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Interest is what we think for 2015

The cash rate has stayed on hold in 2014, but next year we are predicting movement. Home buyers and mortgage owners will breathe a sigh of relief with the Reserve Bank’s decision to leave the cash rate unchanged at 2.5 per cent. This record low rate has remained since August 2013, and how long this run of low rates will last is a million dollar guess.

Some economists predict that rates will rise in 2015 and other economists predicted rates would be cut. Confused? Sure, but there’s no need to worry about your home loan repayments just yet.

There are several key issues that will impact the cash rate movement in 2015. There is a definite shift in the direction that the cash rate could take. Here’s why economists are going up, and down.

The case for going up

If you think the cash rate is going up next year, you may be in the company of those that influenced their predictions including the need for stability, a slow economy, a weakening Australian dollar and no unexpected movements. The unchanged rate is good news for mortgage owners. However, the warning signs that the economy is in a lot of hurt and the opposing view could signal rate cuts.

Could there be a cut?

Last week, Deputy Governor Philip Lowe flagged the possibility of another rate cut amid concerns Australia’s economy might slow more than expected next year. Deutsche Bank made a bold prediction before Tuesday’s RBA meeting earlier in December that rates would be cut to two per cent in 2015 to curb rising unemployment and falling household income growth. It is backed by others including Saxo Bank, Western Union, Westpac and others.

Interestingly the futures market also has the cash rate below 2.5 per cent next year.

There were a number of factors that could contribute to another cut in the New Year.

If commodity prices such as iron ore continue to fall and the world’s economies remain weak, the RBA could be forced to cut the current rate. We think that it is not impossible to see the cash rate cut to two or even 1.5 per cent. The fall in commodity prices, our high dollar and a subdued economy here and abroad could see the RBA trim rates when the next meet in February 2015. Between now and February, new data regarding employment and inflation rates will be in and if the news is disappointing then, the first half of next year seems likely to see the RBA cut rates

The Wash Up

It seems whilst a lot of economists are saying rates will increase it is interesting to know that historical predictions have not gone well, with economists who have a sorry tale of getting it wrong more often than right. Maybe it is best to get the advice of a monkey as they would at least get it right 50% of the time?

The reality is that it is hard to make any real prediction as a lot could change between now and February. With unemployment becoming a big issue and an economy has the wobbles. Our tip is that is more than likely rates will stay on hold for a while longer with a chance of a rate cut looking very much a possibility.

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