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Financial Happenings Blog
Monday, June 18 2007

About 3 years ago - mid 2004 - there was a brave forecast circulating in the media by economists BIS Shrapnel, which forecast interest reserve bank interest rates to hit 8%.  This would have made mortgage borrowing rates somewhere around 9.5%.  Pretty scary stuff. 

Here is the exact text from a Melbourne Age article dated the 14th of August 2004, from the article entitled 'Interest Rates - How High Will They Go':

'On the bear side is BIS Shrapnel, which is forecasting interest rates to peak by late 2006, with the Reserve Bank's cash rates hitting about 8 per cent. That's an extra 3 1/4 percentage points, or $550 a month, on a $225,000 home loan.'

Not suprisingly this report led to various doom and gloom forecasts for property prices - if interest rates were going to rise that far, then property prices would have to fall sharply.  (Or as a mate of mine says, property prices don't fall, they just consolidate).

Not long after this BIS changed their forecast, as mentioned by Australia's best financial commentator in this expert from the Sydney Morning Herald about 12 months later.

Alan Kohler, Sydney Morning Herald, 28 September 2005

The other item in the news this week was BIS Shrapnel's prediction of 6.5 per cent interest rates next year because of rising inflation. This firm had previously forecast interest rates of 9 per cent next year, so it was interesting that the media reporting of its latest report did not say: "BIS Shrapnel cuts rate forecast."

And now I see that BIS have jumped back onto the media forecasting wagon again, and are forecasting 22% growth in Brisbane property prices over the next three years - a much happier situation than previous forecasts would suggest.  The interest rates forecast to go with this is a 1/4 of a percent rise by September this year, and then interest rates on hold.

The bottom line is this.  Economic variables are tough to forecast - just look at BIS Shrapnel - in 2004 they tried to forecast 2 years ahead and missed by a lot, in 2005 they tried to forecast again and were out by half a percent.  Finally, having predicted in 2004 higher interest rates which would have had a negative impact on the property market, in 2007 they predict above average property growth in Brisbane.

Now, if you can just chop and change forecasts at a whim, I have an idea.  Why can't you have more than one forecast on the go at any one time?  So I am going to have a go at this forecasting game, and predict that over the next 12 months:

  • Australian Shares will be down by 5%
  • Australian Shares will return 0%
  • Australian Shares will return 5%
  • Australian Shares will return 10%
  • Australian Shares will return 15%
  • Australian Shares wil return 20%
  • Australian Shares will return 25%

It's a slightly different tact, but who else out there is guarateed of being able to point to the correct forecast in 12 months time!


Scott Francis

Posted by: Scott Francis AT 11:26 pm   |  Permalink   |  Email
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