Two rate hikes in the next two years, say markets

RBA's more aggressive stance could signal higher interest rates, sooner

Two rate hikes in the next two years, say markets

Rate markets have moved up their expectations for an early rate hike after the Reserve Bank of Australia reduced its bond-buying program in response to a stronger-than-expected economic recovery.

The RBA scaled back to a purchasing program of $4 billion per week at its Tuesday meeting, down from $5 billion, according to a report by The Australian Financial Review. The program will be reviewed in November.

The central bank also reiterated that it did not intend to raise the cash rate until 2024 – but acknowledged that there were scenarios in which the rate could be raised sooner, AFR reported.

Cash rate futures for June 2023 rose to 0.53%, up from 0.44% prior to the RBA’s meeting, indicating that at least two rate hikes were likely over the next two years.

RBA Governor Philip Lowe said at a press conference on Tuesday that the economy is in an expansion phase and has recovered faster than expected from the economic impact of the COVID-19 pandemic, The Sydney Morning Herald reported.

“Our central scenario continues to be that the condition for an increase in the cash rate will not be met until 2024,” Lowe said. “But there are alternative plausible scenarios as well. … This means that probabilities have shifted.”

Lowe said the economy was in better shape than had been predicted.

“The economic recovery in Australia is stronger than earlier expected and is forecast to continue,” he said. “The outlook for investment has improved and household and business balance sheets are generally in good shape.”

Several market watchers, including Westpac and Commonwealth Bank, have predicted rate hikes in 2022 or 2023.

A growing concern for the RBA is the continued rise in house prices in Australia’s capital cities, the Herald reported. The median house value in Sydney has risen more than 18% so far this year, and household debt is growing faster than incomes.

Read next: Brace for a rate rise – and soon – says CBA

“Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers,” Lowe said. “There has also been increased borrowing by investors. Given the environment of rising housing prices and low interest rates, the bank will be monitoring trends in housing borrowing carefully, and it is important that lending standards are maintained.”

Lowe said the RBA is actively considering options to cool the red-hot housing market, including interest rate buffers where borrowers are assessed against higher repayment levels and limits on loan-to-value and debt-to-income rations, the Herald reported.

Jo Masters, chief economist at EY, told the Herald that Lowe’s shift from his previous “2024 at the earliest” language regarding the cash rate was notable.

“If the economic recovery continues to surprise on the upside, the RBA will need to act on the cash rate earlier than the current guidance,” she said.

Ryan SmithRyan Smith is currently an executive editor at Key Media, where he started as a journalist in 2013. He has since he worked his way up to managing editor and is now an executive editor. He edits content for several B2B publications across the U.S., Canada, Australia, and New Zealand. He also writes feature content for trade publications for the insurance and mortgage industries.
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