We Australians are a bit of an insular bunch. Maybe it’s just that we’re way down south and ‘girt by sea’, but Aussies tend not to pay too much attention to what’s going on beyond our shores unless it’s some truly jaw-dropping news.
So when Norway raised their interest rates last week, it probably flew right under your radar. After all, it’s nearly 15,000km away.
Yet as the first advanced economy to deliver a post-pandemic rate rise, the decision by Norges Bank should be seen as a clear warning for Australians: rate rises will come. It’s just a matter of when they arrive. The smart thing to do would be to lock your rate in now.
Norway’s rate rise is a sign of things to come. England and New Zealand are set to follow.
The Norges Bank lifted interest rates by 25 basis points from a historic low of zero, debuting a slightly more aggressive policy direction for the months ahead. They’ve flagged December this year as the timing of the next hike, with the Norwegian cash rate hitting 1.25 by the end of next year.
Norway may be the first western country out the gates, but it’s not alone. The Bank of England has also signalled it’s considering raising the cash rate, citing ongoing inflationary pressures as the key motivator behind a modest tightening in policy.
Closer to home, the Reserve Bank of New Zealand has heavily foreshadowed a 0.25 percentage point hike as soon as October 6. The RBNZ forecast its cash rate to be above 0.5 per cent by the end of this year, from 0.25 per cent at present.
The world is already reacting to Norway’s move, as inflation fears continue to grow.
This gathering momentum has sparked big moves in the US and UK bond markets, as traders bring forward their rate hike expectations and inflation fears grow. Economists stress that tightening economic policies will be a necessary step as the world starts to move beyond the Covid crisis.
“What is clear is that if you have a relatively clear path out of the pandemic through high vaccination rates, then the time has come to remove some economic stimulus,” said Alex Joiner, chief economist of IFM Investors, speaking to The AFR. “Monetary settings around the world have been at emergency levels, and the emergency has now passed.”
“We’ve seen a recalibration of expectations by markets, which illustrate that rates are going to go up. It’s clear that central banks are evolving their thinking in deciding just how they will remove those emergency stimulus measures,” said Dr Joiner.
The International Monetary Fund (IMF) has recently warned that inflation remains a growing threat to global recovery, particularly in developing countries. Already, we’ve seen large non-western economies like Brazil and South Korea are pricing in huge rate hikes to try and stave it off.
This inflation is what advanced economies like Norway, England and Australia are very keen to avoid, and tightening economic levers like interest rates is considered a good strategy for doing so. Yet Australia’s Reserve Bank is insistent that it won’t raise rates until 2024, even as we can see the global stage starting to change
The RBA may soon find itself playing catch-up. I think it would pay to lock your rates in now.
The RBA’s stance is built upon a refusal to act until ‘core’ inflation reaches around 2-3% in Australia, which they say will happen in 2024. This has proven a somewhat controversial stance, with consumer indexes continuing to price in expected hikes anyway, and several prominent bank leaders calling for earlier rate rises.
To be clear, the RBA being wrong about this wouldn’t spell sudden economic ruin for Australia – although as I’ve written recently, the economy doesn’t look good. Rather, the RBA would simply be forced to change their stance and raise the rate, a situation that’s looking increasingly likely after Norway’s move. Yet this is far from ideal for the average Australian homeowner.
By acting earlier, a gentle & gradual tightening of rates is still possible. Instead, denying the issue and leaving it too long may result in the RBA being forced to price in a sharp and sudden hike. After repeated assurances of ‘No rate rise until 2024’, a hike like this would be sure to catch millions of Australians by surprise.
Norway’s move signals that things are starting to change as the global economy staggers out of the Covid crisis, and Australia won’t be immune to the effects. It’s why I’ve been recommending to all our clients that they lock in their rates now, while they’re still at a historic low. In fact, I’ve been telling clients for 15 years that you should always lock in your rate, even when they’re moving. Knowing what to expect will help you sleep at night.
Nobody wants to wake up one day to find that their debt repayments have suddenly skyrocketed, but historically it’s how these situations have played out. Don’t let yourself get caught out!
I hope this analysis of interest rates & the global economic situation has been helpful for you. When it comes to news that could potentially affect your finances, we’re committed to helping our clients stay ahead of the curve.
If current events have got you looking to secure your loan, or you’re reconsidering your options in general, then get in touch with one of our advisors today. We’ll help you make the right choice.
The information in this article is of a general nature. It does not take your specific needs or circumstances into consideration. You should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.
