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Investors warned to prepare for rate hikes

By Vivienne Kelly
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The Reserve Bank of Australia left the official cash rate on hold yesterday, but homeowners are being told to brace themselves for what may come later in the year.

Shane Oliver, head of investment strategy and chief economist at AMP Capital, said some economists are finally giving up hopes of further rate cuts during this cycle, and rates are likely to remain on hold until around September or October.

Mr Oliver said even though RBA Governor Glenn Stevens can see encouraging evidence of a handover from mining-led growth to broader growth, this does not mean a rate hike is “imminent”.

“Yes there is increasing evidence that non-mining activity is on the mend, led by a likely boom in housing construction, but against this uncertainty remains the issue of how smooth the transition from mining to non-mining driven demand will be, worries about China and the resurgence in the value of the Australian dollar, and meanwhile inflation is benign,” he said.

A finder.com.au survey of Australia’s leading economists and banking experts also unanimously predicted the Reserve Bank would hold steady yesterday.

Despite the RBA's decision, finder.com.au is warning borrowers to start preparing for higher costs, with five out of the 11 experts surveyed predicting the cash rate will rise during the fourth quarter of 2014.

The five experts from Commonwealth Bank, CommSec, HSBC, ING DIRECT and St George Bank told finder.com.au that the RBA is tipped to increase the cash rate on Melbourne Cup Day at its November board meeting, or by the end of the year.

Finder.com.au’s Michelle Hutchison said now is the time to plan ahead before interest rates start to rise.

“If the official cash rate does increase by the end of the year, it’s likely that we will see home loan interest rates start creeping up before then," she said.

“So if you’re an existing borrower, it’s a good idea to review your budget and factor in higher costs now, before interest rates rise.”

Ms Hutchison said for every 0.25 percentage point increase an extra $50 would be added to the monthly repayments on a $300,000 loan, based on finder.com.au’s average variable rate of 5.37 per cent.

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