What Will Happen to Interest Rates
When The RBA Meets Next Week?

THE GENERAL consensus seems to be that the RBA will further reduce rates by 25 basis points. But can this view be fully justified; and what does all this mean for Commercial property investors?

The RBA faces a real DilemmaMost pundits would point to the recent CPI figures and say “Yes”! And on the surface, an underlying inflation rate of 2.5% per annum is plumb in the middle of the RBA’s stated target zone.

Yet despite what seems to be a rather hesitant mood by consumers, inflation in the service sector actually surged by massive 4.4% per annum. And some other sectors (not affected by overseas competition) also finished the year strongly, growing by 3.9% per annum.

Therefore, the RBA’s decision next week will not be as
clear cut as many might at first presume.

Even the overall labour market figures are a little misleading. Because, while part-time employment fell, full-time employment showed solid growth during late last year. And then, you still need to factor in the effect of the layoffs recently foreshadowed by the major Banks.

But even if Australia’s employment rate were to drift out from 5.2% to 5.6% per annum … this would still be very low compared with overseas.

Clearly, this provides absolutely no joy those who may lose their job. Yet, it certainly would not spell disaster for our economy.

Bottom Line: The three key issues clouding the RBA’s current outlook will be the fact that …

  1. The US economy is continuing to improve;
  2. Greece has been working to conclude a deal on its outstanding debt; and
  3. World leaders at DAVOS are applying considerable pressure upon Europe to “firewall” the euro zone — so as to restore global confidence once again.

Therefore on balance, the RBA will most likely decide to “keep its powder dry” at the February meeting … and leave rates on hold at 4.25% for the time being.

This means Fixed-rate mortgages are currently offering a lower interest rate than Variable-rate mortgages — which makes any Commercial property purchase you undertake, a very attractive funding proposition.


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