No shocks for market as rates stay on hold

The Reserve Bank of Australia is continuing to maintain its course on interest rates, repeating its stance that inflation and wages growth will not be strong enough to warrant a change until 2024 at the earliest.

RBA governor Philip Lowe said while the labour market and overall economic recovery had been stronger than anticipated, inflation and wages growth remained subdued, and the RBA would leave the official cash rate at its historic low of 0.1 per cent.

Dr Lowe said while the RBA’s forecasts showed CPI inflation was likely to jump to 3.5 per cent for the 12 months to the end of June, the central bank expected it to ease to 1.5 per cent over calendar 2021 before rising to 2 per cent by mid-2023.

(The RBA board) will not increase the cash rate until inflation is sustainably within the 2 to 3 per cent target range,” Dr Lowe said.

The RBA’s repetitive insistence that it will not hike rates until 2024 comes as speculation from major banks and industry analysts continues to swirl that an earlier increase is coming.

Two of Australia’s biggest banks, Commonwealth Bank and Westpac, are on the record saying a 2022 rate hike is on the cards, while one in three economists surveyed this month by Finder said they expect the official cash rate to rise in 2023.

AMP Capital’s Shane Oliver told Finder’s monthly RBA survey that there was still a long way to go before wages growth hit the central bank’s target zone, particularly in light of the recent COVID-related lockdowns across the country.

“That said, we expect the conditions for a rate hike to be in place by 2023 so anticipate a 2023 rate hike, ahead of the RBA’s own expectations for no rate hike until 2024 at the earliest,” Mr Oliver said.

Bankwest Curtin Economics Centre deputy director Rebecca Cassells shared Mr Oliver’s concern that the latest lockdowns, and Sydney’s in particular, could have a lasting economic impact.

Just over half of the experts and economists who participated in Finder’s latest survey estimated Sydney’s lockdown was likely to cost the national economy around $2 billion.

Ms Cassells said the exact economic impact of the recent outbreaks and lockdowns remained to be seen.

“In the meantime, the RBA will continue to hold the cash rate at 0.1 per cent but likely introduce greater flexibility into its bond purchase program, aligning with what is looking to be a protracted and bumpy ride through the pandemic,” Ms Cassells said.

REA Group executive manager of economic research, Cameron Kusher said many economists had pulled forward their rate hike forecasts on the back of Australia’s strong-performing labour markets.

“There's still a lot that can go right or wrong between now and 2024 and the RBA is clearly determined to wait until wages are increasing, we've reached full employment and inflation is in the middle of the target range,” Mr Kusher said. 

“They were unsuccessful at achieving these things prior to the recession, I suspect they will want to ensure the recovery is firmly entrenched and international borders are reopened and the impact of that is seen before lifting rates."

Homeloanexperts.com.au’s Alan Hemmings acknowledged the widespread speculation of a rate hike before 2024, but warned borrowers that increased rates were inevitable.

“Property prices are still growing at a very fast pace and although inflation is below the sustainable 2 to 3 per cent target zone, speculation is building around when the RBA will finally make the call,” Mr Hemmings said. 

“Even if the central bank holds off on increasing interest rates until 2023/24, there could be a perfect storm coming as most borrowers who fixed their rates over the last six months roll onto variable rates at that time. 

"While the lenders have protected themselves with serviceability buffers, it will be borrowers who may have overextended themselves that will suffer."

Finsure managing director John Kolenda, however, said consumers had no reason to panic over the continuing speculation that rates were on the cusp of increasing.

“While there have been forecasts of RBA cash rate rises before the end of 2022 by lenders such as the Commonwealth Bank, it’s likely any future rises if they do happen will in small increments, and the RBA would be extremely cautious about their potential impact on consumer confidence and the economy,” Mr Kolenda said.

“Mortgage holders should always be prepared for a rise in interest rates, including increases by lenders independently of RBA decisions, but I don’t think there’s any need for people to panic about big rate rises in the current economic climate.

“We know historically when we have rate rises that the economy slows down, and consumers tighten their belts. While rate reductions help improve consumer confidence and increase spending, rate rises have the opposite effect. This time around we are more likely to see a small increase and a long-term low interest rate environment continue.

“We are also likely to see the regulator intervene should property prices keep rising over the short-term in an effort to balance the needs of the broader economy.

“Until the national vaccination program is complete, we are also still at the mercy of COVID and government restrictions, as the recent lockdowns around the country have highlighted.”

Mr Kolenda said homeowners should seek advice from an expert mortgage broker to ensure they are getting the best deal on their interest rate.