The recession and interest rates - breakfast with the economists

Wednesday the 2nd of September, 2009

Posted by Iden Money .

In Sydney on 26th August a group of Economists joined together in front of 1500 delegates to discuss the current state of affairs in the global and Australian economies. These Economists were:

Stephen Koukoulas: Global Strategist, Currency & Fixed Income Research, TD Securities
David Wyss: Chief Economist, Standard & Poor’s
Dr Subir Gokarn: Chief Economist, Standard & Poor’s, Asia Pacific
Warren Hogan: Head of Australian Economics & Interest Rate Research, ANZ
Bill Evans: Global Head of Economics, Westpac
Rory Robertson: Interest Rate Strategist, Macquarie
Sally Auld: Interest Rate Strategist, J.P. Morgan Australia LimitedThe topics covered included:

•    The Great Global Recession. Has it ended? What will the recovery look like?
•    The monetary policy exit strategy – how can central banks hike?
•    How can Governments repair their tattered budgets?
•    Australia’s recession has been mild, or will it stay that way?
•    How good was the Government and RBA policy to limit the fall out?
•    The RBA are upbeat on China – is this a big enough offset to other global weakness?
•    House prices look firm…or do they?
•    2010 – what sort of recovery will it be?

There was general consensus on the following:

-    Australia is doing satisfactorily – albeit the economy is just chugging along – probably at about 0 at the moment.
-    They all think employment will peak around the middle of next year
-    They all think interest rates will not move for a while yet (read RBA cash rate)
-    US – is still doing it very tough as is UK, and has some way to go yet.
-    China is proving to be a soft landing partner
-    India is also starting to become an important partner

Opinion differed on when interest rates would rise but they generally agreed on between February and June next year and that rates would rise by up to 1.25% by the end of 2010.

This begs the question as to what borrowers should do regarding locking in on fixed rates right now, given that short term fixed rates are already higher than most banks’ standard variable rates and longer term rates (3 to 5 years) are considerably higher. This is a difficult time to make this decision. Some economists are predicting a flattening of the yield curve ie the longer fixed rates coming back a bit, closer to the 1 and 2 year rates. This should be considered along with the borrower’s current variable rate and the effect of the timing on increases to the variable rate. This is very much an individual exercise for each borrower, dependent on their current variable rate and it’s possible movement upward versus their view on the timing and movement of fixed rates and the actual fixed rates currently offered by their lender.

There is no crystal ball on interest rates and borrowers are advised to keep themselves informed as much as possible on this matter by reading newspaper and web articles. The major factor here is whether or not a borrower will benefit by taking a higher, longer term rate now, rather than remaining on variable and following rates up. Being on a low, low variable rate takes some of the importance and urgency away from making this decision.

Iden Money and Property can provide such a low variable rate. If you would like to discuss interest rates and see the best home loans, give us a call on 02 8844 8989.