Rate change fears eased

BORROWERS worried about rising home loan interest rates can sleep easy again.

Chances of any Reserve Bank of Australia interest rate rise this year are now only 50-50 after seeming a near certainty just a few months ago.

And a News Corp Australia analysis of RBA data shows that forecasters have been getting it wrong for years, having been slow to react to the new, low-growth world since the Global Financial Crisis.

Recent moves by banks to lower fixed-interest mortgage rates are another sign that rates should stay at record lows for longer.

While the RBA raises its official interest rate to keep inflation under control, it also tracks inflation forecasts made by economists and consumers.

Economists have incorrectly forecast that inflation would be higher than it was in seven of the last 10 years, and consumers have a worse scorecard – regularly predicting inflation would be twice as high as it turned out to be.

“We’ve all been wrongfooted,” said AMP Capital chief economist Shane Oliver.

He said Australia’s low inflation and low interest rates reflected sluggish economic growth, unemployment and underemployment hovering near 14 per cent combined, and businesses lacking competitive power to put up prices.

Dr Oliver said he was now leaning towards 2019 as the time for the RBA’s first rate rise since 2010. “People at the moment can relax,” he said.

“A rate hike is looking like it’s a long way off – it could be a year – but don’t assume they will never go up.”

BetaShares chief economist David Bassanese said there had been “gradual structural changes in the economy which takes a while for people to recognise and factor into their thinking”.

He said consumers regularly over-predicted inflation because they saw costs surge in healthcare, childcare and electricity, and did not notice falling prices elsewhere.

“You tend to focus on the things that are annoying you.”

Financial markets also have been wrong with forecasts.

“A few months ago the markets were convinced that rates would rise, possibly by mid-year, but now it’s more of a 50-50 bet,” Mr Bassanese said.

“I don’t think they’re going to go up this year.”

In the past two weeks several lenders, including the Commonwealth Bank, have cut interest on fixed rate mortgages, suggesting they believe rate rises are less likely soon.

Angelo Benedetti, managing director of finance broker Financia, said low wage and inflation growth and a volatile global economic environment were causing inaccurate predictions.

He said he had been told by forecasters late last year to prepare clients for rate rises by mid-2018 but “now there’s no talk of that”.