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Everyone is asking what interest rates are expected to do in 2009. I searched the Internet high and low and talked with a few lenders about what they anticipate happening on the rate-front. Most were optimistic, although 2009 is going to be no cake-walk. Rates are expected to fall slightly at the beginning of 2009 and creep back up by mid-Spring. There are so many factors including unemployment, supply/demand, etc. Below is an article published regarding the predictions nationwide for 2009:
John Nicolaou from the CCI is predicting WA growth rate will return to 6 per cent within two years. (CCI)
The CCI originally forecast Western Australia would record growth of 5.5 per cent this financial year but has recently downgraded that forecast to 3.5 per cent.
The CCI economist John Nicolaou says growth is expected to slow even further in 2009-2010, to 3.25 per cent, before picking up to more than 6 per cent the following year.
Mr Nicolaou says, while the next 18 months will seem like a slump compared to the last couple of years, it is a growth rate that is the envy of much of the world.
“It’s important to take those number in perspective,” he said.
“While they are down on the past six or seven years, when we’ve seen exceptionally strong growth, it’s important to know that, against other developed, and developing, economies, that’s a very high rate of growth.
“It’s testament to the underlying strength behind the WA economy, the strong fundamentals, which are likely to support overall growth in the economy at a time when conditions externally are deteriorating.”
Mr Nicolaou says predictions of rising unemployment across Australia in the next 12 months will have minimal impact on Western Australia.
He says the state’s unemployment rate is expected to remain around 3.5 per cent for the next two years.
The West Australian Government, which is demanding all government departments slash spending by 3 per cent, is forecasting an even sharper slow down with growth this financial year of 1.5 per cent.
Drop rates
The slow down is expected to see the Reserve Bank of Australia (RBA) drop interest rates to the lowest levels since the 1960s.
After raising rates in February and March 2008 to 7.25 per cent, and continuing to talk up rates to try to curb inflation, the RBA began cutting interest rates aggressively from September.
By December, the RBA had cut rates by 3 percentage points, unwinding 12 interest rate rises in the past six years in less than four months.
Economists at Westpac, ANZ and Macquarie Bank are forecasting that the RBA will drop the cash rate from 4.25 per cent to around 3 per cent, taking home loan mortgage rates to around 5.5 per cent.
They predict that fixed rates, already down to 5.19 per cent for two years, will fall to their lowest level in living memory by June, 2009, before the RBA will be looking for an opportunity to raise rates in 2010.
“I think mortgage interest rates can go down to about five and a half per cent in Australia,” said Macquarie Bank’s Richard Gibb.
“That would be an all-time low, and that would be consistent with a cash rate of three and a half per cent or below and I think that’s where we are heading.”
But Warren Hogan from ANZ warns that interest rates are heading lower for a reason.
“I think you would be hard-stretched to get any histories that show Australian mortgage rates that low,” he said.
“Interest rates will be low because the economy will be very weak, unemployment will be rising and inflation will be falling rapidly.
“And all of that is symptomatic of an economy, both locally and globally, that is going through a significant adjustment after a very strong … 15 years.”
Westpac’s Justin Smirk is also predicting the RBA will have little choice but to continue dropping rates in the first half of 2009.
He says the low rates will put a floor under house prices and should prevent a long term slump in the housing market.
However, the CCI believes the West Australian economy will recover by 2011 with growth of 6.25 per cent.
Recession inevitable
Chris Richardson from Access Economics says the new year will see more people affected by the financial crisis.
“So far we’ve just seen sharemarkets halve, we’ve seen some sectors, like retailers and car dealers, hard hit. Most people are still doing okay, 2009 will change that,” he said.
“This will be an ugly year. Growth will slow, income growth will slow a lot, unemployment will rise, profits will fall quite sharply.”
Mr Richardson says it is inevitable Australia’s economy will fall into recession.
