Reserve Bank pauses rate at 2.00%
With an uncertain global economic climate, many held their breath in anticipation for the outcome of the Reserve Bank Board meeting this month.
Consistent with our monthly finder.com.au Reserve Bank Survey, which found that all 33 experts unanimously predicted the cash rate would be held at 2.0 percent this month, the Board has paused the cash rate for July 2015.
However, 38 percent of the panel participants surveyed expect the Reserve Bank to slash the cash rate by the end of this year, with nearly half predicting rates to drop as soon as August or September.
With this possible rate cut being expected to be 0.25 basis points, this could potentially bring the cash rate down to a new historic low of 1.75 percent.
Despite expectation, for the cash rate to plummet in the months to come, our money expert Michelle Hutchison advises that borrowers and first home buyers start preparing for future rate hikes, forecast to occur early next year.
Why hold the cash rate?
The Reserve Bank’s decision to hold the cash rate is justified by improved unemployment levels, rising housing costs and improved business confidence.
Many of the survey participants expressed their views that the cash rate was held so the Reserve Bank could buy more time to fully assess the impact of a lower rate on the economy, before easing further.
With financial pressures from overseas markets, uncertainty on the global stage, and predictions for a rate rise in the US later this year, the Reserve Bank decided to hold the rate at 2.0 percent this month as a conservative measure.
Moreover, as the Sydney and Melbourne housing markets continue to outperform, as indicated by continued strong clearance rates, the Reserve Bank will not initiate a further rate cut, just yet.
Held for now, but expected to rise.
Despite a likely rate decrease later this year, our money expert, Michelle Hutchison says borrowers shouldn’t become preoccupied with a rate cut but rather prepare for a future rate rise - expected to occur further down the track.
“While borrowers with a variable rate home loan shouldn’t hold their breath for lenders to pass on a full cash rate cut if the Reserve Bank drops the cash rate again, this is the least of their worries compared to expected rising interest rates.
“The finder.com.au Reserve Bank Survey found the majority of experts (56 percent or 18 experts) are forecasting the cash rate will start rising in 2016, with two experts expecting the cash rate could increase this year. Another 13 experts believe the cash rate will rise after 2016. The average forecast for when the cash rate will rise is the last quarter of 2016.
What will rate rises mean for me?
Mrs Hutchison, our money expert, offers insight about how you can manage your personal finances in preparation for rate increases.
“It’s clear that interest rates will be on the way up, so borrowers need to make sure they are prepared by reviewing their budgets and working out if they can afford higher costs. For instance, for every 0.25 percentage points increase to a $300,000 home loan, it will cost about $50 more in repayments per month.
“Borrowers with this size mortgage should factor in at least $400 extra in monthly repayments and if you can’t afford this extra cost now you will need to consider your options before rates start to rise such as refinance to a cheaper lender, fix your home loan or downsize.”
What if I’m a first home buyer?
With the degree of global economic uncertainty, Mrs Hutchison believes that this could create more pressure, and barriers to entry, for first home buyers looking to get a foot in the door.
“The latest global economic uncertainty has thrown a spanner in the works for our local economy, as the Reserve Bank could now look to minimise the impact by reducing the cash rate this year.
“However, this could lead to further pressure on the housing market, as lower interest rates could fuel further demand for investors and refinancers, leaving first home buyers behind.”
“Even if interest rates fall further this year, it’s likely that they won’t stay lower for long, as our survey found that rate hikes are around the corner.
“Borrowers who are planning to enter the market, buy an investment or refinance need to ensure they factor in higher costs for repayments rather than the other way around or face financial stress in the near future,” said Mrs Hutchison.