The Reserve Bank of Australia has kept the cash rate steady at 0.1 per cent ahead of the federal election, but it is a slight change in language that is likely to pique the interest of borrowers and economists.
The monthly statement from Governor Philip Lowe on Tuesday revealed the official cash rate would remain where it has been since November 2020 when the pandemic necessitated an extraordinary level of monetary support.
But the board has shifted its messaging slightly in the face of better-than-expected economic data and war in Eastern Europe, factors which have boosted inflationary pressures and increased “expectations of future policy interest rates.”
Crucially, the board’s monthly statement no longer features the phrase “the board is prepared to be patient”, which many see as an indicator the rate cycle has accelerated.
“Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs,” Dr Lowe’s statement reads.
“The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target.
The Australian dollar eased to 75.40 US cents in the wake of Tuesday afternoon’s statement, while the ASX 200 dropped sharply.
EARLIER
Despite raging inflation, Dr Lowe has insisted again and again Australia has “time on its side” to boost wages and employment by an appropriate amount before an interest rate hike is needed.
Economists and financial markets, however, are betting on a hike as early as June – and then several more before the year is out – as price pressures show signs of exceeding core forecasts.
Last month Dr Lowe conceded the evolving situation in Eastern Europe – and associated commodity price surge and supply shocks – had the potential to force the RBA’s hand by the end of the year, but again said there was a risk in moving too early.
Therefor on Tuesday, the main focus will be on whether Dr Lowe’s statement will contain the phrase “the Board is prepared to be patient”.
Commonwealth Bank’s global economics research team says the absence of this line will likely indicate the board has decided to accelerate its plans, especially given unemployment is at its lowest since 1974 and tipped to move below 4 per cent next month.
CBA is tipping a hike to 0.25 per cent in June, and for the cash rate to be at 1.25 per cent by next February.
Others – including T. Rowe Price Dynamic Global Bond Strategy associate portfolio manager Scott Solomon – say markets appear to be wrestling with the age-old question of “should vs will”, with last week’s sugar hit from the federal budget muddying the waters.
“It’s a trap many market practitioners fall into, and given current market pricing, the “should” camp is certainly having its say,” Mr Solomon said.
“There are those citing the recent budget proposal as more ammo for the RBA to hike, but the transmission function of fiscal changes occurs on a meaningful lag, if at all. And the RBA is not in the business of making policy changes based on “might”.
“There is always that possibility the RBA will change directions without warning … but for now I think the RBA should remain on the path they’ve laid out thus far in 2022.”
While the RBA is set to leave the cash rate on hold, new research from RateCity.com.au shows threxjmtzywe in four borrowers will have to cut back their spending to meet the forecasted hikes.
Analysis shows the average borrower with a $500,000 owner-occupier loan and 25 years remaining could see their repayments rise by $303 per month by next February, if CBA forecasts are realised.
“While most Australians will be able to take these rate hikes on the chin, not everyone will be taking them in their stride,” RateCity research director Sally Tindall said.
The latest APRA figures show 24.4 per cent of mortgages settled in the December quarter had a debt-to-income ratio of six times or more, which is considered risky by the regulator – the price many Australians had to pay to get into an overheated housing market.
“People who overstretched themselves to get into the property market recently could feel the heat of the upcoming rate hikes,” Ms Tindall said.
“While the banks have checked these borrowers can meet their mortgage repayments if rates rise by 3 per cent, some families will have to make tough budget cuts to make certain that happens,” she said.
“Borrowers who’ve had a change in circumstance could also struggle to make higher mortgage payments. A new baby, a change in careers, a bout of ill health, even a move to a different region can be enough to stress the family budget.”
