How soon will interest rates rise again?

It was no surprise that the RBA did not increase interest rates at their September meeting, but home owners and property investors should factor in rising rates in their budgets for the next year or two.

In fact, with the result of the election now clear, it is likely that the major banks could raise interest rates sooner rather than later and not even wait for an official rate increase.

The RBA indicated comfort with current interest rate levels in their statement last week. However, Governor Glenn Stevens said the RBA’s official rate was “appropriate for the timebeing”. This suggests to me they will not be appropriate in the future and the next cash rate move will likely be up, even if it may be some time before this happens.

So how soon will interest rates rise again and how high will they go?
Over the last week or two a number of economists have come out with forecasts of a strong economy, rising inflation and suggestions that rates will rise significantly.

Bill Evens of Westpac expects three rate rises in the next year: “At present we are expecting rates to rise by 75 basis points during 2011”.

NAB Economist Peter Jolly thinks we may get four rate hikes: “Our year ended GDP forecast has lifted to 3.25% from a little under 3%. As a consequence, we debated whether the 100bps of tightening in our forecast starting February 2011 was enough. We think it is, but it did remind us that a 2010 hike remains possible should either a) Q3 inflation in late October be shockingly high or b) the economy grows above trend in the second half and the unemployment rate (now 5.3%) plunges through 5% – quite possible.”

And JP Morgan expects inflationary pressure to grow and this will of course push up interest rates: “Another report of surging jobs growth, with August ANZ job ads survey showing 2.6% on-month growth, could make RBA thinking a little more difficult in months ahead”, says Helen Kevans, economist with JPMorgan. “Inflation is a big risk and it’s going to cause a headache for the RBA. On one side we have a deteriorating global outlook and on the other side, we have local outlook where inflation pressures are quite widespread,” says Kevans; tips strong corporate earnings, terms of trade, and even wages growth as all pushing inflation higher.

If our economy keeps performing as well as many expect these predictions of higher interest rates will eventuate.

And according to the BIS Shrapnel’s Long Term Forecasts report, this will occur. They suggest that the Australian economy will rebound and inflationary pressures will force mortgage interest rates above 9% within three years.

BIS Shrapnel senior economist Richard Robinson predicts that tightening labour markets and increases in household spending will lead to a higher CPI. This in turn will prompt the Reserve Bank to raise interest rates and Robinson forecasts that the cash rate is likely to reach 6.5%, up from its current level at 4.5%.

And with the margins the banks put on this, the interest rates that homeowners will need to pay will push up to above 9%.

The take home lesson for property investors and home owners is to budget for higher rates. Factor in a bigger buffer in your financial and property investment plans to allow for rates to rise. Of course, the good news is that if the economy does boom and inflation increases as expected, so will the value of your property.

There are still a few good years ahead for property investors until retail interest rates increase to about 9% and stifle this property cycle.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.