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Interest rates on hold but experts tip a rise is coming

The Reserve Bank of Australia has again opted to keep interest rates on hold at 0.1 per cent as they eye the likelihood of increased inflation over the coming months.

In his April monetary policy statement, RBA Governor Dr Philip Lowe noted Australia’s current inflation was well below that of many other countries, but high fuel and commodity prices would likely result in further inflation increases over the coming quarters.

At present underlying inflation is sitting at 2.6 per cent, or 3.5 per cent in headline terms.

Updated forecasts are set to be released in May, but Dr Lowe said the main sources of uncertainty related to “the speed of resolution of the various supply-side issues, developments in global energy markets and the evolution of overall labour costs”.

Those supply issues are being driven by both the war in the Ukraine and the ongoing impact of Coronavirus.

“In response, bond yields have risen and expectations of future policy interest rates have increased,” Dr Lowe said.

However, despite increasing inflation, Dr Lowe said the Australian economy remained strong, with spending picking up following the Omicron outbreak.

“Household and business balance sheets are in generally good shape, an upswing in business investment is underway and there is a large pipeline of construction work to be completed. 

“Macroeconomic policy settings also remain supportive of growth and national income is being boosted by higher commodity prices. 

“At the same time, rising prices are putting pressure on household budgets and the floods are causing hardship for many communities.”

Dr Lowe noted the strength of the economy was particularly evident in the labour market where unemployment fell further to 4 per cent in February, while underemployment was also at its lowest rate in years.

“The RBA’s central forecast is for the unemployment rate to fall to below 4 per cent this year and to remain below 4 per cent next year,” he said.

Low unemployment has also resulted in wages growth, although at present that remains low.

“Given the tightness of the labour market, a further pick-up in aggregate wages growth and broader measures of labour costs is in prospect,” Dr Lowe said. 

“This pick-up is still expected to be only gradual, although there is uncertainty about the behaviour of labour costs at historically low levels of unemployment.”

In the interim, Dr Lowe said financial conditions in Australia continue to be “highly accommodative”. 

“Interest rates remain at a very low level, although fixed mortgage rates for new loans have risen recently,” he said. 

“The Australian dollar exchange rate has appreciated due to the higher commodity prices and, in TWI terms, is around the level of a year ago. 

“Housing prices have risen strongly over the past year, although some housing markets have eased recently. 

“With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.”

Looking to the future, Dr Lowe again reiterated the RBA would only lift interest rates once there was evidence that inflation was sustainably within the 2 to 3 per cent target range. 

“Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target. 

“Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs. 

“The Board will assess this and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the target.”

Geoff Lucas – The Agency

The Managing Director and Chief Executive Officer of The Agency, Geoff Lucas tipped the RBA would raise the cash rate by about 15 basis points in September.

“Given there are wages figures out on May 17 and given there’s going to be an election on the 14th or the 21st of May, and given the RBA has repeatedly stated they want to see wages growth sustainably in the two to three per cent band, I think that an interest rate increase in June is probably less likely,” Mr Lucas said.

“I would have thought that September would be more likely because after May the next wages numbers are out in August.”

Mr Lucas said the RBA was doing a good job of “jawboning” and preparing the economy for what’s to come, which he tipped could be several rate rises to close out 2022.

“Some people are saying (the cash rate rise) will be around 10 basis points but perhaps it will be around 15 basis points only,” he said.

“That would take it from 0.1 to 0.25 per cent, certainly by the beginning of September.

“And there’s the prospect of multiple (rate rises). There might be two or three this year, at smaller rates.”

But Mr Lucas also raised a pertinent wage growth question about where the extra money in people’s pay packets would come from given companies, at the moment, didn’t appear to be willing to increase wages.

“What’s going to create that wages growth?” he asked.

“Borders are now open so what we’re going to see is an increased supply, in coming months and years, of skilled labor, and that potentially caps wage growth.

“Yet companies haven’t demonstrated that they’re willing to increase wages yet and with likelihood of increased skilled immigrants, the supply of labour is going to increase.

“So maybe we don’t get a sustainable increase in wages, and that probably does help the theory or the suggestion that increases in interest rates will be moderate, rather than significant.”

Manos Findikakis – Eview Group

Eview Group Chief Executive Officer Manos Findikakis said there were three speed humps the nation was navigating at the moment, including Easter, the Federal Election in May and the war in Ukraine.

He also said the rising cost of living and pressure on wages would influence future cash rate decisions.

“In regards to wage pressures, I think that will be the wildcard in the mix,” Mr Findikakis said.

“I predicted some time ago that we need to see wage increases.”

Mr Findikakis said with the rising cost of living, including high petrol prices, wages needed to rise and this was only compounded by the fact there is a shortage of talent across various industries.

“Even with the Grand Prix here in Melbourne, the Grand Prix is concerned about the capacity to service people during one of the biggest festivals in Melbourne because of a lack of workforce,” he said.

“Just like the property market experienced tremendous growth because supply was lacking, and the demand was exceeding, we’re going to see the same thing, I predict, with wages.

“I really do believe that wages will be impacted. If interest rates go up, if petrol prices go up and the cost of the weekly shop is increasing, people have to consider their personal circumstances and say, ‘I have to have a pay rise’, or find a job that’s going to pay me more.

“I think that, for me, is the big wildcard that is coming.”

Mr Findikakis said the rising cost of living would direct the property market back to a more balanced market.

He said the number of transactions would reduce but he didn’t expect to see a depressed market.

“In most marketplaces I do believe there will be, in turnover of sales, a 10 per cent drop, but I just can’t see prices, generally speaking, dropping to a great extent because the demand for it is still there,” Mr Findikakis said. 

“It’s just people’s borrowing capacity and ability to pay more is not going to be there.

“I don’t see it turning into a complete buyers’ market, but definitely a balanced market.”

Andrew Cocks – Richardson & Wrench

Richardson & Wrench Managing Director Andrew Cocks noted this month’s announcement might have held interest rates at an all-time low, but the question had become ‘for how long?’

“Even Dr Philip Lowe has started to sew the seeds for an interest rate rise in 2022 by warning borrowers to start preparing for higher interest rates, which is really just a statement of the bleedingly obvious,” he said.

“And in reality, it’s not going to be a major shock to most, as many borrowers have started to experience higher borrowing costs as banks gradually increase the cost of some products to reflect a higher cost of funds, and many recent loans have been structured on the basis of serviceability hurdles at significantly higher levels than the rates at the time loans were written.”

Mr Cocks said the recent Federal Budget had also played into the RBA’s strategy.

While there was a cost of living ‘cash splash’, many of the handouts announced were either a one-off or occur over a defined period that will run out towards the end of the year at about the same time as interest rates will likely increase, he explained.

Referencing data from CoreLogic, Mr Cocks also noted the property market had already begun to adjust.

“The rate of increase in property values has significantly slowed in most markets, with both the major real estate markets of Sydney and Melbourne already starting to see a retreat from the highs that were achieved in 2021.

“As the year rolls on and interest rates increases finally occur, it’s likely that the real estate markets in other parts of the country will also experience their own correction – this isn’t necessarily a bad thing as it’s clear that the massive increases that we experienced were unsustainable and not healthy for the long-term stability of the property markets around the country.”

Paul Ryan – PropTrack

PropTrack Economist Paul Ryan said the RBA had remained patient in its assessment of inflation but this could not continue forever and higher inflation increased the chance of higher rate rises later in 2022.

“The RBA is waiting to see evidence of sustained demand in the economy consistent with inflation within its target over the medium run,” he said.

“The RBA cannot look through temporary inflation forever, so there remains the possibility strong supply-shock driven inflation will force the RBA’s hand. 

“The RBA will be keenly watching that inflation expectations across the economy are not being driven higher by increases in the cost-of-living.

“Higher inflation increases the likelihood of higher interest rates later in the year. This will weigh on housing price growth, which has clearly slowed in anticipation of these higher borrowing costs. 

“The outlook for housing prices later in the year is one of a balance between higher mortgage rates and the higher income growth the RBA is looking to see before raising rates.”

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Cassandra Charlesworth

Cassandra Charlesworth is a features writer for Elite Agent Magazine with over 15 years’ journalism experience in metropolitan and regional newsrooms. She has a specialist interest in real estate, tech disruption and a good old-fashioned “yarn”.

Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.