A new survey has found interest rates could be on the rise with 58 per cent of economists expecting the Reserve Bank of Australia (RBA) to hike rates in 2022.
The latest Finder RBA Survey has found 96 per cent of experts think variable rates are now at their lowest levels, while some economists predict six rate hikes in the next two years, which could take the official cash rate from 0.10 per cent to 1.50 per cent.
With central banks around the world beginning to raise rates, many experts are now focused on the 1 February RBA meeting to see if Australia will follow suit, and signal a rise in the official cash rate. According to the survey, 94 per cent of economists don’t expect the RBA to raise the cash rate in February.
Head of consumer research at Finder, Graham Cooke said there had been a seismic shift in expectations of a rate rise in 2022.
“A rate rise this year has moved from an impossibility to a most likely,” Mr Cooke said.
“With some lenders indicating multiple rises to come, Australian borrowers who purchased over the last few years of rock-bottom rates may be in for a shock when their mortgage costs start to climb.
“The days of sub-2 per cent home loans are almost behind us, and may never return.”
Chairman of foreign exchange provider CLSA Premium, Peter Boehm believes rates will rise this year given the economic indicators.
“The current level of interest rates is not sustainable and does not reflect the present economic realities nor what’s on the horizon,” Mr Boehm said.
“Inflation, wage pressures and the fact that other developed nations have and will start to move interest rates up means Australia will inevitably follow.
“It is likely interest rates will remain on hold until after the federal election because the election outcome will be a major determinant on business and consumer confidence and hence the economic outlook.”
Capital Economics’ Australia and New Zealand Economist, Ben Udy believes rates will rise after quantitative easing ends.
“The surge in inflation and plunge in the unemployment rate highlights the strength in the Australian economy,” Mr Udy said.
“The RBA will therefore end quantitative easing (QE) in February. While the RBA has previously said that it would not raise rates until wage growth was at least 3 per cent, we think the strength in underlying inflation along with the tight labour market will convince the Bank to hike rates first in August and lift rates to 1.25 per cent by end-2023.”
While the majority of economists predict rates will rise, not all experts are convinced it will happen this year.
Managing Director of Emerson Economics, Craig Emerson said weak wage growth will prevent the RBA from acting too quickly.
“The RBA won’t increase the cash rate until wages are sustainably growing strongly,” MR Emerson said.
“Further, it will want the exchange rate to be a filip to Australia’s international competitiveness.”
Corinna Economic Advisory Principal Saul Eslake also feels that the economy isn’t ready for a rate hike from the RBA.
“Notwithstanding market pricing, I’m not persuaded the RBA will raise rates this year.” Mr Eslake said.
“Underlying inflation has only just entered the target band after more than five years below it, and remains lower than in most other advanced economies. Wage inflation is nowhere near the 3.5 per cent the RBA has said it needs to be to be consistent with inflation being ‘sustainably’ within the target band. The RBA has a looser inflation target than most other ‘advanced’ economy central banks.”
Higher repayments
Should interest rates rise, the impact would see borrowing capacity drop and higher mortgage repayments for mortgage holders.
Westpac expects the RBA to raise the cash rate six times in the next two years, starting in August this year. This would bring the official cash rate up from 0.10 per cent to 1.50 per cent.
On a $500,000 home loan, a rate hike from 2 per cent to 3.40 per cent would cost homeowners $369 more per month or $4428 more per year.
Despite inflation rising sharply in the last 12 months and looming rate rises, Finder’s Economic Sentiment Tracker shows economic sentiment is higher than it was pre-COVID.
Head of consumer research at Finder, Graham Cooke said the positive outlook was due to the strong economic rebound.
“This is mainly due to the increase in positivity towards wage growth and employment,” Mr Cooke said.
