WEEKLY E-MAIL

8 April 2022

INTEREST RATES COULD BE IN FOR A RAPID RISE VERY SOON

By James Malliaros

The 2022 Federal Budget contained more spending announcements than was expected, with much of it front loaded, which will add at least some demand to an already strong economy. However, this is not expected to change the Reserve Bank of Australia’s (RBA) thinking about the timing of the first interest rate rise, with the official cash rate having been on hold at its historic low of 0.10% since November 2020.

Instead the first interest rate rise will depend on inflation and wages data in the first half of 2022, with the RBA indicating it is unlikely to lift rates until annual inflation is within the 2-3% target range.

When the RBA does move, the case to do so will be overwhelming. What’s more, it will be starting from a level that is well below neutral and therefore a number of successive monthly hikes is very likely. In fact, financial markets are predicting a cash rate target of close to 2% for the end of 2022 and a target of more than 3% into the later part of 2023.

The market is pricing an RBA cash rate above 3%

Source: Bloomberg, ANZ Research

Financial markets clearly think the RBA won’t muck around once it starts to tighten interest rates. Given its concerns around possible inflationary pressures, the RBA is expected to tighten by 0.15% in June, with larger rate hikes of 0.25% to follow.

The view is that the RBA will undertake a steady tightening strategy ahead, with lots of pauses, which could extend the cycle for a number of years. These pauses essentially allow the economy to adjust to a higher level of rates.

Eventually the peak in the cash rate is likely to be around 3%, but not until sometime after 2023, later than markets are currently pricing in.

At that point it is expected that the RBA will pause for an extended period, not least because by then the US Federal Reserve will have tightened interest rates materially and the US and global economies may be showing signs of slowing.

Mortgage interest rates

In relation to mortgage rates, the 3-month bank bill rate, which is an important factor in determining the cost of home mortgages, is also expected to rise to over 3% in the coming 18 months. If this forecast is accurate, borrowers with a home loan of $500,000 may need to prepare to pay over $300 more a month in mortgage repayments by the beginning of 2023, when variable mortgage rates are expected to be around 4.1%.

To help lessen the impact that a cash rate hike may have on home loan repayments, it may be worth considering making extra repayments now to build up a buffer and reduce the amount you need to repay.

In addition, you should consider refinancing to a lower home loan rate to give yourself a rate cut. If you have a good track record of paying down your debt, then you probably have more negotiating power than you realise.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

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