Interest rate hikes coming sooner rather than later

With economic conditions improving in Australia and other countries, the probability that the Reserve Bank will eventually raise interest rates are high, according to John Flavell, CEO of Mortgage Choice.

"For more than a year, we have seen the Reserve Bank of Australia leave the official cash rate on hold at 1.5%,” Flavell said. “And while it made sense for the Board to leave the cash rate untouched until now given the level of economic uncertainty, things are starting to improve across the globe.

“Indeed, over the last few months, we have seen significant improvements in both the domestic and global markets.”

Positive business conditions and the strengthening jobs market will likely embolden the central bank to raise rates. “Domestically, business conditions have shown signs of improvement, the unemployment rate has fallen to a low of 5.4%, and property price growth has started to stagnate across some markets in line with expectations,” Flavell said.

“With that in mind, it is only fair to assume that next rate movement by the Reserve Bank of Australia could be up.

“When exactly rates will rise is very much undetermined. And while we don’t know when exactly the cash rate will rise, we know it won’t take off at breakneck speeds and home loan rates will continue to be lower for longer.”

Mortgage Choice’s data indicates that the majority of Australians believe interest rates will remain low for the foreseeable future, and will only increase steadily over the next 12 months.

“When asked what they thought would happen to interest rates throughout 2018, 52.5% of Australians said interest rates would rise, albeit quite slowly. Meanwhile, a further 27.8% said they expect the RBA to leave the cash rate on hold for another 12 months at least.  

“The reality is, the cash rate will not remain at this level forever. It’s not a question of if, but when, the Board decides the time is right to lift the official cash rate from its current historically low setting.”

Analysts predict a hawkish RBA

Other analysts, including the Shadow Reserve Bank board at the Australian National University (ANU), also expect the central bank to raise interest rates sooner rather than later.

In October, the ANU’s nine-member board said there was a 73% chance the central bank would raise interest rates in six months – up four percentage points from the last vote in September.

Shadow board member Paul Bloxham said the outlook for higher interest rates was underpinned by a strengthening jobs market and positive business conditions, which could translate into higher wages.

Three members of the Big Four have also forecasted rate hikes next year. Both NAB and ANZ expect the cash rate to rise to 2%. CBA forecasted one 25 basis point rise in the fourth quarter to 1.75%. Only Westpac believes the official cash rate will not budge next year.