Interest Rate Movements

Next Tuesday the Reserve Bank will meet and make their normal monthly announcement about interest rates. Most economists are forecasting a .25% drop, with Bill Evans of Westpac telling the media he expects the cash rate to be  .75% before the end of the year.

I am one of a number of alleged “experts” who are surveyed each month for their predictions on where interest rates are going.  My prediction for next Tuesday was that rates will stay on hold. I added a rider – even though I may be in the minority, hold is where I think they should be kept.

Monetary policy, that’s attempting to influence economy by manipulation of interest rates, may be effective when rates are high, but a reduction of .25% from 1.5% to 1.25% will do nothing to stimulate the economy. Think about it – if a bargain property came along, and you had the resources to buy it, would your decision turn on just .25%.

But there are bigger issues here. The government before the election announced their intention to allow homebuyers to buy without mortgage insurance if they had at least 5% deposit. Couple this, with a further rate drop, and you will be enticing first home buyers into a situation where they may well suffer extreme mortgage stress when interest rates rise again, as they must.

It’s a recipe for disaster.