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MONEY MATTERS:

RATE RISE SIGNS

- Anthony Keane Personal Finance Writer

The Reserve Bank of Australia says interest rates won’t be rising until 2024 “at the earliest”. Financial markets and analysts who bet on these sort of things think rates – including your mortgage – could be climbing as early as next year.

Someone here has got it wrong, and we won’t really know who is right until the next rate rise is announced and home loan costs start rising again.

The RBA’s official cash rate is currently 0.1 per cent – we might as well call it zero – and that’s creating cheap money that’s been pushing up house prices and other assets.

Those who reckon rates will rise sooner say the current borrowing exuberance by Australian­s will result in even stronger growth in property, shares and other assets, and that will push inflation up and force the RBA to raise rates quicker.

The Reserve Bank uses its official interest rate to promote solid and sustainabl­e economic growth by keeping inflation within a 2-3 per cent target band.

Australia’s annual inflation has been below 2 per cent for a year and has not been above 3 per cent since 2011.

Inflation will increase again, eventually. And the next period of sharp interest rate rises will prove painful for many, as loan sizes today are much larger than they were when the RBA last lifted rates more than a decade ago.

So it’s a good idea to know some of the early warning signs of a future rate rise, so you can prepare.

Aussie home values rose 2.1 per cent last month ... as every city enjoyed solid growth. If this trend continues we will find ourselves in a housing boom where owneroccup­iers and investors feel rich, spend cash more freely and drive up inflation. That’s fuel for a rate rise.

HOUSING BOOM

Aussie home values rose 2.1 per cent last month, their strongest monthly rise in more than 17 years, as every city enjoyed solid growth.

If this trend continues we will find ourselves in a housing boom where owner-occupiers and investors feel rich, spend cash more freely and drive up inflation. That’s fuel for a rate rise.

GLOBAL RATES

One of the reasons Aussie interest rates are so low is we’re part of a global rates race to the bottom.

The RBA doesn’t want our rates much higher than other countries because it will draw in huge amounts of foreign cash seeking higher returns on cash, consequent­ly strengthen­ing our dollar and weakening our exports and economy.

When rates around the world emerge from their COVID slump and start climbing again, Australia won’t be far behind.

WAGES GROWTH

In recent years the RBA has emphasised boosting wages growth, which has been weak and was hurt further by COVID’s unemployme­nt spike.

Higher wages will cause higher inflation, which will cause higher interest rates. The numbers and trends are complex, but there’s a clear pattern.

A STRONGER ECONOMY

A better-than-expected result for the economy – a 3.1 per cent rise in GDP (gross domestic product) in the December quarter – was revealed this month to show we’re emerging strongly from the virus.

If this strength continues in the months ahead, and is boosted by the eventual return of overseas travel and internatio­nal migration, we could see significan­t rises in future GDP that will put more pressure on the RBA to raise rates.

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