Jan 2014 – is a rate cut likely next week

Weekly blog – 28 Jan 2014

Is a rate cut likely next week?

Next week we will see the Reserve Bank meet for the first time this year. There is a lot of speculation around what decision they may come to regarding the official cash rate.

Currently, the official cash rate in Australia is sitting at 2.50%. This rate is a record-low with it being over 50 years since Australians enjoyed such a low interest rate. This current low rate is great news for homeowners. But what everyone would like to know is – how long will they stay this low for?

The current rate of 2.50% was set in August last year. Since then the Reserve Bank has adopted a “steady as she goes approach” with consecutive monthly announcements of “no change” being the order of the day. This holding pattern that rates has been in has lasted for 6 months. This in itself is a sign of both stability and security for the Australian economy.

Looking in to the future, we could only wish for a crystal ball that might tell us exactly what interest rates are going to do in 2014. There are, however, some indicators that offer some insight in to what interest rates might do this year.

The strongest indicator as to what the RBA might do with interest rates is inflation. The RBA uses interest rates to manage inflation. Inflation is the rate at which the prices of goods and services rise. This is measured by the CPI or Consumer Price Index. The relationship can be simply explained like this. When interest rates are low, people are able to borrow more money and this results in increased spending. This causes the economy to grow and the inflation rate to rise. The RBA uses the official interest rate as a fiscal tool to manage spending and therefore the inflation rate. Inflation rose by 0.8% in the December quarter and is sitting 2.75% higher than a year ago. Looking at things simply, this rise in inflation could prompt the RBA to consider rising interest rates.

There are a multitude of other factors that the RBA considers when assessing the current level of interest rate. There is only one thing that we can be certain of and that is that interest rates are incredibly low at the moment and now would be an excellent time to review all of your spending and borrowing to ensure you are getting the best deal possible.