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Up, down or steady? Interest rate outlook for 2014

By Geoff Scofield, Westlawn CEO & Managing Director
17 February 2014

There were no real surprises following the Reserve Bank (RBA) board’s first meeting of the year on Tuesday, 4 February. As most economists and finance commentators had predicted, the board announced that the cash rate would remain unchanged at a record low 2.5%.

We now have the longest period of interest rate stability since 2007.

And in its February statement, the board indicated they won’t be rushing to change interest rates any time soon.

“In the Board’s judgement, monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target. On present indications, the most prudent course is likely to be a period of stability in interest rates.”

So, with the RBA signalling a “period of stability in interest rates” what can we expect for the longer term interest rate outlook?

Many economists expect the RBA to chart a steady course at least until the end of this year.

On 1 February, The Sydney Morning Herald reported that its panel of 25 expert forecasters were evenly split on whether interest rates would head up, down or remain steady.

“Eight of the 25 [panel] members expect rates to fall further, nine expect rates to climb, and eight expect them to stay put. Two of the panel expect cash rates to fall to an ultra-low 2 per cent. One of them, Macquarie Group’s Richard Gibbs, expects it to happen in the first half of the year.

“The most bullish forecast is from Stephen Koukoulas of Market Economics, who expects 3.5 per cent by the end of the year and 3 per cent by June.”

Despite the difference of opinions on the Herald’s expert panel, many others share the view that rates will remain unchanged by the end of this year.

For example, the economic boffins at St George Bank expect rates to remain at their current level into next year. Following the RBA’s latest announcement, the bank stated:

“We remain comfortable with our long-held view that the RBA will be on hold for the bulk, if not all, of 2014. After that it could be time for rates to rise from their historically low level.”

Meanwhile, RBC Capital Markets senior economist, Su-Lin Ong, believes the RBA’s latest statement signalled no further movements in the cash rate for at least a year. “We think the cash rate will stay at a record low of 2.5 per cent for an extended period, probably well into 2015.”

And Deloitte Access Economics, in its latest Business Outlook report, says the end of the resource-related construction boom, and caution among the corporate sector and consumers will result in below-trend growth in 2014. It predicts the RBA will not increase rates until next year, and even suggests some banks may cut lending rates independently over coming months.

The ABC quoted Deloitte Access Economics director, Chris Richardson, as saying: “It’s not a done deal, but it’s the wildcard to watch out for on the interest rate front in 2014.”

For businesses, record low interest rates provide an ideal opportunity to finance new equipment or other capital expenditure. Contact one of our Business Finance Specialists to find out how your business could benefit.

And if you have a mortgage, keep a close eye on home loan rates over the coming months. It may pay to contact a Westlawn Mortgage Broker to take advantage of lower rates from home lenders.

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