What are people’s views on what interest rates are going to do over the next few years? My opinion is that they will not rise too much due to the fact that a lot of people are heavily morgaged with lots of credit card debt. If the aim of interest rate rises is to put the brakes on a strong economy, with record high debt levels, surely it wouldn’t take much of a rise to achieve this.
What do you all think?Fairly flat for a while, like the rest of the year, then trending up. There are quite a few inflationary pressures emerging through higher commodity prices, A$ re-tracing against the US, wages growth and an expansionary federal budget.
Rates are unlikely to rise too rapidly or excessively because of the level of debt we all now carry as a nation. Last year from memory Wizard carried out research to show that a 2% rise in rates in today’s terms would have the same choking effect as 17% home loan rates did around 1990.
As a guess, it would be a surprise to see rates any more than 1.0-1.5% higher within the next three years. However, if you start seeing headlines about serious inflation concerns then watch out for even higher rates.
You’ll get a lot of different opinions so just weigh them up.
What do you all think?Yes and no. The RBA doesn’t aim to ‘put the brakes on a strong economy’, it aims to keep inflation within it’s target band of 2 – 3%, and does so by varying the cash rate. Graph
You are correct in suggesting that an increase in interest rates currently has a huge impact on consumer spending and the economy* as a result of record levels of household debt, but this very same debt has brought additional money into the economy, and the inflow of additional cash has caused inflation. Over recent years the majority of this inflation has been evident in house prices, but more recently has shown up in massive state tax & GST widfalls, wage inflation, PPI etc. The other factors worth mentioning are US interest rates and the Australian dollar. The US will continue to increase interest rates. As they do so, if Australian IRs remain flat or fall, the ‘interest rate differential’ narrows, placing downward pressure on the Aussie dollar. A lower AUD means higher import prices and higher oil prices which cause the CPI to rise as these products are included in the index calculations.
I expect a series of small interest rate rises over the next couple of years, regardless of falling house prices and a struggling economy.
Cheers, F.[cowboy2]*Interest rate changes are currently around three times more potent than during 1990 – the final stages of the last housing bubble.
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