Fixed Versus Variable

By Mark Boulton  28/07/09

There was a speech today by the reserve bank governor Glenn Stevens. I cannot find the reference, but in the business spectator they reported here that “The nation’s top central banker said there was no rule that dictates the RBA has to wait for unemployment to peak before raising interest rates, adding to speculation the next move in rates is likely to be up”.

In the last 10 to 20 years, the reserve bank has not raised interest rates until the unemployment rate has started to decline. In this case there may be a move to increase rates a bit earlier. I actualy factored in this occurence in yesterdays update to “Is it worth fixing now”. I believe that there will only be a half percent total increase at before unemployment starts to reduce (unless the banks cost of borrowing reduces). I believe this because in the last interest rates trough in 2001/02, basic variable rates were around 5.7 percent. As unemployment is still expected to peak in late 2010, these preliminary rises may occur sooner rather than later. the financial markets are apparently factoring in such a rise by December at the latest.

If you want to be fixed, then maybe sooner is better than later, as I believe increases in fixed rates will flow through within the next two weeks. Saying this – Glenn Stevens did note that “Most likely, inflation rates in the
developed world will continue to be low for a while”.

See . . . what rates might be worth fixing at?

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