Get ready for interest rate hikes

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James Austin, Chief Financial Officer from explains why the interest rates have remained unchanged at 1.5%.

Investor activity took off in the second half of 2016. Picture: Brianne Makin

THE Reserve Bank has left the official cash rate on hold at 1.5 per cent in its first meeting of 2017, and the majority of experts now believe the next move will be up.

The RBA was widely expected to keep rates on hold at its February meeting after cutting rates twice last year, first in May to 1.75 per cent and then in August to its current historic low.

The last time the official cash rate increased was November 2010.

“Conditions in the housing market vary considerably around the country,” RBA Governor Philip Lowe said in a statement.

“In some markets, conditions have strengthened further and prices are rising briskly. In other markets, prices are declining. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years.

“Growth in rents is the slowest for a couple of decades. Borrowing for housing has picked up a little, with stronger demand by investors. With leverage increasing, supervisory measures have strengthened lending standards and some lenders are taking a more cautious attitude to lending in certain segments.”

According to a survey of 32 experts and economists by comparison website, 58 per cent now believe the cash rate has hit its lowest point this cycle.

“In the past few months, there’s been an increasing sentiment towards a cash rate lift,” insights manager Graham Cooke said. “But don’t hold your breath as the upward move is potentially months away.”

Mr Cooke added that 77 per cent of experts believe Australia has an oversupply of apartments, with Melbourne facing the biggest glut.

But AMP Capital chief economist Shane Oliver believes there is still room for further rate cuts. He said while the low September-quarter inflation reading had left the door “wide open” for a rate cut today, the inflation outcome was in line with the RBA’s own forecast.

He said the RBA would also want to monitor the recent increase in lending to property investors and further data about the economy’s performance after the September-quarter slump.

“As a result all eyes will be on the post meeting Statement and the Statement on Monetary Policy to be released Friday,” Dr Oliver wrote in a client note.

“Our assessment remains that — with record low wages growth, ongoing spare capacity, an increasing risk that low inflation will feed on itself and the dollar remaining too high — the RBA will cut rates again around May.

“Also of interest will be what the RBA has to say about the resurgent Sydney and Melbourne property markets — are they embarking on another round of discussions with APRA?”

CoreLogic head of research Tim Lawless said the hold decision was widely anticipated considering the strength in the housing market as last year’s rate cuts spurred investor activity.

“With inflation consistently tracking below the RBA’s target range for almost three years, it’s likely that the heat in the housing market is one of the primary reasons why the cash rate hasn’t moved lower in an attempt to stimulate spending and push inflation higher,” he said.

Capital city dwelling values rose 10.7 per cent over the past 12 months, a substantially higher growth rate than the 7.4 per cent in the prior corresponding period.

“The acceleration in the pace of capital gains highlights that housing market conditions have rebounded in line with the previous rate cuts and the consistent rise in investor participation,” Mr Lawless said.

“While any further rebound in the headline rate of growth would be unwelcome, some cities could have used the additional stimulus of a cash rate cut. Housing market conditions in Perth and Darwin have been weak since 2014, with dwelling values having fallen in both cities over the past 12 months.

“Despite the cash rate remaining on hold and some subtle upwards movement in mortgage rates over recent months, the cost of debt remains historically low which should continue to see strong demand for housing from both owner occupiers and investors.”

Borrowers, meanwhile, should expect further interest rate increases by the major banks regardless of the official cash rate. LJ Hooker chief executive Grant Harrod in December warned of further rate rises in 2017, after most lenders used the end of the year to book out-of-cycle rate hikes.

Peter White, executive director of the Finance Brokers Association of Australia, said he would be “appalled if banks continued raising interest rates if the Reserve Bank keeps official rates at an all-time low”.

“When the banks increase interest rates because their profit margins are being narrowed, the cost regrettably has to be offset by the borrower. In the current climate this would be very difficult to justify,” Mr White said.

According to financial comparison website Canstar, the current average standard variable home loan rate is 4.45 per cent, and 4.71 per cent for investors.

“If they did [cut rates], one would have to question how much would be passed on to borrowers in any event,” Canstar chief finance commentator Steve Mickenbecker said. “During the last move the banks handed on half and with out-of-cycle increases since, even that half has been severely eroded.

“There are some encouraging signs for the economy, with rising resource prices, but it is too early to call a trend here, or to recognise any sustainable recovery elsewhere in the economy to match some improving sentiment.

“The Reserve Bank will have to wait for positive data before an upward move. It has no inflation headache — aside from Sydney and Melbourne property — to force an early move.”

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