RBA Rates Decision – February 2010

The RBA announced an increase in the cash rate from 3.75% to 4.00% today.  This is the fourth consecutive increase in rates (given the RBA doesn’t meet in January).  The cash rate has now moved up 1.00% from a low of 3.00% back in April last year.

Most forecasters are expecting the cash rate to increase by another 0.75% by the end of the year.  However, the poor performance of the stock market in January, which saw the ASX 200 index move from its high of 4,950 to finish the month at 4,570, could impact on the positive sentiment in the market of late, which could flow through to consumer spending and slow down further rate rises.  Time will play this one out.  (Incidentally, this small correction has seen around three months of rises on the stock market evaporate last month, reminding us all of the volatility of the share market, and that’s never good for our super funds).

In support of further interest rate increases, is the way in which unemployment has not been as high as most forecasters had expected to date.  Plus the latest inflation data in January (2.1%) suggests that inflation is starting to flow back into the economy.  The RBA will monitor this closely going forward to ensure they can keep inflation level between 2%-3%.

There are rumours floating about that given the banks have been increasing their lending margins over the past 18 months due to the lack of competition, some lenders may not pass on the full increases over the coming year.  Certainly Westpac’s ‘shocker’ of a move in December, whereby they increased rates 0.45% compared to the RBA’s cash rate increase of 0.25% , will not play out again this time round.  In the coming days we will see just what the banks are thinking when they announce their own increases to their variable rates.  So stay tuned on that front.

Those of you thinking of fixing your rates; think again, unless you are starting to feel the pinch in your hip pockets.  The margins between the best variable rates and the best fixed rates are still high.  One can only question the benefit of such a move.  Those with tight cash flows will benefit greatly by putting some additional funds into your offset or mortgage to draw on if repayments keep rising.  Cash management is king now and is the topic of my monthly comment below.