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A Rate Rise is Coming, But it Might be Later than many Commentators Expect

A Rate Rise is Coming, But it Might be Later than many Commentators Expect

If you’ve taken out a mortgage in the past decade, you might never have experienced a situation in which interest rates went up rather than down.

The cash rate, which is set by the Reserve Bank of Australia (RBA), has steadily fallen from 4.50% in 2011 to 0.10% today. As ‘official interest rates’ have fallen, lenders have responded by cutting their mortgage rates.

But ever since the RBA reduced the cash rate to a record-low 0.10% in November 2020 – which was an emergency reaction to the covid pandemic – it has said repeatedly that, sooner or later, it will start increasing the cash rate, to bring it back to a ‘neutral’ level. So we know official interest rates will start rising – we just don’t know when.

As this article will explain, the big four banks expect the Reserve Bank to start lifting rates this year, but the RBA has hinted it might not happen until next year.

The big four banks’ predictions

Australia’s major banks believe a series of rate hikes will occur in the near future.

Commonwealth Bank expects the Reserve Bank to start increasing the cash rate in June 2022, and for it to peak at 1.25% in early 2023.

Westpac has forecast that the first rate rise will occur by September 2022, and that the cash rate will peak at 1.75% by the end of 2023.

NAB feels the first rate rise will occur by August 2022 – possibly as early as May, during the federal election campaign – and that the cash rate will reach 1.25% by June 2023.

ANZ doesn’t expect the RBA to start lifting rates until June 2022 at the earliest. “When the RBA does move, the case to do so will be overwhelming. What’s more, it will be starting from a level that is well below neutral. As such we think a number of successive monthly hikes is very likely,” according to ANZ.

“The market is even more convinced of this than we are, with a cash rate target of close to 2% priced for the end of 2022 and a target of more than 3% factored into the later part of 2023. We have been arguing for some time that the peak in the cash rate in this cycle would be 3% or higher. In part, this is because we expect the RBA to take its time once it gets a few hikes under its belt.”

The Reserve Bank’s position

Of course, while the big banks’ forecasts are interesting, the only party that has any control over the cash rate is the Reserve Bank. And the RBA has been singing a different tune.

Every month, the RBA board holds a meeting to decide whether to increase the cash rate, decrease it or leave it on hold. According to the most recently released minutes, here’s what the board concluded at its March meeting:

“As agreed at previous meetings, the board will not increase the cash rate until actual inflation is sustainably within the 2-3% target band. While inflation had picked up, members agreed it was too early to conclude that it was sustainably within the target band. There were uncertainties about how persistent the pick-up in inflation would be given recent developments in global energy markets and ongoing supply-side problems. Wages growth also remained modest and it was likely to be some time before aggregate wages growth would be at a rate consistent with inflation being sustainably at target. The board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

There are three key takeaways from that statement:

  • The RBA won’t increase the cash rate until “actual” inflation (also known as core inflation or trimmed-mean inflation) is “sustainably” between 2% and 3%
  • Actual inflation is unlikely to sustainably reach the 2-3% target band until wages growth increases
  • The RBA is “prepared to be patient” about how inflation unfolds – and therefore, by extension, with increasing the cash rate

So how are things placed with inflation and wages?

With inflation, the Reserve Bank pays attention not to the ‘headline’ inflation rate, which covers all goods and services, but the ‘actual’ inflation rate, which excludes items like food and energy that have volatile prices. Here are the last four inflation results that have been released by the Australian Bureau of Statistics:

  • Mar quarter 2021 – headline = 1.1%, actual = 1.1%
  • Jun quarter 2021 – headline = 3.8%, actual = 1.6%
  • Sep quarter 2021 – headline = 3.0%, actual = 2.1%
  • Dec quarter 2021 – headline = 3.5%, actual = 2.6%

So while headline inflation has been hovering above the 2-3% target band, actual inflation has only recently entered that band. That’s part of the reason why the RBA feels it’s too early to say actual inflation is “sustainably” between 2% and 3%.

Another reason is because of what’s been happening with wages. The RBA believes wages growth needs to be higher than it is now to push the inflation rate sustainably into the target band. But wages growth is currently very low by historical standards, even though it’s been increasing:

  • Mar quarter 2021 = 1.5%
  • Jun quarter 2021 = 1.7%
  • Sep quarter 2021 = 2.2%
  • Dec quarter 2021 = 2.3%

 

The Australian Bureau of Statistics will release new quarterly data on inflation on April 27 and wages on May 18. The RBA will be paying close attention to the results.

Start budgeting for rate rises

Given that the Reserve Bank is “prepared to be patient” about how inflation unfolds, it’s possible the cash rate won’t increase until 2023, rather than 2022 as the big four banks expect.

Again, though, it’s a question of when not if. So borrowers should start budgeting now for higher mortgage repayments.

The good news is that home loan rates are currently at record-low levels, so even when they do increase, they will still be very low by historical standards.

 

Shore Financial can help you find a loan that suits your personal circumstances.

Shore Financial would be happy to discuss how rising interest rates might affect your home loan and financial position. For expert mortgage advice, call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.






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