Other countries prove rate cuts are on the way

One economist has warned that we could be facing up to three rate rises this year as inflation is not beaten yet.

And yet many European countries think they have it under control and so have indicated they are months away from cutting rates.

So, are we right to fear more rate rises and is there much difference between Australia and other developed countries?

I have just returned from the UK after spending the past three months in various European countries; it’s increasingly clear that one of the World’s largest economic blocs thinks it has got inflation licked.

This week, major changes from the Bank of England implied that rate cuts could come as soon as next month – matching what the European Central Bank has said what it is likely to do.

Also, Sweden’s central bank cut its key interest rate for the first time in eight years.

Is Australia likely to follow suit? Probably not, but that does not mean that cuts are out of sight.

This month, for the first time, the Bank of England’s Monetary Policy Committee voted 7-2 to keep rates on hold (previously it was 8-1).  This time, the Bank’s Deputy Governor voted for a cut – implying that a rate-drop is getting closer and closer.

In Australia, it’s a different story – but not completely.

Like the rest of the World, we have experienced unprecedented rate rises – 13 in the past two years.

But, unlike the rest of World, we have not felt as much pain; the Reserve Bank of Australia has our cash rate at 4.35 per cent, whereas in the UK its 5.25 per cent.

Thankfully it has meant our economy has kept ticking along better – this week the UK also officially came out of recession.

And, because the Aussie economy is still ticking along, there’s less need to cut rates to stoke the engine.

But globally, most Central Banks are more confident that they have inflation under control.

So, are we expecting imminent rate cuts?  No.  Could we even face rate rises?  Maybe (but in my opinion it’s not that likely).

But the trajectory is good – rates will start to come down.  How soon we follow other countries is the question.

Graeme Salt is an award-winning mortgage broker who meets the home loan needs of clients throughout Australia.  For a no-obligations consultation on your mortgage needs, please contact him on 02 9922 5055