Reserve Bank of Australia (RBA) Governor Philip Lowe has signalled that the next shift in the official cash rate will be up, not down, and will come as a shock to many households.
However, the rate hike will only come once economic growth improves and wages increase.
Australian households haven’t seen an interest rate rise in seven years, so any rise in the cash rate may initially be upsetting to home owners paying off a mortgage.
“The last increase in the cash rate was more than seven years ago, so an increase will come as a shock to some people,” said Dr Lowe.
“But it is worth remembering that the most likely scenario in which interest rates are increasing is one in which the economy is strengthening, and income growth is also picking up.”
Older home-owning Australians who rely on interest feeding ‘accumulation’ super funds for income will gladly receive the rate rise if their investments also increase the interest they pay in line with any lifting of the cash rate. Those with defined benefit superannuation funds will hardly be affected.
Speaking on Wednesday in Perth at the Australia Israel Chamber of Commerce, Dr Lowe said that while economic growth and employment is improving in Australia, there still may be dark times on the economic horizon.
One such portent would be a trade war that would “put the health of the global economy at risk and damage the Australian economy”, China’s efforts to avoid a financial system crash, and high levels of Australian household debt, which “remains a source of vulnerability”.
The official cash rate has remained stagnant at 1.5 per cent since August 2016, and there’s little chance of a rate hike before 2019, with many saying we won’t see a change until 2020.
Read more at www.afr.com
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