Borrowers prayers have been answered yet again this month as the Reserve Bank decided to keep the official cash rate on hold at 4.75% – where it’s been since November last year when horror of horrors, it jumped by a quarter of a percentage point.
This increase fueled speculation that soon we would be making enormous monthly repayments as the RBA moved to keep inflation in check in the wake of an impending and unprecedented resources boom, hiking rates up goodness knows how many times between that fated Melbourne Cup Day and Christmas 2011.
But how quickly things change when it comes to the fickle Australian economy! With the Aussie dollar going up against the US Greenback and sitting at parity for some time now, not to mention the terrible spate of natural disasters Mother Nature has thrown at us, the RBA has determined that inflation should remain within its long term target range of 2 to 3% until around mid-year.
The finance industry boffins who just can’t help but get excited about all things economic are now speculating that there will be a further increase of a quarter percentage point over the next 12 months…which is a Hell of a lot better than the one point rise some were predicting last year.
The primary reason for this longer than expected reprieve is a weakening in the retail and tourism sectors over the past few months. Needless to say, many mortgage holders felt the fear of God when talk was mounting of an impending barrage of rate hikes late last year. Hence they tightened the purse strings and had a more frugal Christmas and summer holiday season than they might otherwise have done.
But there’s no denying that as we begin to see the effects of overseas markets buying up big in our commodities sector, with continuing jobs growth and further injections of foreign dollars into our financial coffers, consumer confidence will return and we will once again start to spend.
Essentially, Aussies are not standing on the sidelines because they’re short a few quid right now, rather we’re seeing a reversion to the old ways of saving as caution takes precedence over consumerism. But of course, we don’t expect that to last forever! Let’s face it – old habits die hard.
This is evident in the fact that household disposable income grew by 6.4% over the year to September 2010, boosted by our most favourable terms of trade in 140 years and strong employment growth, with the rate of participation in the labour force at a near record high of 65.9%.
Then of course there’s the rumours going around about the banks. Will they risk public and political outrage again as they did last year, deciding to make their own interest rate move, independent of the RBA?
Some think this is a distinct possibility. Ironically, the government that was so incensed about this in 2010 that they moved to ban exit fees in a half hearted attempt to send the naughty banks to the timeout chair, could be giving them the fuel to make such a move.
Many in the industry (myself included), believe that abolishing exit fees will not increase competition, but will instead increase interest rates as lenders scramble to make up the profits they will begin losing as of July 1st when the new legislation potentially comes into play.
And let’s not forget that all important substance that we are so reliant on to get from A to B – fuel. With world oil prices rising, we’re already struggling to fill our tanks at the petrol pump…so much so that the old fill and flee is becoming an increasingly popular pastime of Aussie motorists…and this will only get worse, sending prices soaring and inflation along with them.
When all is said and done though, I’m of the opinion that this will they or won’t they speculation is a bit like playing the pokies, or rolling the dice and hoping those longed for snake eyes come up. We have become such an integral part of the global economy that it’s not only domestic factors we have to watch closely over the coming months, but international ones as well.
All we can really do is take a stab at what might eventuate and hope that it will be good news for borrowers. And in the meantime, I guess we just have to endure the incessant banter from those over-excited economic boffins (and keep them away from the sugar jar and energy drinks lest they get too titillated)!
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).