Reserve Bank of Australia governor Philip Lowe has warned borrowers to prepare for interest rates to rise, but not before 2023 at the earliest.


The RBA has opened the door to an earlier rate rise, although Mr Lowe still maintains 2024 is the most likely time frame for the central bank to lift the cash rate from a record low 0.1%.

He said the RBA board is prepared to be patient when considering a lift in interest rates, but they will rise.

“I do think that both lenders and borrowers need to be aware that interest rates will rise again,” Mr Lowe told a webinar following the board’s monthly meeting on Tuesday.

“They’re not going to rise again quickly and I think they’re not going to rise next year. The most likely case is still 2024 but it’s possible that they go up in 2023.

“So when people are making their borrowing decisions, they need to factor that into their calculations.”

The RBA board kept interest rates on hold on Tuesday but dropped its yield target – one of its coronavirus support measures that helped lower funding costs for all borrowers.

Mr Lowe said the decision to discontinue the yield target reflected the improvement in the Australian economy and the earlier-than-expected progress towards the RBA’s inflation target.

“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished,” he said.

The decision to discontinue the yield target did not mean the cash rate will be increased before 2024, he added.

“Given the information we currently have to hand, it is still entirely possible that the cash rate will remain at its current level until 2024. But it is also possible that an earlier move will be appropriate.”

According to PropTrack economist Paul Ryan, the decision to drop the yield-curve control policy signals the increased likelihood that interest rates will start to rise faster than previously expected.

“This is the first indication from the RBA that rates may rise earlier than the 2024 guidance it has previously provided, although it’s signalling it still does not expect conditions to warrant interest rate increases soon,” Mr Ryan said.

“Mortgagors may see higher interest rates, and increased repayments, earlier than they had expected, but the RBA is likely to increase rates slowly as we move out of a period of exceptionally low interest rates.”

Mr Lowe said the RBA welcomed the banking regulator’s decision to increase the interest rate serviceability buffer on home loans, adding it was important lending standards were maintained at a time of historically-low interest rates.

“My hope is that the increase in the loan serviceability buffer reinforces that message that interest rates go up at some point and you need to be prepared for that.”

The Australian Prudential Regulation Authority last month told banks to lift the minimum interest rate buffer they use when assessing whether borrowers could still meet their repayments if rates rise.

Mr Lowe said he had no concerns about a deterioration in lending standards, which remained broadly appropriate.

RBA rules out a rate rise in 2022

Financial markets have been pricing in rate rises as early as next year, particularly after stronger-than-expected data last week showed annual growth in underlying inflation of 2.1% in the September quarter.

While the RBA’s central forecast was for underlying inflation of 2.25% in 2022 and 2.5% in 2023, Mr Lowe said the latest data and forecasts do not warrant an increase in the cash rate in 2022.

“I recognise that some other central banks are raising rates, but our situation is different,” he said.

He maintained the RBA board will not increase the cash rate until inflation is sustainably within its 2-3% target range, which will require wages growth to be materially higher than it is now.

“This is likely to take time. The board is prepared to be patient,” he said.

He dismissed market pricing for rate hikes in 2022 as “a complete overreaction” to the inflation data, adding that scenario was “not impossible but extremely unlikely”.

Mr Lowe said the state of the economy, and not the calendar, will determine decisions about the cash rate.

Mr Ryan noted the RBA explicitly batted down forecasts that the first cash rate increase will occur in 2022.

“Even with their upgraded forecasts, their central scenario is still 2024,” Mr Ryan said.

“They think that the likelihood of a 2023 hike is higher than it was, but they consider 2022 as not even an outside possibility.”

David Plank, head of Australian economics at ANZ, said he expects rates to begin rising in the first half of 2023.

“This doesn’t mean policy or financial conditions are static until 2023. We’ve already seen some tightening in policy, such as the end to the term funding facility and yield target. The tapering of bond purchases will represent another tightening step,” Mr Plank said.

Fixed mortgage rates likely to rise

Mr Ryan said the removal of the RBA’s yield target increased expectations that interest rates will rise within the next couple of years.

“This means rates for longer-term fixed mortgages will continue to increase, but we are unlikely to see upward pressure on variable-rate mortgages in the near term – particularly for owner-occupiers, for whom competition among lenders is strongest,” he said.

REA Group Broker CEO Susan Mitchell said the property market is likely to remain buoyant throughout next year but more changes to long-term fixed mortgage rates are likely.
“We’ve already started seeing a lot of small rate tweaks on home loan interest rates, mainly on long-term fixed rate home loan products and some discounting on variable rate home loans, but the RBA announcement suggests that more significant changes are on the horizon,” Ms Mitchell said.

Borrowers have been fixing part or all of their home loan interest rate and there continued to be strong demand for refinancing loans, she said.
“We’ve experienced an extremely low interest rate environment over the last few years but cheap rates aren’t here to stay.”

AMP Capital chief economist Shane Oliver said while rate hikes are still a fair way off, the removal of the 0.1% April 2024 yield target implies more upwards pressure on two- and three-year fixed mortgage rates.

That was due to an increase in bank funding costs, at least some of which he said was likely to be passed on as higher fixed rates.

“While this has no impact on existing borrowers it will have an impact on new borrowers and along with the 0.5% increase in serviceability buffers implies a dampening in housing demand going into next year,” Dr Oliver said.

Dr Oliver said AMP Capital economists still expect the first cash rate rise to be in November 2022, followed by another hike to 0.5% in December next year.

RBA won’t hike rates to cool housing market

Speaking on Tuesday, Mr Lowe again ruled out hiking interest rates to cool Australia’s booming property market.

He said using interest rates to contain housing prices “is not on our radar screen”.

“It’s not something we’re contemplating, and I don’t think it would be appropriate.

“Certainly a lift in interest rates now would take some of the steam out of the housing market, but it would also mean fewer people had jobs and wages growth would be even weaker than it currently is.

“That doesn’t sound like a very good tradeoff to me and it’s not one that we have a mandate to make or even I think is appropriate to make.

“It’s more important that people have jobs and their wages are rising reasonably well.”

Mr Lowe said higher interest rates was not the solution to rising housing prices, instead pointing to structural factors like the design of cities, tax incentives for investment in housing, where people choose to live and transportation networks.

Mr Lowe noted housing prices were continuing to rise in most markets and housing credit growth had picked up due to stronger demand for credit by both owner-occupiers and investors.
Australian Bureau of Statistics data released on Monday showed the value of new loan commitments for housing fell 1.4% in September. It was driven by a 2.7% fall in new owner-occupier loans, the fourth consecutive monthly decline.

Mr Ryan said the changes by the RBA and APRA were each small in isolation but signalled the start of a tightening in financial conditions.

“I think the signal is that interest rates and credit availability is likely to tighten further from here,” he said.

“It’s consistent with both the economy improving and it’s also consistent with regulators taking a view that housing prices growth that we’ve seen over the past few years isn’t sustainable in the future.”

But Mr Ryan expected housing market conditions would remain strong in the near future, given the continued high demand from buyers.

“We’ve seen, particularly with the Melbourne and Sydney markets reopening from lockdowns, there’s a lot of vendors waiting to list their property,” he added.

“The outlook for housing market activity over the next six months is going to be very robust.”

ABS data released on Wednesday showed the number of dwelling approvals fell by 4.3% in September, following the end of federal and state stimulus measures.

Source: realestate.com.au