What will happen to interest rates in 2017?
The Reserve Bank could put an end to the "new normal" of low rates.
The forecast for interest rates in 2017 has changed drastically since 2016. While last year started with the near-certainty that rock-bottom rates were here to stay, this year begins with lenders having already hiked rates and the Reserve Bank of Australia (RBA) tipped to follow suit.
Low interest rates have been the “new norm” for some time now. The RBA began its current easing cycle all the way back in November 2011. Over the course of the last five years, the RBA has dropped the cash rate from 4.75% all the way to its current 1.50%.
Lenders have largely followed suit, with borrowing rates hitting record lows. But all the while lenders have cut rates, they have also been vocal about the increasing gulf between their funding costs and the Reserve Bank cash rate.
What happened last year
Coming into 2016, the Reserve Bank had maintained a “wait and see” approach for some time. Inflation remained low, but so did unemployment. The housing market had continued booming, and the Reserve worried further rate cuts could cause it to overheat.
At the outset of the year, 56% of the experts surveyed in finder.com.au’s Monthly RBA Survey expected the official cash rate to remain untouched at 2.00% for the duration of 2016. Only 34% foresaw a rate cut during the course of the year, with 52% tipping a rise in 2017.
But the Reserve Bank had some surprises in store for experts. In May, the Bank trimmed the official cash rate to 1.75%. This was in spite of 96% of experts in finder.com.au’s survey forecasting a rate hold. Economists and pundits were certain the RBA would maintain its “wait and see” approach, and hold fire until the Federal Budget. The RBA had other plans.
Along with the Reserve Bank cut came a wave of cuts from lenders, albeit at a slow pace. Lenders seemed to use the opportunity to take a stand on their funding costs. Many failed to pass on the RBA’s full 25 basis point cut. While three of the four major banks did pass on the full cut (ANZ cut by only 19 basis points), they took their time doing so. The big four waited an average of 20 days before passing on rate cuts.
When the lenders did pass on cuts, they did so with a warning: their funding costs were no longer directly tied to the RBA cash rate, so borrowers could no longer expect them to move in lock-step with the Reserve.
For the Reserve Bank’s part, it played to economists’ expectations when it chose to cut rates again in August. It moved on rates after figures from the Australian Bureau of Statistics (ABS) showed the lowest annual inflation rate in more than 17 years.
What 2017 could hold
Lenders stood their ground following August's rate cut, with many passing along half or less of the RBA’s 25 basis point reduction. The major banks averaged just an 11.75 basis point cut, and took between 10 and 21 days to make their changes.
The signal lenders sent in August was an important one. They would willingly suffer consumer ire in order to chart their own course on rates. This mindset was on full display following the final RBA meeting of the year. In spite of the RBA holding rates steady, lenders began to shift their rates upward.
The rate changes began with moves on fixed rates. This soon led to rate hikes for investor variable rates. Finally, lenders began to move variable rates upward for owner-occupiers.
The usual pattern for interest rates has been one of the RBA setting the course and lenders following suit. In 2017, it's possible these roles could be reversed. Lenders have already moved on rates, and 37% of experts surveyed by finder.com.au believe the RBA will follow suit within the next two years.
While the year began with economists predicting an RBA easing cycle continuing into the foreseeable future, most experts now believe the RBA’s next move will be up. After more than five years of easing, the Reserve Bank is tipped to begin tightening the official cash rate once again in 2017 or 2018.
At the outset of 2016, record-low interest rates appeared to the “new normal”. The year ahead appears to be anything but.
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