Interest Rate Outlook For 2012

Anticipating the interest rate decision handed down by the Reserve Bank each month has almost become a sport for finance commentators and the general public in Australia.

Although the interest rates set by the Reserve Bank of Australia (RBA) are becoming increasingly disconnected from those set by the banks, for now the movements by the RBA are still followed very closely by the major banks.

It is little surprise that the monthly rate decision attracts so much attention around the country, as a movement of just 0.25% can have a major impact on the repayments made by the average Australian.

On a mortgage of $300,000 taken over 25 years, a 0.25% cut in rates equates to a saving of around $45 on each monthly repayment. For the many Australians who have larger mortgages, the savings are even greater.

February 2012 Rates Decision

The first interest rate decision for 2012 will be handed down next Tuesday the 7th of February, and the majority view is that home loan interest rates will drop by 0.25%, with a smaller number of people predicting a 0.50% cut.

According to reports in the Herald Sun newspaper, the Australian Associated Press (AAP) surveyed fourteen economists, with thirteen of them tipping a 0.25% cut in February. This would bring the RBA rate down to 4.00%, its lowest point since March 2010.

Betting house Centrebet takes wagers on interest rate decisions, and the odds for an interest rate cut certainly correlate with the views of most economists. Centrebet currently has the 0.25% cut at odds of $1.25, with a ‘no change’ result at $3.65 and a 0.50% cut at $7.00.

If rates are cut in February it will be the third consecutive monthly cut following the 0.25% cuts in November and December of 2011. The RBA does meet to discuss rates during January.

The last time we had three consecutive rate cuts was during the height of the Global Financial Crisis in late 2008 when rates were cut each month from September 2008 to February 2009.

Rate Outlook for 2012

With conditions expected to worsen in the global and Australian economies during 2012, most financial commentators and economists are expecting more cuts during the year. The retail industry is calling for major cuts in interest rates to encourage more spending, however the RBA is unlikely to make additional cuts based on the demands of a single industry.

At this early stage of the year it is difficult to predict exactly where rates will be in December 2012, however it would be fairly safe to say that they will be lower than they are today.

A lot will depend on the economic situation in Europe and how that affects the rest of the world. Further problems in Europe could lead reduced growth in China, and reduced growth in China will almost certainly lead to weaker conditions here in Australia. This would lead to considerably reduced rates in order to stimulate growth.

If on the other hand Europe can sort out its problems we may find that the global economy will stabilise, reducing the need for major interest rate cuts in Australia, however this seems unlikely given the lack of solutions in Europe right now.