Nell Matzen - 6 Jul, 2021

July RBA cash rate remains steady, but major lenders predict early interest rate hike

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The official cash rate will remain at 0.1%, following the Reserve Bank of Australia’s (RBA) July Monetary Policy Meeting.

The announcement marks the eighth consecutive month of the historically low cash rate, which the RBA has previously stated will stay put until at least 2024.

However, due to the strong recovery of the economy from the impacts of COVID-19, some of Australia’s biggest lenders are predicting an earlier cash rate rise.

What are the big 4 banks predicting?

According to the Commonwealth Bank of Australia’s (CBA) Economist Gareth Aird, the CBA predicts a rate rise by November 2022 – thanks to the better-than-expected recovery of Australia’s labour market.

“Given the starting point for the labour market and the forward-looking measures of labour demand, we now forecast the unemployment rate to be 4.5% at end-2021 and 4.0% by end- 2022,” he said.

May’s 2021 unemployment figures from the Australian Bureau of Statistics (ABS) showed the current unemployment rate of 5.1% is the same as February 2020 – a promising sign.

Mr Aird said the CBA predicts a cash rate rise of 15 base points, taking the rate from 0.1% to 0.25%. 

CBA also predicts a further increase of 25 base points to follow in December 2022. 

“We have three further 25 base point hikes in Q1 2023, Q2 2023 and Q3 2023 that would take the cash rate to 1.25%, the level at which we assess the cash rate to be neutral.” 

Mr Aird added there was a possibility that the central bank would lift rates earlier than this scenario. 

“There are scenarios that could see the RBA pull the rate-hike trigger earlier than November 2022, particularly if they tweak their reaction function because it becomes irrefutable that wages growth is on a path to 3% per annum.”

“Alternatively, the RBA could delay hiking the cash rate of growth in labour supply was to accelerate quickly when the international border is reopened,” he said.

ANZ were the first to predict an earlier cash rate rise believing that the benchmarks for the 2024 raise will be reached earlier than expected.

The bank’s economic team predicts inflation could top 2%, and wage growth could surpass 3% midway through 2023, thanks to a tighter labour market.

“The tighter labour market will drive wages growth and ultimately inflation higher.”

“The bands of uncertainty around our forecasts remain wider than usual.”

“It is possible that the conditions for rate hikes arrive even earlier than the second half of 2023 if the recent trend of rapid improvement in the economy continues.”

“But there is also the prospect that the recovery is knocked off-track by COVID and rate hikes are delayed,” they said. 

What will this mean for mortgage holders?

The predicted early rate rise does not spell total doom and gloom for borrowers who took on a bigger mortgage, thanks to historically low-interest rates.
 
Mr Aird explained that the possible cash rate of 1.25% by the end of 2023 is a neutral cash rate – which indicates the economy is neither booming nor struggling and could suggest that the rate will hover around this point for some time.

It would also mean that the interest rate would return to the rate seen in June 2019.

What's my borrowing power if I earn $ per year?

A 1.25%-point rise in the cash rate, when passed directly onto the borrower, would take the average owner-occupier mortgage rate from 3.10 to 4.25% and the average investor rate from 3.44 to 4.59%.

On a $500,000 mortgage, that rate rise would result in a small $324 per month increase in repayments.

Words by Nell Matzen

Sources
Commbank: RBA will hike the cash rate in November 2022
Australian Bureau of Statistics Labour Force Australia
Commonwealth Bank warns interest rates will rise next year pushing up mortgage costs
ASX closes up, ANZ tips rate hike, ACCC approves Woolworths deal, Greensill appeal fails

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