Will the Federal Budget Drive Interest Rates?
by Michael Williams, Managing Director
Interest rates are the domain of the Reserve Bank of Australia (RBA) which is legislated to operate independently of the Federal Government. They control interest movements based on the underlying policy of keeping inflation between their target range of 2-3%. The RBA thereby raises rates when inflation is above 2-3%, and decreases rates when inflation is below this rate.
Government policy can have dramatic effect on inflation, as does the current Australian and International economic conditions. If the Government spends a lot of money and runs a deficit, this can cause inflation, which the RBA responds to by raising rates. Due to the Global Financial Crisis, previous budgets were all about big spending to stimulate the economy; this has definitely not been the case this year.
Even though we are entering an Election Year, where money is normally overpromised on everything in an attempt to buy votes, this budget has been very restrained, if not extremely boring. This is in direct response to the Government wanting to be seen as fiscally responsible by reducing the long term budget deficit.
Reducing our long term deficit and not spending up big should help keep inflation, and therefore interest rates, in check. There is nothing in the budget, that we can see, that will increase interest rates in the short term.
This means interest rates will continue to be affected primarily by economic conditions. With the continuing recovery in asset prices (shares and property), this could mean increasing inflation and therefore rising rates over the medium term. The RBA has outlined in their boardroom minutes that interest rates are back to a long term average and their expectation is for rate increases to slow as they watch the economy to see how it has been affected by the previous increases.
Europe and expectations
In light of the recent European sovereign debt issues that have affected Global equity markets, and the reduction in home loan applications in Australia and slow down in retail sales figures, economists have indicated their expectation is that rates will stay steady for the next couple of months. There has even been discussions that if the issues persist in Europe, then the next move for rates could be down. We believe this is unlikely as we expect the volatility in the share markets to reduce, and the European Union and International Monetary Federation to stabilise the affected countries.
If interest rates stay steady or rise slightly, this will benefit investors as rents continue to climb, as less people can afford to purchase property and more people need to rent. Whilst for current owners, an increase in interest rates is usually in support of climbing prices. And whilst your repayments will increase, so will the equity in the property.
For more information, or to arrange an appointment with a John Hopkins Financial Adviser, please contact our Client Liaison Officer on 1300 726 082 or click here.