Debbie Shankar - 11 Jan, 2017

Prepare for a Cash Rate Increase in 2017

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Economic bodies suggest the Reserve Bank of Australia (RBA) must prepare the nation for a cash rate increase in 2017. Such action will prevent turmoil in the housing market and other economic repercussions.

Turning the Australian Economy Around

In November, the Organisation for Economic Cooperation and Development (OECD) released the Global Economic Outlook. This report shows that world governments need to push economies out of low-growth traps. Making better use of financial initiatives will see countries push through any development barriers.

At present, Australia and other richer nations have monetary policies in place that offer disappointing outcomes. However, the OECD suggest that low-interest rates give policymakers a “window of opportunity” to actively boost growth. Plus, implementation of these actions can lessen inequality without compromising debt levels.

By focusing on spending money in areas that boost development, governments can make growth inclusive. Therefore, spending money on infrastructure, education, and skills is ideal.

How the Turnbull Government Can Facilitate Change

Many economists feel Malcolm Turnbull needed to introduce a higher goods and services tax to increase Australia’s economic outlook. Nevertheless, government failure to do so has pressured the housing market to relax prices. These “financial distortions” have also forced the official cash rate down.

The OECD’s outlook highlights several financial risks such as the exchange rate, cash flow instability, and housing price distortion. Subsequently, these factors are increasing the financial exposure of businesses, especially in emerging markets.

Rather than tightening the Australian budget, the government needs to invest in infrastructure, education, and skills development. So, by improving these areas, Australia can bring itself in line with other developed countries.

Prepare for a Cash Rate Increase in 2017

Suggestions by the OECD include rejecting President Trump’s idea to tighten trade agreements, and developed economies spending more. If Australia follows such tactics, then the economy should gradually increase at a level of around 3% growth.

Trump’s trade embargo will affect lower-income households as social measures will come into play when sharing gains. Furthermore, this action will push growing Asian economies into recession.

By investing in public growth, the Australian government is investing in its future and the prospects for Australian society. Money spent on telecommunications, roads and public transport will increase the viability of the nation. Plus, there is still room for Australia to increase its spending further. Moreover, the export of natural gas will assist in the economic recovery of the nation. Employment rates in Australia and wage growth will improve, but this will be gradual.

The Australian Housing Market and Interest Rates

There is talk that the US Federal Reserve will raise interest rates in 2017. When this occurs, then Australia will have no alternative but to follow suit. Consequently, Australia’s official cash rate will increase in late 2017. Although, the Australian government will need to avoid hurting the Australian dollar and housing market.

Housing prices in Sydney and Melbourne continue to rise despite the introduction of tighter lending criteria. But, a dramatic price drop in home values cannot occur either. Otherwise, this will weaken consumer demand and building activity.

While the Australian housing market won’t go backwards, it will continue to adjust. Thus, the Australian Prudential Regulation Authority (APRA) suggests lenders will see a decrease in returns compared to the last 10-years. Consequently, some homeowners who have invested considerably will be looking to retrieve equity. When this does not occur, some may take greater financial risks.

Overall, the housing market will take a sideways step. Micro markets, such as apartments, will take a hit. But, overall the market has bottomed. Fixed rates are increasing along with variable rates for some lenders. Many suggest this is just a taste of movements that are to come.

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