3 min

Is the ‘Cash Rate Rocket’ About to Launch?

November 2007 was the last time the Reserve Bank of Australia (RBA) raised its cash rate, as inflation had spilled over 5% due to a labour shortage and high material demand fueled by the mining boom. Now in 2022, Philip Lowe & the RBA are in an analogous situation and surely cannot remain on the sidelines as inflation soared an eye-watering 2.1% in the first three months of this year – far above street expectations.

Inflation is now at 5.1% and is expected to grow circa 7% in the second half of the year. This may become uncontrollable, and it demonstrates that Australia is not immune to worldwide inflation that has been provoked by the aftermath of the pandemic, through on-going supply chain issues and growing consumer demand.

The longer the RBA waits and delays hikes, the more likely Australia will end up in the same situation as the US.  The risk being that inflation becomes rooted, leaving the only option to return to a sustainable path is to enter an economic recession.

Countdown to launch…

If the Australian bond market turns out to be right, an RBA ‘cash rate rocket’ launch is less than a week away.  As of recently, traders are placing their bets that the official cash rate will be raised to at least 0.25% at today’s RBA meeting with future hikes around the corner:

What are the implications for consumers?

So, what does this mean for those who currently hold loans, or are looking to obtain finance soon? Well, this is where we’re sitting now:

   - The head of economics at Commonwealth Bank believes that about 1 million of Australian households have not experienced an      increase in their mortgage rates.

   - Australians are among the world's most indebted, with a debt-to-household disposable income ratio of 140.5 percent, a new high.

   - Due to the historically low fixed rates recently has lowered the interest payment to income ratio to an all-time low.

   - Additionally, households who took advantage of the low fixed rates during the pandemic will soon have their fixed periods mature      and will revert to a much higher variable rate. To put this into context, fixed loans as a percentage of total loans in its peak in      August 2021 was 46%, almost half! As of February 2022, it is 28% and predicted to fall further.

With the cash rate predicted to starts its ascent, times are certainly starting to change in the home loan space. Those seeking new finance may face challenges, as banks will no doubt sharpen their focus on future serviceability for new lending on this path of higher interest rates.

Current mortgage holders may start to feel the pinch. While many household balance sheets remain relatively strong and will be able to adapt to the higher rate environment, a proactive approach to reviewing existing mortgages would be prudent in these times – be sure you have the best lending arrangements in place for you within the current environment.

We always act into support our clients’ best interests to provide tailored debt solutions to help you navigate the consequences of rising interest rates such as affordability. As more and more of our clients’ fixed rates are maturing and are looking to purchase new property soon, now is the time to reach out to Balanz today to discuss!

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