Market/Finance News Blog: Interest rates in 2015

By the resi financial blog team, 13 January 2015

Market/Finance News Blog: Interest rates in 2015

Australia's economy has been tracking below trend for 2014 and is expected to only really start picking up towards the end of 2016, according to the Reserve Bank of Australia (RBA). But what does this mean for interest rates, one of the RBA's primary tools for stimulating growth?

Throughout 2014, the official cash rate was kept at a consistent 2.5 per cent. The RBA has held the rate since August 2013, setting the country up for a record period of stability according to the Housing Industry Association (HIA).

While Australia experienced rapid growth in investment and property values, many industry experts expected the interest rate to rise in 2015 to temper burgeoning prices and lending. According to the Monthly Reserve Bank Survey by finder.com.au, in November 2014 most commentators expected a rise in August this year.

However, after the September quarter figures were released showing an economic growth that was half what was predicted, many experts on the Survey panel started to predict a drop in interest rates in 2015 to make up for the soft economic performance.

"This is an unsettling update on Australia's growth pace. Most analysts had been expecting growth to be well above the 0.5 per cent mark," said HIA Senior Economist, Shane Garrett.

"Coming at a time when a more downbeat perspective regarding Australia's economic prospects was already in the ascendancy, an elevated focus on a possible further rate cut is likely to be one consequence of today's result."

At its December board meeting the RBA noted that market expectations were leaning towards an interest rate cut in 2015 due to a number of factors, but did not elaborate beyond that. The board did conclude that for the time being, a period of stability was most likely to stimulate economic growth - as long as the Australian dollar plays its part.

The RBA believes that the Aussie dollar is still fundamentally overvalued, despite recent drops against the US dollar. If the exchange rate continues to fall it could have enough of an impact to negate the need for an interest rate cut to stimulate the economy, as well as maintain inflation targets. However, if the the dollar continues to be overvalued compared to foreign currency, hurting our exports and manufacturing, a drop in the cash rate may be on the cards. All eyes will be on the RBA's decision in February.

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