Consumers and businesses were delivered an unexpected shock yesterday when the RBA lifted rates by 25 basis points, but experts say they should brace themselves for more pain over the next year as the official cash rate could reach as high as 5.75%.
The message comes as the Commonwealth Bank raised its variable mortgage rate yesterday well above the RBA’s 25 basis point increase, with their standard variable mortgage rate jumping 45 basis points from 7.36% to 7.81%.
One financial analyst says businesses should be watching out for more rate rises over the next year, as the RBA hopes to moderate the pace of inflation.
Cannex financial analyst Mitchell Watson says banks generally didn’t pass on rate cuts during the global financial crisis, but now that rates are increasing, the banks may well start pushing up business rates as well.
“What I’ve been able to see, based on previous performances, is that there will definitely be some rises across business loans. Banks kept their rates quite high during the GFC, and held off passing some of those previous rate cuts to borrowers. Now some rises will be passed on.”
And that potential has already been demonstrated by the Commonwealth Bank. However, Watson says this isn’t necessarily a surprise.
“With regard to Commonwealth Bank, they do have some of the lowest rates in the market and they may have less scope to keep these rate rises back.”
CommSec economist Craig James agrees it is more likely that the RBA will increase rates over the next year, but he also warns it will be taking a “wait and see” approach in the short-term, at least until February.
“This rate hike from the RBA is really a type of pre-emptive strike in a sense. Inflation is under control and will remain that way, but the statement from the RBA suggests it wants to be certain of that, and that’s why it’s lifted rates.”
“I think it’s very much a case of “wait and see” until February next year, and they will watch how consumer spending and businesses perform over the next few months.”
James says he believes consumers are doing it harder than the RBA may believe, which will prompt it to wait for another rate rise until February. He also says that if the economy continues to perform well over the next six months, we could reach a cash rate of 5.75% by this time next year.
“Provided we do well over the next six months and come out the other side, we could see a cash rate of 5.5% or 5.75% by this time next year as the RBA hits the brakes a couple more times. Historically, that is still very low. And we would expect the RBA will keep rates on hold in the meantime.”
James also says there will be two factors at play here: the RBA’s decisions and the banks’ subsequent reaction, which he says will determine how consumers react.
“These are two very different factors, and we’re going to have to wait over the next few days to see what they do. Banks will have to make a judgement on that, and the RBA and banks could differ on their decisions.”
However, the Commonwealth Bank has wasted no time in passing the rise on to customers, much to the disgust of business owners. But James says there isn’t much that can be done about that.
“The banks are going to make their judgement calls on that. They’re going to decide whether to absorb it and pass it on, and that’s going to be up to the individual banks.”
However, raising rates is only going to generate more pressure on the banks, with Canberra gearing up for some significant banking reform. And with Westpac announcing a cash profit of $US5.88 billion, businesses and consumers alike are watching every rate move carefully.
“If something is not done then the other banks will, without doubt, follow suit and small businesses will struggle even more,” COSBOA chief executive Peter Strong said in a statement this morning.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
