Reserve Bank of Australia governor Philip Lowe has admitted for the first time that interest rates may rise later this year, although a hike could still be a year or longer away.
While financial markets and many economists are predicting the cash rate will rise this year, Mr Lowe and the RBA board are adopting a wait and see approach when it comes to the timing.
“Interest rates will go up,” he said during a major speech on Wednesday.
“I can’t tell you when but they will go up.”
Addressing the National Press Club on Wednesday, RBA governor Philip Lowe said a cash rate hike later this year is possible. Picture: Getty
Mr Lowe said the faster-than-expected progress towards the RBA’s goals of full employment and inflation sustainably within its 2-3% target range does bring forward the timing of a likely increase in interest rates.
“Whether it happens this year or not remains to be determined,” he said during a National Press Club address.
While optimistic about Australia’s economic prospects, Mr Lowe said there were significant uncertainties on the inflation and wages fronts.
“If things go well and the economy performs strongly there are clearly scenarios where we would be increasing rates later this year if some of these uncertainties get resolved in the way that I hope they would. But time will tell.”
Pressed on the issue, Mr Lowe said a rate rise this year was “certainly a plausible scenario”. But there were many other scenarios as well, he added.
“There are a lot of uncertainties both on the supply side and the labour market dynamics, and because inflation is not that high at the moment we can wait to see how those uncertainties resolve.
“If they resolve in one way then we’ll be raising rates. If they resolve in another way then it’s still quite plausible that the first increase in interest rates is a year or longer away.”
Mr Lowe had previously ruled out a rate rise in 2022, but made it clear the state of the economy and not the calendar will determine decisions about the cash rate.
Debate over likely rate rise timing
PropTrack economist Paul Ryan said Mr Lowe’s concession that a rate rise in late 2022 was possible marked a big change from a few months ago that reflected the economic data released since the RBA last updated its economic forecasts in November.
“This speech puts to bed a lot of the forecasts for interest rate hikes before late this year, so I would be thinking November might be the earliest whereas a lot of market commentators have August pencilled in,” Mr Ryan said.
“It’s a big upgrade in forecasts due to the improvement in economic conditions that we’ve seen over the past three months.
“But governor Lowe still pushed back on the optimistic projections that market commentators have put forward about the cash rate hike timing.”
Financial markets have been pricing in a rate rise by mid-year while economists at the four major banks all predict the RBA will begin raising the cash rate later in 2022.
Mr Ryan expected the first rate hike to be in early 2023, but said a move later this year in November was possible.
The first interest rate hike could be delivered later this year or in 2023. Picture: Getty
The RBA board left the cash rate at a record low 0.1% at its first meeting for 2022 on Tuesday, with Mr Lowe saying the board is prepared to be patient.
Mr Lowe said the RBA’s decision to stop its quantitative easing or government bond buying program did not represent a tightening of monetary policy.
While in a number of other countries the ending of the bond purchasing program has been closely followed by an increase in rates, Mr Lowe said their current circumstances were quite different to Australia’s.
“The decision to end the bond purchase program does not mean that an increase in the cash rate is imminent,” he said.
Mr Lowe has previously pushed back on market pricing for an imminent rate hike. On Wednesday Mr Lowe said he was surprised that markets were pricing in four rate increases in both the United States and Australia this year.
“So the market is pricing in the same increase in interest rates in Australia and the United States by the end of this calendar year, yet our inflation rate is half that in the US and labour costs growth is half that in the US.”
Economists at Westpac and the Commonwealth Bank expect the first rate hike will be in August, while National Australia Bank economists predict hikes from November.
“We expect the inflation, wages and labour market data will be sufficiently strong over coming quarters for the RBA to hike the cash rate in August 2022,” CBA head of Australian economics Gareth Aird said after the RBA speech.
ANZ economists now believe the RBA will start lifting the cash rate in September, instead of the first half of 2023.
RBA doesn’t have a crystal ball
Mr Lowe conceded the economy has performed much better than the RBA expected.
“The downturn from the first part of the pandemic wasn’t as severe and the bounceback has been much stronger. That has come as a surprise to us and we’ve responded to it.
“We don’t have a crystal ball. Things happen that we don’t expect, but what I hope you expect of us is that we respond to that and try to explain why.”
Until recently, the RBA’s guidance was that a rate rise was most likely in 2024, possible in 2023 and ruled out as “not impossible” but “extremely unlikely” for 2022. It is now a “plausible scenario”.
Given many homebuyers had expected rates to remain on hold until 2024, Mr Lowe defended the RBA’s previous guidance.
“At no point have we said that rates will not go up until 2024,” he said.
“What I’ve always tried to do is to set out our forecasts, our reaction function and then over the past couple of years drew an inference about if those forecasts come to pass what that meant for interest rates.
“We’ve not made a promise that interest rates wouldn’t go up. We’ve said based on these forecasts, we don’t think they will, but the forecasts change and then the outlook for interest rates changes.”
Mr Ryan said there is a lot more uncertainty in the economy now than before the pandemic.
“The RBA is rightly responding to that by being a bit more circumspect and taking in more data before making decisions on the cash rate,” Mr Ryan said.
Borrowers advised to get ready for higher rates
The last time the RBA raised the cash rate was back in November 2010, when it was at 4.75%. According to comparison site RateCity, more than 1.1 million Australian households with a mortgage have never experienced a cash rate hike.
Higher mortgage rates are on the way, at some point. Picture: Getty
At one point on Wednesday, amid laughter from the audience, Mr Lowe was asked if he would be scrambling to seek a fixed rate if it was his mortgage before a RBA hike.
He didn’t know the answer, because he hadn’t thought about it. He also didn’t have a mortgage, having lived in the same house for 25 years and was fortunate enough to have paid it off.
But the RBA governor did have some advice for others – to make sure they had buffers in place for when rates do rise.
“Interest rates will go up. We need to be prepared for that and people need to have buffers.
“The positive news is that when we look at the data, most households are paying off more than is required by the current level of interest rates.
“They’re keeping money in their offset accounts, in the redraw facility.
“So there’s a lot of capacity for many borrowers to keep their current level of spending even with higher interest rates because they’ve built up these buffers.”
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