The RBA board voted to leave the official cash rate on hold today, at its first meeting for the year.
The decision failed to surprise experts, though a growing number of economists are firming in the belief that the central bank will be forced to hike rates at least once this year; well earlier than its predicted 2024 timeframe.
Most commentators are making conservative forecasts, but Westpac’s Bill Evans went out on a limb last week, predicting a 15 basis point rise as early as August this year, followed by another 25 basis point hike just two months later, bringing the official rate to 0.5 per cent before the year was out.
Westpac also predicted further hikes in following years, until the rate hits 1.75 per cent by March 2024 (a date that the RBA has been telling us we would likely be at no more than 0.25 per cent by).
What does that add up to?
If you had a $1 million mortgage, you’d be looking at paying about $1000 extra a month on your home loan. This sort of rate increase would come as a massive shock to most mortgage holders, thanks to a decade or more of falling rates making historic low repayments “the new normal”.
And spare a thought for borrowers trying to get into the market. If Bill Evans is right about this year and we hit 0.5% by October, someone earning $100,000 a year would be able to borrow about $30,000 less than what they currently can. Further rate rises would make the situation catastrophic for borrowing power.
Take control of your own finances
RateCity research director Sally Tindall said that APRA data shows average Australian borrowers are nearly four years ahead on their home loan repayments, which is promising.
But being in control of your finances also means making sure you’re on the best rate. Tindall says borrowers should get ready to switch to a different lender or at least ask their bank for a better deal.
“RBA data shows the average existing variable rate customer is on a rate of 2.98 per cent, while the average new customer is on a variable rate of 2.59 per cent – that’s a 0.39 per cent difference worth haggling for,” she told News Corp. “If you do manage to move on to a lower rate, consider putting any savings back into your loan, which will also help minimise the impact of future rate rises.”
RBA puts end to bond stimulus
One big decision the RBA made at the February meeting was to put an end to its $350 billion bond purchase program, as it upgraded its economic forecasts.
Recently, core annual inflation hit 2.6%, which places it within the RBA’s 2-3 per cent target range.
And unemployment is now at a 13 year low of 4.2 per cent. These suggest a rate rise could happen in the short term, but the RBA has repeatedly said it wants these two measurables to be “sustainably” within their target bands, which means inflation will need to stay put for a while.
Wage growth is another factor and the central bank will want to see it rise from its current 2.2% to 3%.
RBA Governor Philip Lowe said in his statement that “while inflation has picked up, it’s too early to conclude that it is sustainably within the target band” and that “it is likely to be some time before aggregate wages growth is at a rate consistent with inflation being sustainably at target”.
He is no longer putting an “earliest” date on potential rate rises, but says the board “is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve”.
So the coming months will be interesting, but in the meantime, speculation from commentators will continue to be rife.
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