There seems to be a lot of hype in the media at the moment about rising interest rates. Personally, I’m not sure why. Australia has had the lowest cash rate in decades and all of a sudden they are shifted slightly and everyone gets nervous. Through all the recent property booms across the country, they have all occurred when interest rates have been higher than they are now.

In 2008 when the term ‘GFC’ was part of nearly every conversation & headline, the RBA responded accordingly dropping interest rates faster than they had ever done before and lower than they had done for the last 40 or so years. This to me was a true sign of an active board that should be applauded for their swift movements, leading Australia almost unscathed out of what was a turmoil period for the world economy. There is no doubt Australia did suffer, however to a lesser extent than that of other developed countries around the world. The GFC is not over, although journalists are calling an end to it although I do believe the effects of it will linger for some time. In particular, I think every new and existing investor will make their decisions with the GFC in the back of their minds as a very real possibility to consider in both the short term and beyond.

So now we have seen what could happen and how it can be managed. The share market is up over 50% from its lows in March, the property market has pushed up over 8% this year alone and unemployment levels are nowhere near the levels that were once expected at the start of the GFC.

So what does rising interest rates actually mean? Well, for starters, I think we should be happy about them. Rising interest rates are evidence that our economy has survived AND is showing signs of growth. So, in order to slow down inflation, which the RBA is very wary of, interest rates are required to rise.

My concern though is not that interest rates are rising but more importantly that interest rates may rise too quickly. Everyone seems to think that we are over the worst and that there is only positive news to come, but, with such a fragile world economy at the moment the slightest hint of bad news could bring the economy crashing down (again, although I don’t believe it will be anywhere near the levels we saw in March 09).

The NAB has suggested that there will be an interest rate rise of 25 basis points in every board meeting until March 2010. This means the cash rate should hit 4.25% within months. NAB’s chief economist Alan Oster said growing consumer confidence and an improvement in business conditions had increased the likelihood of further rises. The business conditions index surged nine points over the last month to a reading of +12, which is substantially above the long run average reading of +3 index points.

“While confidence has surged in recent times, business conditions have remained significantly below long term averages. That has now changed. In many ways, very high business confidence readings appear to be bearing fruit,” Mr Oster said.

Now although the business conditions index is reading +12, much higher than the long term average of +3, it doesn’t take into account the fact that we have just been through one of the most serious financial downturns in history, so human psychology will tell us that any glimmer of hope to escape the negative sentiment in the world would be exaggerated. So although there is a reading of +12, it needs to be taken into context against the backdrop of the reading as I do think its hard to agree that business is 4 times better at the moment than our past average years.

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The Reserve Bank of Australia has stated that Australia’s recession could be over by Christmas. A recovery may be on the agenda as confidence and economic activy returns to the market on both a globa scale and locally in Australia. They aslo believe that the worst of the global gloom may then be behind us aswell.
Backed by strong signs of improvement in China, the local economy could show signs of recovery as Australia is China’s larget trading partner. This backed up with certain local stimulas packages has resulted in consumer confidence increasing slightly too.
The RBA have stated that “In the case of the Australian economy, members observed that there were signs that the economic stimulus that had been applied was supporting demand. Nonetheless, substantial growth was not expected to resume until around the end of the year.”
So if the Reserve Bank of Australia is eyeing any sort of recovery in the pipeline the likley hood of any furture interest rate cuts in the short term will be relatively low. That being said, if the economy doesn’t start to improve or remains weighed down, then the RBA will be forced to cut rates further in the second half of the year.

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