Which way are rates heading in 2016?

Tuesday, 2nd Feb 2016
Categories: Finance, Newsletter

where are we heading croppedAfter 18 consecutive months of leaving rates on hold, the Reserve Bank of Australia slashed the official cash rate twice in 2015. So what can we expect for the year ahead?

The two rate cuts that we saw in 2015, the first in February and the second in May, were largely expected for the year, it was just a matter of when.

At the time, there were two key reasons for the RBA to drop rates.

Firstly, the national economy had remained stuck in a sluggish mode despite the cash rate sitting at a record low of 2.5% for 18 consecutive months.

Another reason was the stubbornly-high Australian dollar, which was still trading above US$0.80 at the start of 2015.

Now that we’re 12 months on, and the official cash rate sits at 2%, what can we expect in 2016?

Following its December board meeting, the Reserve Bank of Australia said that it was happy to leave rates unchanged because the prospects for an improvement in economic conditions had firmed in recent months.

It also noted that the national economy continued to grow at a moderate pace, and that an improvement in business conditions had flowed through to stronger growth in employment.

This more upbeat outlook would suggest that, should the economic environment continue to improve, the RBA is likely to leave rates on hold for the short term.

This decision would also be supported by the lower Australian dollar, which has been trading just below US$0.70 for the majority of January.

However, the RBA also left the door open for a possible rate cut. During its December board meeting it said that it was comfortable with the current rate of inflation, which would allow it to drop rates if necessary.

By present indications, though, we’re likely to see rates remain on hold.

However, should growth begin to slow, or the RBA feels it necessary to give the national economy a shot in the arm, then we could be in for a drop in rates in 2016 – possibly to 1.75% or even 1.5%.

Either way, the current financial environment provides property investors with access to cheap finance, and presents an opportune time to build their portfolios.

Furthermore, it’s also a good time for property owners with established mortgages to consider refinancing to secure a better deal.

For more information or a review of your current mortgage, please contact out finance team today.