We have been living in a low interest rate environment for so long now that people think it is situation normal, but this week the cycle may have finally turned.
Any change is likely to be gradual, but rising rates will have a major impact on the property market, and consequently on ordinary Australian families.
On the other side of the ledger, they will be good for savers, as deposit rates would then rise.
Higher rates could also prompt a rise in the Australian dollar, which would tip the balance between imports and exports and could influence the tourism industry, and the overseas education market.
On the winning side: depositors, import businesses, Australians travelling overseas, perhaps some home buyers because prices might fall.
Losers: people with big mortgages, exporters. Also some home buyers because they may not be able to borrow quite as much for houses.
It would be great to say that higher rates would be unequivocal good news for all. Home buyers, but that’s too much of a stretch.
Here’s the scenario. Since November 2011, the Reserve Bank of Australia has cut official interest rates 12 times and they are now at a record low 1.5 percent.
Mortgage and other lending rates, of course, are not down to that level but mortgages can be had for under 4 percent.
On the other side of the equation, of course, depositors are hard put to get much more than 4 percent for savings in the bank.
The whole point of low interest rates is to stimulate the economy. If money is cheap, the theory goes, then people will be encouraged to spend and invest.
It hasn’t really worked this time around, until now, apart from fuelling the property boom in some capitals, notably Melbourne and Sydney.
This week’s decision to leave interest rates on hold was driving by higher than expected inflation figures last week – a sign that the RBA strategy is starting to work.
New RB Governor Philip Lowe put it this way when announcing official rates had been left on hold: “Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years.”
Economists made careers out of reading into statements by RBA Governors, in much the same way as priests read goats’ entrails in ancient Rome.
But Lowe’s comments are best read as code for saying that the economy is starting to pick up and inflation is stirring higher.
In any environment like that, interest rates will first be held and then they will rise. Classic economic theory says they won’t be cut further.
In the wake of the RBA’s inaction – and comments – this week, people need to understand where they would stand if rates were to rise and decide if they need to prepare.
Locking in fixed mortgage rates, reducing debut, or building that deposit in anticipation of finally being able to buy that house are strategies – it all depends where you stand.