What will happen with interest rates in 2017?

Yet Brexit and the electoral victory of the soon-to-be 45th US President Donald Trump, are likely to have more of a negative than positive impact on Australia’s economy.

The direction of interest rates is increasingly uncertain and movement in 2017 is dependent on a number of factors.

Low inflation

In the first quarter of 2016 inflation fell below 2%, causing enough concern for the Reserve Bank of Australia to make two interest rate cuts in quick succession.

Inflation is now expected to remain low and the RBA has adjusted and included this forecast in its outlook. Another low inflation figure on its own is unlikely to trigger further interest rate cuts.

Increased unemployment

Although unemployment has remained relatively stable throughout 2016, the RBA is concerned about capacity.

Of particular concern is the number of people who are underemployed, that is working part-time but who want to work more hours.

This implies there is more capacity in the labour market than the unemployment rate is currently showing.

If this starts to lead to an increase in unemployment, then it is likely that the RBA will cut rates in an effort to stimulate the labour market.

Housing demand

The RBA thinks the housing market has slowed since 2015.

The market is also operating at different speeds in different cities with Sydney and Melbourne seeing strong growth, compared with more moderate growth in other cities.

But given that house prices in Sydney and Melbourne appear to be accelerating again, there is no doubt the strength of the housing market will weigh upon any rates decision.

The US economy

The US economy is strong and it is likely that the Federal Reserve will increase rates this month.

The decision is likely to strengthen the US dollar relative to the Australian dollar. This would take the pressure off our inflation rate.

While this is fairly straightforward, it’s yet to be seen how uncertainty following Trump’s win will affect the US dollar.

There was a brief strengthening following the election but it has since stabilised.

If a Trump administration leads to strong economic growth in the US, it is less likely we will see rate cuts in Australia.

However, if economic growth in the US slows, then rate cuts in Australia are more likely.

Many of Trump’s policies are likely to be good for economic growth (lower taxes, less regulation of the banking sector), but his trade policies are concerning.

Rate cut coming?

Where will we see rates head? With so much uncertainty, it is difficult to say however they are more likely to remain stable or be cut.

At this stage, it is unlikely we will see a rate rise.

Source-Nerida Conisbee