Rate Rises on the Horizon

Interest rates could begin to rise in the coming months after inflation in the December quarter exceeded expectations.

The Reserve Bank of Australia (RBA) has been forced to rethink its economic stimulus after the Consumer Price Index (CPI) rose by 1.3 percent in December, up from a 0.8 percent rise in the previous quarter. Consumer price growth for the year rose to 3.5 percent in 2021, according to the latest data from the Australian Bureau of Statistics (ABS).

Having previously ruled out a rise until late 2023, last week RBA governor Dr Philip Lowe conceded that if the economy continued to outperform recovery expectations – interest rate rises were likely later this year.

Following Dr Lowe’s annual address to the National Press Club in Sydney, it appears that the RBA is now aligning itself with the consensus among economists for rate hikes in the second half of 2022 or early the following year.

With the rise in inflation and sharp fall in unemployment, most analysts expect that the RBA will lift interest rates this year, with August becoming a commonly tipped month for lift-off.

KPMG’s chief economist Brendan Rynne is a little more conservative, but still expects the RBA will raise interest rates before the year is out, probably in November.

It would be the first official cash rate rise since November 2010.

RateCity analysis reveals that more than 1.1 million first home buyers have taken out loans since then, a large cohort who have experienced nothing but falling official interest rates.

In terms of how far the cash rate might rise from its current record low of 0.1 percent, forecasts range from 1.25 percent to potentially more than 3 percent.

ANZ’s chief economist David Plank forecasts a 0.75 percent cash rate by November 2022, rising to 2 percent by the end of 2023.

“We see this as below the eventual peak in the cash rate, which we think could be above 3 percent.”

With the average new owner-occupier mortgage rising from $363,421 in November 2010 to more than $600,000 currently, borrowers could be in for a shock.

If ANZ’s forecast is correct, the average recent new borrower on a variable rate home loan could find themselves paying around $1,000 a month extra in mortgage repayments.

Looking ahead, Dr Lowe urges new homeowners to build in a buffer to withstand any increase in mortgage repayments, as the economy continues to recover from the COVID-19 recession.

And with fixed rates increasing every day, there has never been a better time to evaluate and secure the best mortgage deal. Contact FIA today and make sure you are on the most competitive home loan interest rate.