Will interest rates rise earlier than expected?

Shirley Liu 5 April 2016

interest-rate-rise

Experts say interest rates will rise after 2016.

Reserve Bank of Australia (RBA) experts say a surplus in economic growth will cause interest rates to rise at the end of 2016, possibly early 2017. Expert economists suggest that the cash rate will remain on hold as the Australian economy performs well with minimal impact from the equity and capital markets volatility.

Experts warn that if the economy continues to produce a surplus, the RBA will need to raise interest rates to curb growth. However, if the dollar continues to appreciate, the RBA will move to cut rates to help keep inflation in the target range of 2-3%.

The RBA has left the cash rate unchanged at 2% for the past nine months. According to a survey conducted by finder.com.au, 170% of the respondents believe that the RBA will hold the cash rate on Tuesday.

What do the experts say?

Economist, Saul Eslake, suggests that current monetary policy is helping stabilise inflation and keeping it in the target range.

Head of investments at AMP Capital, Shane Oliver, said although economic growth is strong, the RBA will continue to have an easing stance.

Out of all the resident rate experts at finder.com.au, 97% correctly forecast the rate to hold at 2.0% on Tuesday 1st March 2016.

The RBA’s reasoning

During 2015, there was less spending on mining and there was a strong growth in other areas of the economy which has boosted Australia’s gross domestic product (GDP).

Inflation is also low and in January 2016 it was at 1.7%

Monetary policy is comfortable due to the above factors. In order to help increase demand, interest rates are lower and other measures continue to improve lending standards.

History of the RBA cash rate

Below is a graph showing the changes to the cash rate in Australian history.

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What is the Reserve Bank of Australia and what is the cash rate target?

The RBA is the government body that implements monetary policy by setting the Australian cash rate. It’s independent of party politics and has the ability to make its rate decisions at its own discretion.

The RBA’s aim is to keep inflation between 2-3%. When inflation is controlled, it keeps the value of the Australian dollar stable and supports long-term growth.

Factors that influence interest rates

There are three main factors that drive interest rates:

  • Supply and demand. An increase in demand places more pressure on interest rates to increase and vice versa.
  • Inflation. Higher inflation means interest rates will probably rise.
  • Government and/or Monetary policy. If the government buys more securities, the banks are left with more money. The banks will have more money than they know what to do with so the interest rate will decrease.

Just because the RBA hasn't raised the cash rate for a while doesn't mean you can't still get a competitive deal on your savings account. Compare high interest savings today and make your money work harder for you.

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