RBA wants us to be a little more tipsy before we take the bowl of punch
It is also true that the many people who have locked in a fixed rate at the lowest will face a sharp increase in their repayments at the end of their fixed maturities over the next several years.
However, the recent fixed rate hikes must be put into perspective.
The cost of borrowing money remains extremely low, and recent fixed rate changes will, by definition, only affect people who take out new loans, not existing fixed or variable rate customers.
Earlier this year, Reserve Bank Deputy Governor Christopher Kent said fixed rate increases at the time had a “minimal” impact on broader financial conditions. In addition, new borrowers are already reacting to the latest developments in fixed rates by reverting to variable rates, where banks are now more competitive.
The point is, the RBA’s most important interest rate in influencing the economy remains the overnight rate. It’s the rate that determines what banks charge the vast majority of their mortgage customers, and it’s still only 0.1 percent.
RBA Governor Philip Lowe has rejected forecasts that he will have to raise interest rates next year in response to higher inflation. He has said repeatedly that rate hikes would require much higher wage growth than it currently is and “sustainable” inflation within the target range of 2-3%. No one knows exactly when rates will rise, but he believes those conditions will likely be met in 2024, although 2023 is also plausible.
There is no doubt that this inevitable rise in interest rates will affect the housing market. Over the past 30 years, Australians have responded to steadily declining borrowing costs by taking out larger mortgages and using the borrowed money to raise house prices. When borrowing becomes more expensive, you would expect the prices to drop a bit.
But the fact that households are so sensitive to even small changes in borrowing costs is also a reason why any future rate hikes are likely to be gradual and small.
Another important point is that many central banks – including ours – are doing everything possible to stress that they will be patient while waiting for the return of sustainable inflation and wage growth. They no longer see their job as removing the “punch bowl” just as the party starts.
Economist Saul Eslake explains that since inflation has been so low for so long, the thinking of central banks has changed and the RBA has made it rather clear that it will only react when it sees inflation. real – not just forecasts of price increases.
âIn a way, it’s almost like saying that it’s actually the job of the central bank to encourage people to get a bit drunk before they take the alcohol out,â Eslake says. “Phil Lowe says, we’re all still sober – people have to keep drinking a little longer.”
Despite all the excitement in the market about the possibility that interest rates may rise earlier than expected, the bottom line is that monetary policy is extremely loose.
Of course, financial conditions have tightened a bit. But the recent changes are just small steps in the long journey away from super-cheap debt.