Finance Your Budget Interest rates confusing? Here’s the deal in 2015
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Interest rates confusing? Here’s the deal in 2015

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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 constant since August 2013, and how long this run of low rates will last is anyone’s guess.

This week economists predicted 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.

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Michelle Hutchison, money expert at finder.com.au, said 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, with the survey results showing the majority, 33 experts were forecasting the cash rate to rise next year, including one expert predicting a rate cut before an upward cycle begins,” she says.

“Regardless of the direction, the vast majority, 94 per cent of experts are expecting the cash rate to move next year.”

Here’s why economists are going up, and down.

running up money
Up and at em! Photo: Shutterstock

The case for going up

If you think the cash rate is going up next year, you are in good company.

Ms Hutchison said the reality was most economists were predicting a rise.

Out of the 37 economists and experts surveyed by finder.com.au, 33 believe interest rates will rise in 2015.

“Of the 37 experts, many raised several key issues that influenced their predictions including the need for stability, a slow economy, a weakening Australian dollar and no unexpected movements in the past month,” Ms Hutchison said.

John Caelli, ME Bank General Manager Markets, says the unchanged rate is good news for mortgage owners. However, he expects the next cash rate change will be upwards in 2015 – likely in the second quarter.

The good news is that it is expected to be quite gradual and won’t come as a large surprise.

FINAL fin-rba-cashrate-piechart
When economists surveyed by finder.com.au expect rates to change.

“We expect the cash rate will possibly peak at four per cent in 2016 and then go down again in 2018,” he says.

“With low interest rates, borrowers can save years off their mortgage and save tens of thousands of dollars in interest by paying off their loans sooner.

“Yet, despite the large number of people paying off their home loans faster, according to a ME bank survey, 42 per cent said they were just managing to make minimum repayments. While any future rate increases are likely to be gradual, borrowers who are just managing repayments now will need to make financial adjustments when this happens.”

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 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 include Saxo Bank and Western Union.

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

Money
A cash rate of 1.5 per cent is not impossible. Photo: Shutterstock

Economist Stephen Koukoulas also believed there were a number of factors that could contribute to another cut in the New Year.

He said that if commodity prices such as iron ore continue to fall and the world’s economies remain weak, the RBA could cut the current rate.

“It’s not impossible to see the cash rate cut to two or even 1.5 per cent,” Mr Koukoulas said.

“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 alternatives

At least one expert surveyed by finder.com.au, Domain Group’s Andrew Wilson, believed rates could be cut early next year, followed by rate rises.

Two economists believed the cash rate would stay on hold until 2016.

On Tuesday the RBA continued their mantra that there would be a “period of stability” in interest rates.

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