Australians should brace themselves for official interest rate rises by the end of 2017, states the Organisation for Economic Co-operation and Development (OECD).

The OECD warns that monetary tightening is expected to begin towards the end of next year, given the need to “unwind tensions” in the housing market caused by record low interest rates.

"Monetary policy tightening is expected to commence towards the end of 2017 and this is appropriate given likely monetary policy developments elsewhere, the cyclical development of the [Australian] economy and the need to unwind tensions from the low-interest environment, notably in the housing market, which has in many places experienced rising prices for some time," the OECD reported in its latest economic forecast for the Australian economy.

“The government envisages fiscal consolidation. In the event of disappointing growth, however, fiscal rather than monetary support should play the leading role given the housing-market concerns and fiscal leeway.”

The OECD’s warning comes as some banks begin to increase their standard variable rates for new borrowers independent of the Reserve Bank of Australia. Yields on safe government bonds are also slowly beginning to rise eight years after the global financial crisis.

Market economists who’ve been tipping the Reserve Bank’s cash rate to stay lower for longer are reviewing their forecasts, with some still tipping another rate cut in 2017.

The OECD made its concerns about rising real estate prices plain in its economic forecast and urged higher rates.

“Significant housing market concerns remain and there is growing discord between financial market developments and the rest of the economy due to the low interest rate environment. The housing market remains a risk as an acceleration in price adjustment would weaken consumption demand and construction activity.”
 

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