Home loan interest rates: Will the RBA raise them in October.

The question a lot of people are asking right now is “will the Reserve Bank of Australia raise interest rates in October?

Readers of my recent articles will know that I have been saying since May 2010 that interest rates were raised once too many in May, and that another  interest rate rise would not happen till February 2011.

Many of the reasons for my prediction of an interest rate rise in February 2011 still hold true.

However we are not living in a gold fish bowl, and we need to look at the Global pressures on our interest rates, not just the local economy.

What the RBA is seeing

The minutes from the board meeting a fortnight ago point to a strong economy, fuelled by the resources boom, and inflation pressures as key reasons that monetary policy would be tightened.

The case for leaving interest rates as they are

1. Interest rate rises hit everyone, those with higher pays in the Mining States of Western Australia and Queensland, as well as those in States in the South Eastern States of Australia, who haven’t enjoyed these pay rises businesses who can only dream of the raises in demand for their goods and services, or workers not enjoying the higher employment rates in high income work, as the wealth of the mining boom filters through the economy.
2. Low inflation. We have low inflation and house prices look to soften in falling demand.
3. The banks want to raise interest rates independent of the the official rates. Leaving rates as is will allow banks to improve their margins and bottom-line and slow the housing growth in one move, and as a bonus allow the smaller non bank lenders to prosper with a batter interest rate offer than the big banks.
4. Investors have deserted the housing market for the share market. So housing demand and prices should remain soft.
5. Raising interest rates will likely raise the value of the Australian dollar to new  heights that will make exports fall, hurting mining, agriculture and tourism in Australia.

The case for Raising interest rates

1. The Reserve Bank has delivered its frankest warning yet that interest rates are likely to rise sooner rather than later.
2. The mining boom is inflationary of itself and inflation is public enemy #1 as far as the RBA is concerned.
3. Consumer and business confidence is high and the RBA likes to spoil that party to keep a lid on inflation.
4. Fiscal transfers from rising taxes in mining states will be transferred to consumer dependent states. Australia’s economy is a well oiled machine and allows for wealth flows from richer to poorer States and regions.
5. Older self funded retirees will get a better interest rate from deposits.This should mean better rates of return for them, and lower pension top ups for those self funded retirees from the Commonwealth.
6. Australia’s house prices are too high. House prices have fallen in Europe, the UK and the US, but not Australia. We pay too much for our homes. This is underpinned by a housing shortage that must be addressed.

So, unless unforeseen overseas economic issue arise the RBA is bullish about raising Interest rates.

Conclusion: the next interest rate movement will be up.

If you take it on the RBA’s statements and the rosy view of the Australian economy it will be in October or November 2010.

Why I am still punting on Feb 2011 as the trigger date.

I am still punting on February 2011 as the next interest rate rise. The uncertainty over the US economy and Europe and China resolving the raise in their currency value and housing bubble are still not clear.

About: Rick Adlam: Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers. Website: http://www.mrmortgage.com.au