• Greg Morgan

Getting Ready for a Rate Rise

The Reserve Bank of Australia has kept the official cash rate at the record low of 0.1%. Despite this figure sticking for the last 12 months, changes are on the horizon. According to many experts, an interest rate rise is expected sooner rather than later, as the economy bounces back with gusto. While the Reserve Bank is playing down the immediate threat of a rate rise, it wants the official cash rate to eventually climb to 2.5%, and possibly higher to 3.5%.

While interest rates were not expected to rise until 2024, they could now rise much earlier. According to Reserve Bank Governor Philip Lowe, “We’re trying to get interest rates up over time. If we’re successful, interest rates will go up. People borrowing today need to remember that.” As you might expect, this would have significant implications on the ground, with some lenders already making adjustments.

A rate increase to 2.5% would lift the repayments on a $750,000 mortgage by $1004 a month or $12,048 a year. This is currently the average loan for an established house in NSW. At 3.5%, which is not out of the question, home loan repayments would climb by $1468 a month or $17,616 a year. In Victoria, the average mortgage is worth $634,000, which equates to a rise of $849 a month or $10,188 a year for 2.5%, or $1241 and $15,000 for 3.5%.

While multiple rate rises are pretty much guaranteed at some stage over the next few years, the timing will depend on inflation, wages growth, GDP growth, and many other key indicators. The Reserve Bank expects GDP growth of 3% over 2021, 5.5% in 2022, and 2.5% in 2023. According to Mr Lowe, another “important source of uncertainty continues to be the possibility of a further setback on the health front.”

As always, the Reserve Bank wants inflation to be in the target range between 2%-3%. A recent pickup in core inflation lifted the figure to 2.1% in the September quarter, which is the first time it has entered the target range in six years. While the Reserve Bank still doesn't forecast a rate rise before 2024, they recognise it as a possibility if global inflationary pressures became embedded in international supply chains.

While there are many other signs of economic recovery, according to Mr Lowe, conditions are still far from ideal due to a lack of wages growth. Rates will only change when conditions are “tight enough to generate wages growth that is materially higher than it is currently... this is likely to take some time. The board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2.5% at the end of 2023 and for only a gradual increase in wages growth."

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