Will the Australian interest rate really stay low?

The Reserve Bank of Australia (RBA) made it clear in last Tuesday’s statement that to stop the economy from overheating, they plan to keep the Australian interest rate at 0.10% until 2024. This means that taking out a home loan in this country has never been cheaper. But some lenders – including The Commonwealth Bank & Westpac –  are starting to hike their rates for four and five-year fixed-rate home loans. Does this mean you’re about to lose your chance to lock in a once-in-a-lifetime rate?

Australia’s economy is going through some strange times. If you’ve been following the media over the last year or so, you might be getting desensitised to words like ‘unprecedented’ or ‘historic’. But it’s worth taking stock of where we’re sitting at the moment.

The official national interest rate is currently at 0.10%, one of its lowest rates ever, and the RBA has signalled that they’re not likely to raise the rate until at least 2024. Meanwhile, March saw home values across Australia grow at a hefty 2.8% – their fastest monthly growth rate in 32 years.  Both lenders and borrowers are keeping one eye on this skyrocketing property market, and the other on an economy moving tentatively towards recovery. With things heating up this fast – could the RBA be wrong?

How are lenders behaving?

Some lenders are starting to make moves to increase their rates. Commonwealth Bank, as Australia’s largest home loan lender, made the biggest ripple when they increased their four-year fixed rate by 20 basis points in March, from 1.99% to 2.19%. The move sparked headlines across financial media outlets as potential borrowers started to fear they were missing their chance to capitalise on low fixed rates.

According to data from RateCity.com 10 other lenders have increased their four year fixed rates since the CBA raise – including large lenders like Bendigo Bank, Bank of Queensland and Aussie Home Loans. The jury is still out on whether Westpac, Australia’s second-largest lender, will join the trend.

Speaking to Yahoo Finance, RateCity director Sally Tindall pointed out that the raise is in line with the RBA’s predictions, saying that “It’s not surprising CBA has decided to raise its four-year fixed loan – the bank is pricing in at least one cash rate hike over this time. RBA Governor Philip Lowe has repeatedly said the first round of cash rate hikes wouldn’t be until at least 2024, but that’s only three years away.”

So, what about the RBA’s predictions?

For now, all eyes are on the Reserve Bank of Australia, with everybody speculating whether they’ll hold the line. The logic behind their 2024 forecast is based on a complex interplay between wages & the employment rate, inflation rates, and household debt. In his official statement, RBA Governor Phillip Lowe explained that even though the unemployment rate fell to 5.8% in February, it’s currently still too high for wages to grow. Wage growth, says Lowe, is crucial to gradually achieve the target inflation range of 2 – 3%.

The other factor in play is household debt. Under the current conditions – low-interest rates, rising house prices, and debt-to-income ratios already starting to push gently higher –  there’s a chance that household debt could spike and increase inflation too rapidly. The RBA has been clear that they’re monitoring home loan trends carefully, and stress that this can be wholly avoided if proper lending standards are maintained.

How will it pan out? Economists Weigh In.

Debate continues to rage amongst bankers & economists as to what will happen next. Speaking anonymously to the Australian Financial Review, one senior banker posited that even in the above scenario, the RBA would be unlikely to raise the rates significantly. Doing so, they argue, would decrease consumer confidence and create a negative feedback loop of decreased spending and weakened economic recovery.

Other economists disagree, citing the unexpectedly rapid recovery rate of the economy so far. Speaking to Yahoo Finance, KPMG Australia’s chief economist Dr Brendan Rynne commented that “We expect to see strong performance in the Australian economy, with GDP boosted by the unlocking of pent-up demand from a lockdown-affected 2020 – but this will start to taper off in 2022. Our forecasts on inflation (rising) and unemployment (falling) mean that by next year, the RBA will come under pressure to review its pledge to keep ultra-low interest rates until 2024. The inflation genie is still in the bottle, but it can definitely be seen edging up the sides.”

Speaking to 9News, Chief AMP economist Shane Oliver seemed to walk the middle path, claiming that “While the economy has recovered faster than expected, the RBA is still a long way away from meeting its inflation and employment goals, so a rate hike is still a long way away,” Mr Oliver said. “That said – the faster than expected recovery will likely see the first hike occur earlier than the RBA’s expectation of no increase before 2024. It could come late next year or early 2023.”

So… What should I do?

While all this logic seems sound, the takeaway is that interest rates are ultimately dependent on economic recovery – and only time will tell how that will really pan out. In the meantime, I’d advise borrowers to respond to the fixed-rate increases with caution. If you’re about to lock in a long-term home loan, make sure you stress-test your ability to continue repaying when interest rates eventually begin to rise. If you know you can afford it, then lock in your interest rates as soon as you can – before they keep rising. You can sleep easy knowing you’ve taken advantage of an amazing (but fleeting) opportunity, and you can tune out of worrying about a sudden rise to your rates.   

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.

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