Interest Rates: What can we expect for the year ahead?
Added on by Etairos Accounting 
After 18 consecutive months of leaving rates on hold, the Reserve Bank of Australia (RBA) cut its official cash rate twice in 2015. So what can we expect for the year ahead?
The two rate cuts that we saw in 2015 were largely expected by commentators and economy watchers alike, it was just a matter of when. At the time, there were two key reasons for the RBA to drop rates.
First, the national economy had remained sluggish, failing to respond to the record low cash rate of 2.5 per cent at the time. Second was the stubbornly-high Australian dollar, trading above US$0.80 at the start of 2015 despite the fall in commodity prices.
Now that we’re 12 months on, and the official cash rate is down to 2 per cent, what can we expect in 2016?
After its’ December meeting, the RBA said that it was happy to leave rates unchanged as the prospects for an improvement in economic conditions had firmed in recent months. It also noted that the national economy continued to grow at a moderate pace, and that an improvement in business conditions had flowed through to stronger employment growth.
This more optimistic outlook would suggest that, should the economic environment continue to improve, the RBA is likely to leave rates on hold for the short term. This decision is also supported by the lower Australian dollar, which has been trading around US$0.70 for the majority of this year, slipping below this mark from time to time.
However, the Central Bank has left the door open to a possible rate cut if necessary noting that it was comfortable with the current rate of inflation, which would allow it to drop rates if necessary.
In the present environment we’re likely to see rates remain on hold. The Bank will be loathed to give up its capacity to stimulate the economy with further cuts unless absolutely necessary. The RBA Board and its’ Governor, Glenn Stevens, will be keeping a close watch on the current volatility in international markets and the economic outlook for important trading partners, like China, knowing it has room to act.
In a scenario where global conditions deteriorate, we could see cash rates around 1.75% or even 1.5%. This would imply discounted retail mortgage rates of around 3.75%. In advance of such an occurrence we would most likely see short term rate declines reflected in the price of 2 and 3 year fixed rates.
Obviously, governments and other authorities, here and overseas, are working hard to drive growth in their economies and although tentative, we would all like to see the recent improvement in economic conditions continue.
Either way, the prospect for rates is to continue to remain low for some time providing businesses, homeowners and property investors with access to cheap finance.
For business this presents a great time to consider increasing or updating plant and equipment to expand output or increase productivity. For property owners with established mortgages now is a good time to consider refinancing to secure a better deal.
For more information about commercial, business or equipment finance, or a review of your current mortgage, please contact Jaeneen or Paul in our finance team. We'd love to speak with you.
