Will interest rates rise in 2018?

Q&A with AMP Capital's Head of Investment Strategy and Economics and Chief Economist, Dr Shane Oliver. 

A recent survey revealed that more than half of all Australians are worried about interest rates1. So are they set to rise in 2018?

Q. What is the outlook for interest rates in 2018?

The Reserve Bank of Australia (RBA) will most likely raise interest rates in 2018 but not until late in the year.

Sub-par growth thanks to still-falling mining investment, slowing housing construction and weak consumer spending along with low underlying inflation and the desire to keep the Australian dollar down will likely see the RBA keep interest rates on hold for the next year.

But by late next year growth and inflation should be strong enough to allow the RBA to start raising rates.

However, we only expect one 0.25% hike late next year and the risks are such that it could be delayed into 2019.

Q. What impact would a rise in interest rates have on property prices?

The anticipation, and then eventual reality of a rise in interest rates – along with tightening bank lending standards and increasing apartment supply – will contribute to a cooling in the hot Sydney and Melbourne property markets next year.

It’s unlikely to have much impact though on property markets outside of Sydney and Melbourne, which have been a bit calmer, or very cold in the case of Perth and Darwin.

Q. How would a rise in interest rates affect first home buyers?

For first home buyers the start of official rate hikes should be good news.

Sure, it will cost a bit more to borrow, but to the extent that rate hikes contribute to calmer property markets in Sydney and Melbourne, it should make it easier for first home buyers to get into those markets.

The best time to buy for first home buyers is when rates are rising, because if you can get used to higher rates things will only get better when they inevitably come back down again, and it’s when rates are rising that the best opportunities can be found.

Q. Will rising interest rates impact upon retirees?

For retirees reliant on interest from bank deposits, an eventual move to higher official interest rates will be good news as it will flow through to higher bank deposit rates.

That said, interest rates will still be historically low for an extended period so it makes sense to continue looking for alternative sources of income to bank deposits that offer higher income flows.

Q. What about investors and home owners?

For investors, a rise in interest rates will mean higher loan servicing costs and it'll be another reason to expect a slowing in property price gains in Sydney and Melbourne.

Home owners should allow for an RBA-driven rate hike of 0.25% late next year, and with the likely cooling of property prices in the Sydney and Melbourne markets, the warm feeling of rising wealth levels may start to fade a bit.


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