Economists expect cash rate to hit 'new normal' in three years

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The Reserve Bank is likely to start increasing the cash rate mid next year, which will see interest rates continue to rise for the next three years, according to the latest Reserve Bank survey.

Economists and industry figures surveyed in the monthly Reserve Bank Survey conducted by correctly predicted that there would be no change to the official cash rate at the central banks’ board meeting today. However, all respondents forecast a rate rise next year, with many betting on a gradual rate rises for the next three years, until it reaches a “new normal” of about 4%.

The survey revealed a 46% chance of an increase during the third quarter of 2015, a 21% chance that rates will begin to rise in the first quarter and an 18% chance of rate hikes to start in the second quarter.

In a statement on September’s monetary policy decision, Reserve Bank governor Glenn Stevens said the most “prudent” course is likely to be a period of stability in interest rates.

Shane Oliver, chief economist at AMP thinks the cash rate will start to rise in quarter three of 2015 and will continue to rise to a new normal of 3.75%.

“While housing related indicators are strong, providing a reason not to cut rates further, the rest of the economy is sub-par. Uncertainty remains high regarding how quickly the mining investment boom will unwind, inflation is benign and the Australian dollar remains too high – all of which suggests it's premature to start raising rates. The most recent commentary from the RBA has indicated that a period of stability in rates remains prudent. This language is likely to be dropped well before the RBA starts hiking rates,” he said.

Paul Bloxham, chief economist at HSBC thinks rates will rise in the second quarter of 2015 and will reach a new normal of 4-4.25%.

“For the moment there's still concern that the labour market has spare capacity, and that they'd like the unemployment rate to be declining before they raise interest rates. By the same token, I don't think they've got scope to cut interest rates any further because the housing market continues to boom,” he said.

Savanth Sebastian, economist at CommSec expects rates to start rising in the first quarter of 2015 and reach a new normal of 3.75%.

“Interest rate stability has been the mantra by policymakers. The economy is lifting and falling currency will help to rebalance effort away from mining to export sectors,” he said.

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