Is the RBA’s end to bond buying a sign interest rates will rise?
The RBA’s promise to not increase interest rates until 2024 seems to be a statement of the past, writes Peter Lawrence from Pitcher Partners.
This week the Reserve Bank announced the end of its quantitative easing program, resulting in the conclusion of its bond buying stimulus scheme. The end of the program, which was implemented in 2020 to ease the possible derailment of the Australian economy due to COVID-19 by stimulating economic growth, is a sign Australia is recovering from its economic downfall.
However, this announcement has raised the hairs on many people’s necks as they now fear an imminent rise in interest rates.
In its first meeting of the year, the RBA confirmed the official interest rates will be held at 0.1% although, with inflation running above the RBA’s long-term target inflation range, there are predictions of an increase to occur as early as May this year.
A rise in the RBA’s cash rate will mark the first time since November 2010 that the cash rate has been increased. This could put homeowners with mortgages under severe financial pressure as they will be faced with unanticipated mortgage repayments, driving many into financial hardship.
Additionally, job security continues to be a wavering issue in the country, despite the unemployment rate dropping to 4.2% (December 2021) and predictions it will drop below 4% by the end of 2022. Employment remains an ongoing concern for many Australians, particularly for those with agile roles that have been, and continue to be, detrimentally affected by the pandemic and government restrictions.
The predicted rise of inflation to 3.25% in combination with potential job loss and increasing mortgage repayments could see hard working Australians struggling to meet their financial responsibilities, with some having to eventually forfeit their loan repayments.
Banks can, and already have, raised their mortgage rates, independent to the RBA’s cash rate, with more than 60 lenders increasing the interest rate on their three-year fixed loans in December 2021. It is obvious that banks are sending a clear signal to the market that they are expecting RBA rates to rise in the short term.
As a result, many Australians now face the risk of falling victim to their overcommitment to their home loans that they originally entered into as they were under the false impression that the long history of low and steadily decreasing interest rates was a forecast for the future.
On the contrary, an interest rate rise could see Australia’s housing affordability take a turn, with an increase in loan defaults as investors begin to seek to offload rental properties to beat any potential price drops, and reduce their financial commitments, resulting in a surplus of properties on the market.
This could benefit those who have struggled to break into the property market, providing them with an opportunity to take advantage of lower property prices. Although, they will still need to manage the risk of having to make larger monthly mortgage repayments into the future.
The RBA’s promise to not increase interest rates until 2024 seems to be a statement of the past, with rising inflation and interest rates becoming an imminent reality. Mortgage owners must now take action in order to overcome the looming challenges that they will face once the RBA raises interest rates.
