The Reserve Bank of Australia (RBA) left interest rates on hold today at 1.5%, but indications are that the next move could be a rate hike.
The good news is that it may be some time before that happens with the RBA forecasting Australia's economy to grow slowly before gradually strengthening. Here are a couple of sentences from the announcement that sum that up.
"Over the next year, the economy is forecast to grow at close to its potential rate, before gradually strengthening. Inflation is expected to pick up gradually over the next two years."
If inflation has bottomed out, then is highly unlikely that we will see the cash rate go any lower than its current level of 1.5%. And as inflation gathers pace, the RBA may well act early and raise rates to keep a lid on growth.
I fully expect Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) to pass on the full rate move to mortgage borrowers if the RBA raises the cash rate.
It also has consequences for the stockmarket, with higher interest rates impacting on company profit levels (as those with debt have to pay out more in interest), as well as fixed income securities offering a 'safer' asset class with higher interest rates. That could see the likes of yield plays like Sydney Airport Holdings Ltd (ASX: SYD), Transurban Group (ASX: TCL) and APA Group (ASX: APA) sold off.
Higher interest rates also have consequences for Australian property markets. Higher rates could see property prices fall because many borrowers won't be able to afford the repayments. Some homeowners could be forced to sell out because they can't afford the new rates, leading to a surplus of housing on the market – and hence lower prices.
The good news is that we are unlikely to see a series of fast rate hikes. The last time the RBA raised rates was in November 2010 by 0.25% to 4.75%. That lasted a year before the central bank began cutting rates in November 2011 and it's been downhill ever since.
