RBA makes last interest rate call for the year

The Reserve Bank of Australia (RBA) has left rates on hold at their record low 0.10 per cent, even as banks race to hike mortgage rates.

In the last meeting of the year, the RBA chose to leave settings unchanged as it waits for inflation to lie comfortably between 2 per cent and 3 per cent.

Headline inflation landed above 3 per cent in November, however governor Philip Lowe has said Australia still has a “way to go” due to oncoming uncertainty.

“The Australian economy is recovering from the setback caused by the Delta outbreak,” Lowe said on Tuesday.

“High rates of vaccination and substantial policy support are underpinning this recovery. Household consumption is rebounding strongly and the outlook for business investment has improved.”

The Bank is also monitoring the Omicron variant, with experts split on whether the RBA will shift rates higher in the second half of 2022 or wait until 2023.

“The market is signalling interest rates will rise sooner than the RBA’s official position, and with central banks in other countries starting to lift rates, the RBA may be forced to move sooner than anticipated,” forex broker CLSA Premium chairman Peter Boehm responded to the Finder interest rate survey.

“The key will be the period over which the RBA increases rates to their neutral position of between 2.5 per cent and 3.0 per cent, and by what increments. Even a 0.25 per cent increase could have negative impacts on the economy.”

Today’s meeting is the last time the RBA board will meet before February 2022, as the Bank won’t meet in January.


Changing mortgage landscape

Even as the RBA is unlikely to lift rates until late 2022 at the earliest, Australia’s banks are beginning to move.

April 2021 saw some 180 fixed rates below 2 per cent, but as of today, there are just 73 such rates, according to RateCity analysis.

And fixed rate borrowers with the big four banks are already feeling the difference.

Someone with a four-year fixed rate would have been paying an average 2.04 per cent rate in January 2021. Today, they’re paying an average 3.07 per cent – a $268 difference per repayment on a $500,000 loan.  

Rate Jan 1 rate Today Difference Difference in repayment on $500K
1 yr fixed 2.12% 2.38% +0.26 $67
2 yr fixed 2.08% 2.45% +0.38 $96
3 yr fixed 2.08% 2.87% +0.79 $204
4 yr fixed 2.04% 3.07% +1.03 $268
5 yr fixed 2.57% 3.29% +0.73 $194

Source: RateCity.com.au. Note Rates are for owner-occupiers paying principal and interest. Monthly repayments assume 30-year principal and interest loan.

“Fixed rates are likely to keep rising across 2022 as global economies continue to recover from the pandemic and central banks around the world start to lift official interest rates,” RateCity research director Sally Tindall said.

“By this time next year, there could be no fixed rates under 2 per cent. In fact, the majority of fixed rates for owner-occupiers are likely to start with a ‘3’.

“Anyone currently on a fixed rate needs to prepare to pay significantly more when their term ends.”

The Commonwealth Bank believes the RBA will begin increasing rates in November 2022, and rates will hit 1.25 per cent by August 2023.

“Even if the RBA doesn’t hike rates in 2022, it’s entirely possible banks will,” Tindall said.

“To date, the rising cost of funding has only affected fixed rates. However, it could get to a point where lenders decide they also need to hike variable rates ahead of any official move from the central bank.”


Article from: au.finance.yahoo.com