No consensus on where interest rates will head in 2016

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With the Reserve Bank of Australia set to hold their first board meeting next week, opinion varies on where Australia’s official cash rate is headed over the coming year.
 
The official cash rate has sat unchanged at 2% since May 2015, when the RBA reduced it by 0.25%, and some of the nation’s leading economists differ in their predictions for what 2016 will bring.
 
Shane Oliver, chief economist at AMP Capital, believes recent global economic instability brings a rate cut of 0.25% into play for this year.
 
“The latest bout of global growth worries warns that the global environment Australia faces remains messy. So while rebalancing away from mining will continue to help we may face another year with growth stuck around 2.5%,” Dr Oliver said.
 
“Ongoing commodity price weakness means ongoing pressure on the budget deficit, points to more downwards pressure on the Australian dollar and more pressure on the RBA to cut interest rates again. Expect the Australian dollar to fall to around $US0.60 by year end and the RBA to cut the cash rate to 1.75%,” he said.
 
But Bill Evans, chief economist at Westpac, believes predictions of further rate cuts in 2016 are off the mark.
 
“Despite markets confidently expecting that the Reserve bank would cut rates by February Westpac has remained firmly of the view that the Bank will remain on hold throughout the second half of 2015 and the whole of 2016,” Evans said.
 
“We retain that view despite some concerns from this survey that consumers may slow their spending in response to this current global uncertainty,” he said.
 
Evans’ opinion is supported by Joe Sirianni, head of mortgage broking firm Smartline, who said a rate cut seems unnecessary.
 
“I don’t think there’s anything at the moment that really makes a rate cut a necessity,” Sirianni said.
 
“I think a long period of stability would be the best thing and I really can’t see there being a reduction anytime soon.
 
While he would prefer no movement, Sirianni said he could potentially see the need for a rate rise towards the end of the year and suggested it could be the right time for borrowers to consider locking in their current rate.
 
“I think we’ve definitely hit the bottom of the yield curve for interest rates and I would suggest people start looking at locking in a rate and giving themselves some certainty.
 
“It’s about mitigating risk. If you’re an investor you’ve got your rent locked in for the next 12 months, why not lock in your interest rate for the next two or three years? Your rent is more than likely going to increase and you’ll improve your cash flow.”
 
Despite the upheaval seen in the investor lending market over the past year, Sirianni said as long as rates stay at similar levels to what they are now he can’t see investors deserting the market.
 
“I thought this year might be the time where the owner occupiers and first home buyers come back a bit, but if you look around property still looks like a pretty good investment at the moment.
 
“The share market’s pretty volatile right now and you’re not getting much benefit in a term deposit, so I can’t see why people are going to desert property. It won’t be the frenzy it was last year, but the investors will still be there.”
 

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