MENU

Will interest rates be at 2% by early next year?

Economists are predicting that the Reserve Bank of Australia (RBA) will cut interest rates to as low as 2% within the next six months, despite fears that such a move could increase the risk of a property price bubble.

Westpac’s (ASX: WBC) chief economist Bill Evans – who has been one of the most successful interest rate predictors over the last few years – has put forward that the RBA will be forced to reduce the official cash rate by 25 basis points by as early as November, whilst another 25 basis point cut would follow in the first quarter of next year.

Tipping that the jobless rate still has further to climb from today’s 5.8% to around 6.5% by mid-2014, Evans also believes that the stalling of growth in the non-mining sectors is a concern. Whilst he expects that these two rate cuts could cause the Australian dollar to fall to around US84c by the end of next year, such a move by the RBA would provide a boost to the economy.

Furthermore, Evans also believes that the global outlook is yet another reason for concern. He said, “The US economy will face another year of underperformance, China will disappoint next year and Europe is likely to record a third consecutive year of recession. This will leave the Australian economy sluggish and force the RBA to act.”

However, the RBA has remained cautious about cutting interest rates any further from their current level at 2.5%. Although the RBA’s half-yearly Financial Stability Review stated that the major banks, including Westpac, ANZ (ASX: ANZ), NAB (ASX: NAB) and Commonwealth Bank (ASX: CBA), have maintained their lending standards so far, it also warned that they must continue to do so in order to avoid a housing price bubble.

Foolish takeaway

The low interest rate environment has allowed the banks to drastically increase their earnings and profitability; however, it is vital that they do not relax their lending standards just to increase revenue further.

Are you interested in our #1 dividend-paying stock? Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

More reading


Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.