A senior Australian economist has offered up a number of compelling reasons why interest rates won’t increase until 2020.

AMP Capital chief economist Dr Shane Oliver noted that the Reserve Bank of Australia has left rates on hold for 21 months already and predicted it would be another 19 months before it would increase rates.

Oliver cited the fact that economic growth is anticipated to be below RBA expectations as a driving factor behind the predicted interest rate stability until 2020.

Growth is now likely to be 2.5-3 per cent, which is below RBA expectations for a pick up to 3.25 per cent. This is largely because housing construction is slowing, debt levels are high, consumer spending is constrained by slow wages growth and house prices are falling in Sydney and Melbourne.

Even a tax cut in the Federal Budget is unlikely to offset this slower-than-predicted growth.

The household debt boom is over and lending standards are expected to get stricter around borrowers’ income, expenses and total debt levels.

Both wages growth and inflation are also likely to remain low, further discouraging a rate rise. “Continuing weak wages growth along with excess capacity and high levels of competition in goods markets will keep underlying inflation around the low end of the RBA’s 2-3 per cent target for a lengthy period yet,” said Oliver.

Additionally, the household debt boom is over and lending standards are expected to get stricter around borrowers’ income, expenses and total debt levels. The major upshot of this is that lower income borrowers will be further squeezed and high property-price-to-income markets like Sydney and Melbourne will become more unattainable for these buyers.

APRA has tightened restrictions on investors and interest only loans, housing affordability is an issue right around the country and supply is a problem in many markets, discouraging the RBA from raising interest rates.

Dr Oliver cites a couple of factors to watch out for, which may impact upon price growth and interest rates. Firstly, any move to lower immigration levels and cut capital gains tax discounts will slow house price growth further.

And, if the declines in home prices turn out to be deeper, then the next move could end up being a cut!

 


 

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Wednesday 5th December 2018
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