RBA signals interest rates could rise before 2024

The Reserve Bank of Australia has abandoned its 2024 interest rate timeline as the economy bounces back from the Delta outbreak.

In its monthly board meeting the RBA on Tuesday held interest rates at a record low of 0.1%, where they’ve sat since November 2020.

However, the key focus was the monthly statement, which no longer included a key line saying interest rates will remain on hold until 2024.

Read today’s monetary policy statement – https://t.co/URIkjU49DW

— RBA (@RBAInfo) November 2, 2021

RBA Governor Philip Lowe said the economy was recovering after the interruption caused by the Delta outbreak.

“As vaccination rates increase even further and restrictions are eased, the economy is expected to bounce back relatively quickly,” Mr Lowe said in a statement.

“The Delta outbreak caused hours worked in Australia to fall sharply, but a bounce-back is now underway. The Bank’s business liaison and the data on job ads suggest that many firms are now hiring, which will boost employment over coming months.”

The RBA also confirmed it was abandoning an emergency policy measure, called yield curve control, which was implemented to help lower borrowing costs low and support the economy.

Inflation returns to RBA’s target

One of the RBA’s main objectives is to keep inflation between 2-3% on average, over time.

Until now, the RBA had said it didn’t expect inflation to sustainably sit within that range until at least 2024.

However, surprisingly strong inflation data released last week pushed annual underlying inflation to 2.1% in the September quarter, and back within the RBA’s target range for the first time in six years.

The RBA has held interest rates at a record low of 0.1% since November 2020. Picture: realestate.com.au.

Previously the RBA had anticipated inflation would only hit 1.75% by the end of 2021.

“Inflation has picked up, but in underlying terms is still low, at 2.1%,” Mr Lowe said. “A further, but only gradual, pick-up in underlying inflation is expected.”

There’s debate over whether these price pressures are being driven by temporary factors, such as the global timber shortage and supply chain disruptions, which are expected to normalise over time. However, as the economy reopens and vaccination rates soar, some economists say rising inflation could be more permanent than first thought.

Mr Lowe said the bank had upgraded its inflation forecasts to 2.25% by the end of this year, before reaching 2.5% by the end of 2023.

What it means for property

In November 2020, the RBA cut interest rates to a record low of 0.1% and vowed to keep them there for as long as was necessary to aid the economic recovery.

One of the trade-offs, the RBA has acknowledged, has been a surging property market with prices hitting all-time highs in many parts of the country.

“Housing prices are continuing to rise in most markets and housing credit growth has picked up due to stronger demand for credit by both owner-occupiers and investors,” Mr Lowe said.

“The Bank welcomes APRA’s recent decision to increase the interest rate serviceability buffer on home loans. It is important that lending standards are maintained at a time of historically low interest rates.”

Households have been taking on larger loans to keep up with rising prices, with ABS data on Monday revealing the average mortgage size for people buying a home to live in hit a record high of $574,427 in September – up $63,000 since the start of the year.

PropTrack economist Paul Ryan said the prospect of higher interest rates would cool house price growth.

“The RBA today signalled that they expect interest rates are likely to increase faster than previously expected, perhaps in 2023. This will increase borrowing costs for mortgagors, but is likely to put downward pressure on housing price growth, benefitting aspiring owners,” Mr Ryan said.

“However, any interest rate increases are likely to be modest at first, as low interest rates have led many households to take on large amounts of debt.”

Steve Mickenbecker, chief spokesperson at comparison website Canstar, said borrowers should be preparing now for higher interest rates.

“The time to start interest rate proofing yourself is now, when rates are low,” Mr Mickenbecker said.

“Borrowers should be preparing for the eventuality of higher rates now if they can, by making the additional repayments, before the banks ask for them.

“Low rates give a great opportunity to get the loan down and build up a buffer that can be redrawn to help with higher repayments if times get tough.”