Rate cycle is near bottom

SUNCORP'S banking analysts believe interest rates in Australia are either at or very close to the bottom of the interest rate cycle.

Suncorp general manager of banking Terry Wasmund said the chances of further cuts in official interest rates were diminishing and it was likely the Reserve Bank of Australia (RBA) will keep rates on hold when it meets today.

“There are a few positive signs starting to emerge and that may be enough to influence the RBA board's decision,” Mr Wasmund said.

“Unless we see another massive shock to the financial system from offshore, I don't think Australia's interest rates will drop much further.

“As we get closer to the bottom of the cycle a lot more people are expected to seriously start to consider locking in a fixed interest rate.”

Mr Wasmund said while the issues in the US and European economies had a contagion effect on Australia, there were signs that the worst may be behind us here.

“It's still a relatively poor economic environment which is cause for concern, particularly around growing unemployment, but I can't see official interest rates in Australia going down to the levels of the USA. The American economic circumstances are different than our own.” he said.

“Of course, in the global sense anything is possible, but it looks like we are past the worst and that means the RBA is unlikely to have a compelling reason to reduce rates at the moment.

“I'd say there is only a 20 per cent chance they will reduce rates, last month it was closer to 50-50.”

Mr Wasmund based his prediction on an improvement on recent economic news including consolidating equities markets and the first increase in consumer sentiment since the index fell for three consecutive months, beginning in January.

“Consumer sentiment surged in April as the recent rally in global equities and the Australian dollar eased economic concerns,” he said.

“Inflation has also dropped back within the RBA's target band for the first time in over a year.”

As we get closer to the bottom of the cycle a lot more people are expected to seriously start to consider locking in a fixed interest rate.

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