Too soon for cash rate hike? Bank economist and aggregator weigh in

RBA will announce the cash rate on Tuesday

Too soon for cash rate hike? Bank economist and aggregator weigh in

It’s too soon for a cash rate hike, one bank economist says, expecting the Reserve Bank of Australia to leave the official cash rate unchanged at its April meeting.

Similarly, aggregator Specialist Finance Group said it will and should remain on hold.

Having sat at a low 0.1% since November 2020, when RBA cut the cash rate 15 basis points to support job creation through the COVID-19, pandemic, a rise in the official cash rate would mark the first in more than 11 years.

In setting the official cash rate, the Reserve Bank of Australia (RBA) has three main objectives: to achieve stability of currency, maintain full employment and achieve economic prosperity and welfare for the people of Australia.

Read more: RBA makes rate announcement

Westpac Business Bank chief economist Besa Deda (pictured above), said the bank’s forecast showed three official cash rate rises this year, in August, October and December. 

At the end of the year, the cash rate was forecast to be 0.75%.

“We’re expecting RBA to start with 15 basis points in August (taking the cash rate from 0.1% to 0.25%), then we expect October and December to be 25 basis points each,” Deda said.

She said interest rate markets had seven rate hikes priced in, starting in June.  Swap rates, on which pricing of fixed home loans were based, had risen from the lows of late 2020.

“There has been an uplift in fixed home loan rates across the financial services industry, reflecting the fact that swap rates have moved higher, and markets have anticipated that the Reserve Bank needs to start raising rates,” Deda said.

Reserve Bank governor Philip Lowe had pledged patience on raising rates due to uncertainty surrounding the COVID-19 pandemic and global supply chain disruptions.

Wage Price Index data showed wages grew at 2.3% per annum in the December 2021 quarter.

“We think that wage pressures are building, and that wages growth will quicken … because job-turnover is rising, there is evidence that bonus payments [and] retention rates are rising,” Deda said.

“The RBA has now said it’s looking at a broader measure of wages and we do think that on those broader measures, there’s signs of a pickup in wages growth.”

The rate of unemployment, currently 4%, is at a 13-year low, indicating full employment.

“We see it could go under 4% before June, and [we haven’t] had an unemployment rate on a sustained basis, below 4% since the 1970s,” Deda said.

Stronger wage, inflation and/or employment data, might result in a rate hike before August.

“We certainly couldn’t rule out a June or July rate hike, but our fuller view is they’ll move in August,” Deda said.

Blake Buchanan (pictured below), aggregation manager at SFG said rates will and should remain on hold, despite obvious and emerging indictors and pressures for it to rise.

“There is simply too much uncertainty, both on a global and domestic scale and much data that I think is misleading, such as employment rates and wages growth,” Buchanan said.

Referring to the skyrocketing cost of living, including petrol and groceries, Buchanan said April didn’t allow sufficient time for these recent and additional costs to be factored into the RBA’s decision.

“I fear that whilst the pressures for an increase are compounding, it is simply too early to pull the trigger. Looking at the US, at this stage either moving too late or too hard too early increasingly looks like they will have no choice but recession. We should be cautious to avoid the same outcome,” Buchanan said.

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He said mortgage brokers always have their clients’ best interests in mind – and part of that responsibility includes educating them about different providers and products.

“Brokers have recently experienced climbing rates in the fixed area and whilst the variable to fixed rate gap is climbing, it is always worth discussing and ensuring when you do, that you discuss the benefits, the constraints and rate locking,” Buchanan said.

“You should always be in regular and constant contact with your clients and a discussion about the current and future rate movements is as good a reason as any to have a meaningful discussion with your clients today.”

RBA will deliver its third official cash rate announcement of the year on Tuesday.

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