Interest Rates Could Rise Eight Times in Two Years, Former RBA Board Member John Edwards Predicts

The interest rates could be hiked eight times into the next two years, driving up the cost of servicing a mortgage and business loans.

Former Reserve Bank of Australia Board Member John Edwards has predicted that the days of low interest rates may be coming to a end. Australians who are only just able to pay off their newly bought homes in the huge property market of Sydney and Melbourne could be in real danger.

The cash rate is currently at a historical low of 1.5% due to the government’s attempts to stimulate the economy and increase economic growth. Yet this low rate has been in effect for so long that it no longer has the same effect of decreasing savings and increase investment and expenditure. Australians have gotten use to the low rates.

Mr Edwards wrote “My guess is that [the RBA] is already thinking about a program of rate increases that will continue for several years”, explaining that economic growth was picking up in a way that was “more consistent across the global economy that we have seen in most of the years since the 2008 financial crisis.”

“As the impact of the 2008 crisis fades, so does the rationale for super low central bank policy rates.”

The global economy is on the up, The US Federal Reserve had increased its policy interest rate earlier this month, with the United Kingdom and Canada hinting at doing the same. The time has come for the RBA to get back to normal.

For the Australians on variable rate home loans, this is a scary prospect that could have disastrous effects on their abilities to repay their mortgages and my result in a housing bubble to pop as many could end up defaulting on their loans.

Mr Edwards has also said that the RBA would not change the cash rate too abruptly or unexpectedly and that the change would be long term so that people will have time to adapt.

There are other economists would believe that a raise in interest rate is very unlikely to happen unless economic growth greatly increases over what the RBA has expected. The economy is still growing at a low rate and the change increase in interest rate may cause ever slower growth which can cause problems for the Economy.

WHAT DO YOU GUYS THINKS??

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5 Comments

  1. Wouldn’t that affect the Government’s goals and the medium term fiscal goal of fiscal consolidation/bringing the budget back to a surplus(?), because both policies will be (more) contractionary, even though growth and inflation is quite low, and unemployment is higher than the target.

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  2. I would like to see interest rates rise, as they indicate a resurging economy and lead to greater profits from savings accounts. It is unfortunate that those with marginal loans will suffer, however, they are at least partially to blame in that case as they were unwise to take out large loans that were only serviceable at record low interest rates, particularly given the growing consensus that the housing market is experiencing a bubble and now is a poor time to invest.

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  3. Although this article is speculative, it is a possible scenario if the RBA decides its goal is to return interest rate expectations ‘to normal’. However, this might cause inflation to drop even lower than it is now as economic activity is suppressed. Since it is already dangerously low (close to deflation) I doubt they would sacrifice their primary aim of 2-3% CPI for a resetting of the interest rate clock.

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    1. I still think it’s unlikely, as the RBAs current goal isn’t to return interest rates to ‘normal’ and given the current state of many world economies it would be a foolish move to do so as there are many issues such as the threat of deflation with raised interest rates.

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