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No rate rise in March

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by Peter Switzer

The good news is that the Reserve Bank might not raise interest rates in March. The bad news is that the official cash rate of interest set by the central bank could be five per cent by year’s end.

It’s now at 3.75 per cent and that means our home loan interest rates could end up around seven to 7.5 per cent, depending on how charitable your lender wants to be to you.

Close call

This week, we saw the minutes from the February get together of the RBA board and the decision not to raise rates was a close run thing.

The summary of what the board thinks looks a bit like this — there has been sufficient rate rises and given a few questionable developments it might pay to play the waiting game until the economic data, the stock market news and European debt issues look a lot more positive.

“The RBA considers that, after three successive increases in the cash rate in each of final three months of last year, plus an average of another 25 basis points in borrowers’ interest costs on top of the cash rate hikes, the urgency to raise the cash rate at each meeting is now not as pressing as it was when the cash rate was being raised from the “exceptionally accommodative” level it was when it was just three per cent per annum between April and September of last year,” said BankWest’s chief economist Alan Langford.

Optimism vs. negativity

That’s good for a “no rise” scenario for March, but what about beyond?

The minutes, however, do say this as well: “If economic conditions evolved broadly as expected, further adjustments to policy would probably be needed over time to ensure that inflation remained consistent with the target over the medium term.”

This is code or eco-speak for the RBA is clearly not yet done tightening unless one or more of the key risks turn up.

The pace of the eventual increase will hinge on optimism versus negativity, and at the moment it’s a closely run race with optimism still making the running.

Power economy

Yesterday’s stock market run emphasised this point. But on the subject of yesterday we saw the latest Westpac-Melbourne Institute leading index which said the economy was set to power at 6.2 per cent pace later in the year!

Right now we are at 1.3 per cent but that 6.2 per cent number looks unbelievable.

If it’s true then the cash rate could go to five per cent-plus as the big growth would threaten high levels of inflation.

In turn, it would push home loan interest rates up over 7.5 per cent towards eight per cent, which I reckon would choke off the recovery.

While I doubt the size of the leading index number, it does point to a very good economy ahead, which should be great for business profits, jobs and the stock market. So our interest rates would go higher but we would at least have the money to make our payments!

Who said economics is a dismal science?

For advice you can trust, contact Switzer Financial Services.

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Published on: Thursday, February 18, 2010