Long term gain or short term pain?
It has been widely reported this year that the Reserve Bank of Australia (RBA) would raise the cash rate, despite many Australians already feeling the pinch when it comes to rising costs of living. It always seems ironic, that to be spared from this inflationary agony in the longer term, many borrowers are subjected to short term pain.
Fortunately, throughout 2011 we have been spared from interest rate hikes, for now, but should a rate rise eventually occur, it could be a double whammy when combined with the existing inflationary pressure.
There have been many factors at play in influencing how much we spend on groceries and what we are paying in interest. The Japanese earthquake and tsunami, sovereign debt difficulties in Europe, weakening of commodity prices and the strong Australian dollar have all had their effects. Possibly most of all, we know that the floods and cyclone Yasi over the summer months not only devastated many lives, but also wreaked havoc with our economy. The RBA attributes a 0.75% - 1.00% decline in GDP growth in the March quarter to a reduction in coal production alone. While this has likely contributed to the deferral of the looming rate hike, anyone who eats bananas will know all too well what these natural disasters have meant to our experience at the checkout.
So the questions that we seek from our crystal ball are, when will prices start to come down and when (if at all) will interest rates rise?
The RBA maintains that despite the impact from the recent Australian natural disasters and increases in utility prices, Consumer Price Index (CPI) inflation is close to its target of 2 – 3%. We have seen fuel prices ease in recent weeks, and the banana index too seems to be slowly heading south!
This is good news, as it means that the ‘tightening’ mechanism that the RBA has at its peril – a red button labelled ‘raise interest rates’ – should only need to be used sparingly. Furthermore, recently released employment statistics failed to meet expectations, which could further delay any use of the red button.
As it stands currently, analysts are predicting an increase before the end of the year, but the outlook for interest rates is not as hostile as it was only a few months ago.
The impact on Australians
Australians are exercising caution when it comes to purchasing property, and this is being reflected in the property market. Homeloans’ general manager of retail sales, Greg Mitchell, understands this caution, however stresses that in assessing a loan application a provision is made for increased interest rates and living expenses.
“One of the factors used to assess an application, is the ability of the applicant(s) to make the loan repayments without experiencing financial hardship,” Mitchell says.
“The lender will consider a range of factors including income, expenses and other liabilities in order to determine whether or not the applicant will be able to comfortably make the loan repayments, even in the event of interest rate increases.”
It is not just those considering borrowing who are affected. A number of existing home owners are currently experiencing financial hardship as a result of increased living expenses.
“The advice we would give to anyone in this situation is to contact us,” Mitchell says.
“We have a number of ways to assist borrowers experiencing hardship, achieving a favourable outcome.”
Homeloans customers can contact our client services department on 1300 78 78 74.
What are your thoughts on Australia's current financial climate?