Rising Tide Blog

What is going to happen with interest rates?

Posted by Matt Hale

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Last week, Sam Gawenda and I were fortunate to spend an hour in Sydney with Hayden Dimes, ANZ rates strategist and economist. It was worth every minute.

In short, Hayden is one of the key people at ANZ who predicts what ‘may’ happen with interest rates and the Australian economy (Remember, economists always underpin their points with ‘may’).

Here are some of the takeaways from our conversation and Hayden’s insights;

  • Although the economy is growing at a slower rate than 12 months ago, the good news is, it’s still growing
  • Things are on the up if the property market keeps rising and interest rates keep dropping
  • The housing market plays a key role in the Australian economic outlook for two reasons:
    • A lot of Australians wealth is tied up in property, and therefore consumer sentiment fluctuates with property values
    • Construction provides a huge contribution to our economy, so when there are cranes up and new jobs being created, it’s good for all of us
  • Retail spending is down – even with different stimulus methods being in place.

Hayden’s comments highlight that even though interest rates are lower than ever before, Australians are still spending less on the ‘wants’ in our lives. Basically, this is because we are carrying more debt than previous generations and our ‘needs’ are also now costing more, so things like retail spending and holidays are taking a back seat.

So, what does the future hold? Well, while I don’t have a crystal ball, fortunately, some of the information that Hayden provided helps to keep us better informed. 

In our conversation, Hayden reiterated that the RBA (Reserve Bank of Australia) has an expectation of low interest rates. He then went on to explain exactly what ‘low’ means, saying “The 5-year cash rate is expected to remain over that period on an average at around 0.6%, which is lower than it currently is – and the 10 year rate is likely to stay sub-1.0%”.

In the short term, it’s expected that the RBA will reduce rates twice more, in February and May and hopefully that will be enough to keep the growth in the economy steady. Hayden thinks rates will get to 0.25%.

What’s my take on things? 

Fixed or variable home loans – which is the way to go?
If you want certainty, and you won’t be in a position to pay off any additional funds in the fixed period (the banks often only let you pay a small amount extra off a fixed loan), then go for it. Fixed loans are at an all-time low and that certainty can be great for cash flow.

If there is even a small chance you will need to sell your home in the near future or you want to keep trying to find the best rate as you go, variable is for you, but remember, most banks will charge you break fees for leaving a fixed rate early.

There will be more rate cuts, but as we all know, we might not get all of it passed back from the banks – so it’s imperative you chat to your lending specialist before you make a decision (particularly if you haven’t had that conversation in the last 12 months).

We are spending less on the ‘wants’ – is that a good thing?
While Australians are clearly taking advantage of the lower rates and there are a reduced number of interest only home loans, I’m sure the spectre of rising household expenses like education and utilities are causing us to spend less on the things we want.

I would love people to feel confident they are paying their debt down as well as spending some cash on their ‘wants’, otherwise the feeling of groundhog day can be overwhelming.

Whilst debt is cheap, it doesn’t necessarily mean it’s time to load up and take on more. For many, it’s a great opportunity to pay down your loans and create or grow your equity. But it is important to make sure you also spend some time becoming aware of your cash flow, so you can create some space for the ‘wants’.

A good starting point is ‘How do I know if I am spending too much?’.