Economists predict interest rates will hit 4.25% by end of 2015 – but are these projections likely?

Economists predict interest rates will hit 4.25% by end of 2015 – but are these projections likely?
Economists predict interest rates will hit 4.25% by end of 2015 – but are these projections likely?

The official cash rate has been tipped to rise by almost two percentage points by the end of 2015. However, most economists say a one percentage point rise is more likely.

A survey of 32 economic analysts by Bloomberg News found more than half expect interest rates to rise within a year, according to The Australian Financial Review.

The analysts projected rates could hit as high as 4.25% by the end of next year, significantly higher than the current record low of 2.5%.

However, JP Morgan chief economist Stephen Walters told SmartCompany while possible, such a steep percentage point hike is “unlikely”.

“The transition from mining investment to other sources of growth is still a work in progress,” he says.

“The currency is also still quite higher, so it’s definitely a difficult case to make for the Reserve Bank to raise rates.”

Walters says there has also been speculation of a tough budget in May, which is likely to further impact rates.

“It just doesn’t make much sense… employment is going up too, so aggressive rate hikes are unlikely,” he says.

Interest rates have been on hold since August last year, when the official cash rate was cut by 25 basis points from 2.75% to 2.5%.

The decision was motivated by a need to boost the economy as it struggled to adjust to lower levels of mining investment.

Unemployment also began to edge higher throughout 2013, a trend which is expected to continue in 2014.

In February, Australian Bureau of Statistics figures revealed unemployment remained steady at 6%;however, economists have predicted it could reach 6.5% by the end of the year.

CommSec economist Savanth Sebastian toldSmartCompany because unemployment is expected to rise and non-mining business investment isn’t showing significant improvement, rates are unlikely to reach 4.25% by the end of 2015.

“To reach 4.25%, this means we’re really looking at eight rate hikes between now and then which is very unlikely. The RBA aren’t expected to raise rates until well into the last quarter of this year,” he says.

“The economic environment is still very patchy… rates won’t go back to super aggressive levels any time soon.”

Sebastian says because forward indicators are improving, some movement on rates can be expected, but not until the end of the year.

“We will see steady increases next year… even if everything goes right it’s unlikely they’ll raise by that much. It would create pain in the economy, especially for first home buyers who have taken out loans with wage growth being at the second slowest rate on record,” he says.

Sebastian says the economy is establishing new norms in terms of household credit growth and consumption and this will be kept in mind by the RBA.

Both Sebastian and Walters say rates are more likely to be around 1% higher by the end of 2015.

“Rates are all super low and if the economy improves in relatively positive fashion you could see 1% worth of rate hikes next year,” Sebastian says.

“There will be about four over the year, which is more likely to take the cash rate from 2.5% to 3.5-3.75%, which is more reasonable for the economy to continue to adjust from the fall back from mining investment and allow the economy to continue to grow.”

This article first appeared on SmartCompany.

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