Will interest rates rise?

As well as death and taxes, another reality of life is that there is always a cycle. This definitely applies to interest rates, which now look to have bottomed and are likely to start turning up from around September-October.

Rate cuts have done their job. A housing construction boom is on the way and the cuts have contributed to higher household spending and taken pressure off the $A - all at a time when the economy needs to rebalance away from mining investment. Right now the Reserve Bank is in no hurry to increase rates as signs of recovery are still tentative and it wants to avoid putting pressure on the $A.

However, in five or six months, evidence of stronger growth is likely to have built and it will have become desirable to start normalising interest rates to ensure house price gains don't get excessive. Expect the official cash rate, currently 2.5%, to have increased to 3% by year's end.

The process of raising rates will be gradual and depositors will face low rates for a long time yet. But home buyers and owners should allow for a turn-up in the interest rate cycle and the softer gains in house prices it will eventually bring.

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