Cash rate uncertainty – why the next two quarters could hold the answer

Aggregator CEO says it seems unlikely the rate will stay on hold

Cash rate uncertainty – why the next two quarters could hold the answer

It came as no surprise that the cash rate was left at 0.1% last week given the RBA’s intention to keep it on hold until 2024. But the central bank’s insistence that it would keep rates down despite rapidly rising house prices and record loan activity has left many in the finance world doubting whether the claim will really come to pass.

Read more: RBA vows to keep rates low

According to Finsure CEO John Kolenda, whether the cash rate goes up sooner than 2024 depends on the next two quarters of economic activity. While certain segments of the economy are firing at the moment and consumer spending is strong, other areas such as tourism and hospitality are likely doing it tough, he told MPA.

“The signs are actually quite positive at the moment, depending on the circumstances around the effect of when Jobkeeper stops and how that will impact SMEs,” he said. “If the vaccine rolls out effectively and we get a large percentage of the Australian population getting it, we’re more likely to see a faster turnaround in improvements.”

Kolenda was cautious to put a timeframe around when the cash rate would rise, but said he believed it would before 2024.

“You’re already seeing the bond market pricing in a faster recovery so we’re seeing those rates going up,” he said. “That’s still prefaced on how the economy goes over the next couple of quarters. That will give us a better sense or idea as to how quick or when the rates will move.”

Aggregation manager for Specialist Finance Group Blake Buchanan said it was difficult to tell how swiftly the country would recover in a post-COVID world.

“If I was a betting man, I would say that we will be in this extremely low interest rate market until at least the beginning of 2023,” he said. “One of the only things in the short term to have an upward impact on rates would be if other macro prudential tools to slow housing growth failed. It is likely that we will see no or modest changes in the next three years.

“There could be room to move around half a percent in the shorter term if present conditions were maintained but there are so many impending changes that could affect this - including the removal of Jobkeeper, to name but one.”

Read more: Low rates could lead to inflation risk – former RBA chief

Kolenda said consumer sensitivity played an important part in the RBA’s cautionary decision-making, explaining that even a 15-basis point rise could be enough to slow the economy down again.

“I do believe we are in a low interest rate environment for quite a number of years,” he said. “If you look at historical interest rates, the average might have been 7-7.5% - we’re not going to get to that for a very, very long time and it’s only because consumers are so sensitive to movements.”

According to Buchanan, rising interest rates would have a trickle-down effect.

“Mortgage stress rates increase, serviceability is reduced and these two alone will increase available property stock on the markets which will have a slowing effect on prices,” he said.

Buchanan and Kolenda agree that mortgage and finance brokers play a pivotal role in this uncertain cash rate environment.

“A broker’s role in this is to educate their clients about the different rate types available and find the best one that not only meets their needs for today but also for the future,” said Buchanan. “It is important that brokers check in with their clients regularly, and in particular annually, and when interest only or fixed periods are coming up for renewal.”

Kolenda pointed to the growing complexity and confusion borrowers face when applying for a loan.

“It’s so complex compared to two years ago,” he said. “I think there’s a greater need for mortgage brokers and their skills in helping consumers navigate their way through very challenging and difficult times and also the complexity of lending.

“What’s proven is brokers’ adaptability. Their real customer focus has really supported people through very difficult times.”