Rates – What’s the go, RBA?

//Rates – What’s the go, RBA?

While its good news for mortgage holders that rates were left on hold this week, one of the things I find interesting at the moment (especially since the last rate rise) is a number of comments made by people at BBQs and Christmas parties about interest rates and the RBA. The implication is that they think there is no need to lift rates (understandable as it impacts mortgage payments and many businesses are far from booming) but it does show a general lack of understanding of the positive implications.

Of course we don’t like paying more for our mortgages but as proposed by the Governor of the RBA last week we should expect our prosperity as a nation to increase for some time which will undoubtedly mean more rate rises and not that far away. So while house prices have slowed (partially driven by the seven rate rises since October 2009) wages have continued to rise and RP Data/Rismark are reporting the net effect is an increase in affordability – a key to house price growth. As our economy continues to improve over the next couple of years we will see more rate rises, but we’ll also see rises in confidence, incomes, skilled labour shortages and population growth. With a current undersupply and other strong market fundaments, while the short term looks to be sluggish, the medium and long term look very good indeed.

Where are rates going and why the ‘shock’ rate rise on Melbourne? That’s best left to the explanation by the Assistant Governor Phil Lowe in a speech last night, “This latest decision was taken not because the economy is currently growing too quickly or that inflation is currently too high. Clearly, neither is the case. Rather, it was made on the basis of the outlook for output and inflation. With the economy currently operating with relatively limited spare capacity at a time when a substantial lift in investment is expected, it was judged that inflation was more likely to rise than fall over the next few years. Given this, the Board judged that it prudent to make an early and modest adjustment to the cash rate. In doing so, the Board has sought to reduce the probability of inflation rising to uncomfortably high levels and thus requiring a more substantial increase in interest rates later on.”

The future is bright, rates are on hold until at least February (given no meeting in January) so we can relax over the Christmas season reviewing our property investing business plan as we look at what opportunities lie ahead and how best to manage our cash flows with a strengthening economy and the subsequent rise in rates.