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RBA tipped to put winter freeze on interest rates

If there is one thing finance experts agree on, it’s that interest rates are bound to soar upwards. What they can’t agree on is when that will happen.

With the 0.25% cuts in February and May still simmering in the economy, the Reserve Bank of Australia is expected to maintain the status quo this month.

Housing Industry Association chief economist Harley Dale says there is currently no pressing case for the RBA to raise or reduce rates.

“We’re in a period in the middle of the year where we can be certain there’s not going to be a move in interest rates,” he says.

“So that’s quite a different environment from late last year and particularly the first half of this year where months and months out there was, at times, quite feverish speculation about what would happen.

“The world’s moved on a little bit and the central bank’s made it clear they are not averse to prospect of lowering interest rates further, but they’re in no hurry to do so as they assess what’s going on in the economy in the middle part of 2015.”

Low rates have given the housing sector a leg up this year, making it one of the brighter lights in an underperforming economy, Dale says.

“There seems to be an increasing amount of evidence that the February and May rate cuts in the first half of the year did generate increased demand for new housing in Australia, which is a positive outcome,” he says.

“You particularly see that in regard to trade-up owner-occupier buyers, so those who’ve been in the market for a while. They’re in their first, second or third home and they’re looking at buying or building a second, third or fourth home.

“That part of the market seems to have picked up on the back of interest rate cuts we saw earlier this year.”

A red-hot market

Increasing speculation about a property bubble is a factor for the RBA to consider. Governor Glenn Stevens described sections of Sydney’s heated property market as “crazy” earlier this month, but said the RBA was obliged to take a national focus.

While the RBA hasn’t ruled out a further rate cut this year, it could drive property prices up even further, says Phil Anderson, chief operating officer at the Association of Financial Advisors.

“There’s concerns about the strength of the economy, but there’s also concerns that a further reduction in interest rates may contribute to further heating in the housing market,” he says.

“From a consumer perspective there’s the concern that if interest rates go much lower people will find themselves taking out home loans and being unprepared for an increase in rates, which inevitably will come.

“We certainly don’t want to see interest rates go up, forcing problems with repayment of mortgages and then people needing to sell, so they need to manage against that downside.

“I think the RBA has a sizeable challenge in front of them.”


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