Market Update – Interest Rates in 2017

Without having a crystal ball at your disposal, the question of whether interest rates will rise in 2017 is a tough one. So, what indicators can we look at to get a feel for the direction interest rates are likely to head in the coming months?

Based on data from the Reserve Bank over the last 30 years, the cash rate has hovered on average between 4% and 6%, yet the current official cash rate is only 1.5%! It stands to reason then, that the cash rate will at some point head back towards the long-term average. Another indicator is that banks have in recent times increased their interest rates, notwithstanding the Reserve Bank’s position to keep the cash rate on hold.

That said, inflation is still incredibly low, and typically the Reserve Bank will seek to stimulate the economy by keeping rates low. The only problem, Australian household debt is at an all-time high due in large part to sustained low interest rates. Household debt is growing at a much faster rate than household income. As a result, if interest rates were to rise, some households could suffer financial hardship. A recent survey of 26,000 Australian homes, conducted by Digital Finance Analytics, found that an interest rate rise of just 0.5% would cause financial stress to 1 in 5 households in Australia.

Whilst the Reserve Bank may keep the official cash rate on hold as a result of continued low inflation, the banks may not follow suit, and as already indicated in late 2016, may elect to chart their own course and increase rates.

Have you reviewed your debt position recently and considered the impact an interest rate rise may have on your financial position? It may be time to come in and speak with your broker to discuss whether a fixed or variable rate may be best suited to your personal circumstances.