The Reserve Bank of Australia had their first monetary policy meeting for the year today and decided to keep interest rates on hold, with the official cash rate remaining at 1.5%.
Despite some predictions last year that rates would finally rise in 2018, the decision to keep them untouched for now probably doesn’t surprise many people.
RateCity money editor Sally Tindall said there would need to be substantial movement in inflation numbers – currently at just 1.9% – before the RBA could justify hiking rates: “We know the direction for interest rates is up, but until inflation gets over the coveted 2% mark, it’s unlikely the RBA will hike rates,” she said.
“Lack of wages growth is another culprit. Without substantive increases in pay, it is unlikely the RBA will hike rates, particularly with household debt at a record high.”
Through January and February the RBA Rate Indicator – which tracks the ASX 30 Day Interbank Cash Rate Futures – predicted interest rates to remain stagnant, while as of yesterday it recorded the February 2018 contract trading at 98.505, stating that this indicated a 0% expectation of an interest rate increase to 1.75% at the next RBA Board meeting.
The last move on rates was in August 2016, when there was a 25 basis point cut to 1.5%.
Since then, debt-burdened homeowners have enjoyed Australia’s longest run of record low-interest rates.
The RBA last lifted the official cash rate seven years ago, meaning that there is now a sizeable number of first-home buyers who have never experienced a rate hike.
While other countries such as the US continued to raise interest rates last year, we still faced a climate of unhappy consumers struggling with low wages growth, rising energy process and high debt levels – household debt has now climbed to a record high of 199.7%.
The rising US economy could have a big impact
Many economists, such as REA Group Chief Economist, Nerida Conisbee, believe a rate hike is on the cards in the second half of this year, with jobs and wage growth getting better (unemployment rose from 5.4% to 5.5% in the last month but employment growth was the strongest it has ever been over a calendar year) and businesses developing greater confidence. Having a major impact is the rapidly rising US economy, she said.
“The US is our second largest trading partner, after China, and is also the largest economy in the world; as such, what happens there determines global growth,” she said.
Increased demand for Australian exports would mean more jobs and better wages.
“Better growth in the Australian economy means that the RBA is more likely to raise rates sooner,” she added.
Home loans will be more expensive and trickier to secure
There was a big jump in buyer demand on realestate.com.au/buy following the last two rate cuts, according to Conisbee.
But it’s not all good news for homeowners as the big banks are still likely to increase their own home loan rates, she added.
“Banks are already increasing loan rates. Part of this is because their costs of wholesale funding are going up but also because there is a growing expectation that rates will rise later in the year.
“Basically Australians borrow more than they save and this means that banks have to borrow money from overseas. With US rates, in particular, rising quite rapidly, this will be partly passed on to mortgage holders even if the RBA doesn’t increase rates,” she said.
“In addition to this, there continues to be a push by regulators for banks to lend less and an upcoming Banking Royal Commission which will add to their costs of doing business – this is likely to be passed on to customers,” she said.
Consibee advised homeowners and investors to regularly review your mortgage, as a buffer for the time rates jump up: “If you find a better rate, it may be worthwhile refinancing. While rates are low, it is definitely worthwhile paying off more if you can. That way, ideally, your repayments will not be much different when rates are higher,” she said
A silver lining is that first home buyers and basic home loan packages would be less affected by a rise in home loan rates, as first-time buyers were generally perceived as safe borrowers and tended to have a decent deposit.
“It is, however, possible that this will change over the year. If you are looking to get a loan, the more information you have on your income and saving history, the better. This will make a loan easier to get and ensure that you get the best rate possible,” she said.
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