The RBA has delivered another interest rate ‘bomb’ to anyone with a home loan, with the July 0.5 per cent increase coming hot on the heels of the June 0.5 per cent rate rise, and there are more to come.
How do I know that? Well, when the RBA delivers a decision on interest rates, governor Philip Lowe shares his and his board’s insights on what drives rates higher or lower.
Also by Peter Switzer:
Economists, like Shane Oliver of AMP, pore over every word Lowe utters on the first Tuesday of the month - when the RBA board meets.
And here are the three big takeaways:
1. The cash rate was pushed up by 0.5 per cent to 1.35 per cent
2. It’s the fastest back-to-back increase in rates since increases of 0.75 per cent and 1 per cent in November and December 1994, respectively, which were huge
3. The RBA thinks the economy remains strong and is worried about inflationary expectations
So, expect more rate rises this year, with Oliver tipping the cash rate will peak at 2.5 per cent in the first half of 2023.
For anyone with a home loan, the big question is how high can the cash rate go? The answer to this is important because the cash rate determines how high home loan rates could go.
The scariest call out there comes from money market professionals, who think it could go to 3.7 per cent.
I reckon they’re wrong, but let’s see how these possible rate rises could slug those with loans.
Right now, if you have a $600,000 home loan, the rate rises this year (0.25 per cent in April and 0.5 per cent in both June and July) have bumped up repayments by $420 a month or $5,100 a year.
If the cash rate went to 3 per cent, the take from borrowers from these RBA rate rises would be a huge $12,200.
That would hurt a lot of households and could cause a recession.
That’s why Lowe will watch how these recent rate rises affect spending, house prices and other economic indicators.
The RBA governor isn’t silly enough to raise rates so high that it causes a recession. And he must understand that rises in petrol prices are already acting like interest rate rises, as these hikes also take money away from consumers.
The best hope for interest rate worriers is for inflation to start falling because China’s pandemic lockdowns end, which will mean cheaper products from that country that will help bring prices down.
Wage moderation from unions would also help keep a lid on inflation, while the biggest price-dropping development would be an end to the Ukraine war, which would bring petrol prices down.
At the end of this month, we will see the latest inflation reading. If it’s a big one - say 7 per cent - the RBA could do another 0.5 per cent rate rise in August.
However, if it surprises on the low side of forecasts, and other inflationary forces are starting to dissipate, then the central bank should hold fire on rate rises.
For your information, the AFR conducted a survey of 32 economists to get their best guesses on what would happen to the cash rate by year’s end.
Most see it at 2.25-2.6 per cent.
Given we’re at 1.35 per cent now, if these professional economy-guessers are right, rates could go up another 1 per cent by Christmas.
Happily, former ANZ chief economist Saul Eslake, Katrina Ell from Moody’s Analytics and former Labor minister and respected economist Craig Emerson of Emerson Economics are tipping a cash rate under 2 per cent.
I hope they’re right and, unless you’re a saver who wants higher term-deposit rates, I bet you hope so too.