future? Over the past week a number of economists have come out with forecasts of a strong economy, rising inflation and suggestions that rates will rise significantly.
Bill Evens of Westpac expects three rate rises in the next year: “At present we are expecting rates to rise by 75 basis points during 2011”.
NAB economist Peter Jolly thinks we may get four rate hikes: “Our year-ended GDP (gross domestic product) forecast has lifted to 3.25 per cent from a little under three per cent. As a consequence, we debated whether the 100 basis points of tightening in our forecast starting February 2011 was enough. We think it is, but it did remind us that a 2010 hike remains possible should either a) quarter three inflation in late October be shockingly high or b) the economy grows above trend in the second half and the unemployment rate (now 5.3 per cent) plunges through five per cent – quite possible.”
And JP Morgan expects inflationary pressure to grow and this will of course push up interest rates: “Another report of surging jobs growth, with August ANZ job ads survey showing 2.6 per cent on-month growth, could make RBA thinking a little more difficult in months ahead,” says Helen Kevans, an economist with JP Morgan.
“Inflation is a big risk and it’s going to cause a headache for the RBA. On one side we have a deteriorating global outlook and on the other side, we have local outlook where inflation pressures are quite widespread,” says Kevans; tipping strong corporate earnings, terms of trade, and even wages growth as all pushing inflation higher.
If our economy keeps performing as well as many expect, these predictions of higher interest rates will eventuate.
The take home lesson for property investors is to budget for higher rates. Factor in a bigger buffer in your financial and property investment plans to allow for rising rates. Of course the good news is that if the economy booms and inflation increases, so will the value of your property.
There are still a few good years ahead for property investors until retail interest rates increase to about nine per cent and stifle this property cycle.
Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. Subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.
