Future of Interest rates in Australia

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The Reserve Bank of Australia (at the meeting held on 3 May 2016) decided to lower the cash rate by 25 basis points to 1.75 an all time low to be effective 4th May 2016. This suggests that the policymakers believe in a lower outlook for inflation and that growth for the Australian economy would be boosted by easier monetary policy as consumer prices hit the target over time. Governor Glenn Stevens said that the available data shows the continuing rebalancing of the economy after the earlier boom in mining investment. GDP growth has picked up in 2015, particularly during the second half of the year and the labour market improvement suggests that growth will continue in 2016 at a more moderate pace of growth.

The rate of inflation has been surprisingly low going by recent data and the overall outlook for inflation is lower than had been previously thought. In spite of the temporary factors in these quarterly reports.. This can be partly attributable to low key labour cost growth and reduced cost pressures globally. Monetary policy has supported demand with low interest rates and the low exchange rate has strengthened trade. Credit growth for households has reflected moderate growth while credit growth for businesses has improved over the past year. All these factors are helping the economy to make the adjustments necessary though the process could be affected by the exchange rate appreciating. The Board considered the developments in the housing market in finalising its decision noting the improving standards of lending and the possible reduction in price pressure.

In considering the forecast interest rates in Australia for the period 2016 to 2020, the interest rate by the end of this quarter, according to various economic models and expectations is expected to be 1.75%. This rate is expected to continue for the next 12 months and the long-term rate is expected to be around 3.5% in 2020.

Experts predict that homes in Sydney and Melbourne will become more affordable in the near future as they believe that the cost of repayment of housing finance has reached peak levels. They also believe that the more subdued housing market could see lower interest rates this year though without the marked effect on housing prices in comparison to 2015. These expectations follow the recent cut in the official cash rate. The inflation in the Sydney and Melbourne housing market is believed to have restrained the RBA from cutting rates in the second half of 2015. It should be recalled that the pre-emptive move of the RBA to cut rates a year ago and to boost housing prices by double figures in Sydney and, to a lower extent in Melbourne. It is now considered unlikely that the same sort of price growth in housing scene over the last decade will happen in the near future. Interest rates certainly play a part in determining housing prices, but it appears that at the moment, there are other factors to be considered.

 


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