When and what will the next Reserve Bank movement be?

With yesterday’s decision to keep the cash rate on hold at a current record low of 2.5%, in the longest period of stability since 2007, investors are asking what they should expect next. Unfortunately, there doesn't seem to be a particularly clear picture available.

As is always the case around interest rates, companies send out their comments in reaction to the potential circumstances expected in advance so that the media can prepare their stories. This was the first meeting of the year and it was generally accepted that no change would occur at this February's meeting.

However, this was the first time in the most recent cycle that there was a clear split in the responses being sent through. While everyone sent through a response for the interest rates staying on hold, and of course this was commonly expected among all of our experts surveyed in the weeks prior, some only provided a rate drop alternative, while others only provided a response for if there was an increase.

This distinction makes it clear that there’s certainly mixed expectations as to what the Reserve Bank will be doing next and that there really is a division of perspectives within the market.

In fact, directly after the rate decision was made, there were already predictions for the next change being discussed.

RateCity noted that their expectation is for the next rate change to be an increase, particularly when using the actions of lenders as a gauge.

Since October 2013, 73 variable rates have increased out of cycle, while 550 fixed rates have increased.

CEO Alex Parsons said that while the recent decision wasn’t a surprise, households should be expecting the next rate move to be up, and that they should be ready to pay more for variable loans before the end of the year.

“Lenders are eager for new business and competition at the pointy end of the market remains strong. While the average basic variable rate is 5.19%, there are 25 variable home loans with rates below that,” he said.

Loan Market’s director, Mark De Martino, said this stability of rates has been encouraging buyers back into the market but that it’s largely unclear where the next movement will be as lenders are adjusting fixed rate products in opposite directions.

“For five consecutive meetings the RBA has made the right call by watching past rate cuts bring confidence back into the market. As inflation and unemployment numbers continue to make cases for rate movements in either direction, it’s not easy to predict where rates may head next,” said De Martino.

“There’s lots of posturing with fixed rates at the moment and with the daily fluctuations of the Aussie dollar, we’re seeing competition open up with lenders trying to correctly predict when this interest rate cycle will bottom out,” he said.

Interestingly, Place Advisory’s director Lachlan Walker believes that there’s likely to be no change until the second half of the year. After this time, his suggestion is that if there is any change it will be a drop.

“I can’t see the cash rate being lifted this year,” Walker said.

“If the Reserve Bank does anything to the cash rate, the only thing I expect they would do is reduce it,” he said.

“While inflation has risen a little, confidence is only starting to rebound and the Australian economy has yet to regain strength.”

He pointed to concerns around unemployment as a clear sign that there’s still a way to go before rates can be increased again.

Meanwhile, Ruan Burger, TIME Home Loans director, said that the banks maintaining or dropping their rates is a good indication that the RBA is expected to remain stable.

“As has been widely reported, many banks have dropped their fixed rates recently, including majors such as Westpac and NAB, as well as non-majors such as Citibank,” he said.

“This reduction in fixed rates is more a reflection on their costs and subsequent margins, however, and this has enabled them to factor in a drop. If they were anticipating that the cash rate would rise though, fixed rates would likely be going in the other direction.”

“The cost of money is cheap, and this is undoubtedly creating an opportunity for home buyers and investors – you really can’t say people can’t get into the market now if they don’t want to,” he said.

It seems that there’s really no general consensus on what the Reserve Bank's next likely act will be. You can read more details from our expert panel, who all tipped the latest 'no change' verdict accurately.


{module What do you think the next Reserve Bank rate movement will be?}




Jennifer Duke

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

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