Rate hikes on the horizon

The survey of 28 leading experts, including those from all four major banks, unanimously expected no change to the official cash rate at the Reserve Bank board meeting yesterday.

However, all respondents forecast a rate rise next year, with many betting on a gradual interest rate upward cycle for the next three years.

According to the survey, the cash rate is expected to start rising in June 2015.

There is a 46 per cent chance of an increase during the third quarter of 2015, a 21 per cent chance that rates will begin to rise in the first quarter of next year, an 18 percent chance of rates to start rising in the second quarter of 2015 and a 7 per cent likelihood of rate hikes from October next year.

Finder.com.au money expert Michelle Hutchison said that cheap interest rates are coming to an end and property buyers need to be cautious with their borrowing levels.

“The Finder.com.au Reserve Bank Survey sentiment revealed that many factors will keep the cash rate at the current low level of 2.5 per cent,” Ms Hutchinson said.

"Inflation being subdued, the low Australian dollar, and damage to property markets outside Sydney and Melbourne should the cash rate rise too soon,” she said.

“However, the good times for property buyers are not expected to last much longer, with our survey showing the next rate rise being forecast for June 2015, and a 21 per cent chance that the cash rate will start rising from the first quarter of next year.”

The cash rate is expected to gradually increase over the next two to three years and hit a ‘new normal’ level of four percent, according to the survey.

Only 11 per cent of the 28 experts surveyed believe the cash rate will reach the historical average of about five per cent, while the majority (64 per cent) believe a ‘new normal’ of below five per cent will be reached.

“About one in three experts surveyed are expecting the cash rate to hit a ‘new normal’ by 2016, while 29 per cent are expecting it to happen in 2017," Ms Hutchinson added.

Only one respondent, chief economist at Commonwealth Bank Michael Blythe, is expecting a ‘new normal’ cash rate level to be reached in 2015. The remaining respondents were unable to comment.

“If you’re an existing homebuyer or hitting the property market this mortgage season, make sure you prepare a buffer for when interest rates rise,” Ms Hutchinson said.

“This is the time when you should be paying as much as you can on your mortgage, to lower the impact of higher rates,” she said.