Why interest rates won’t rise too much

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The media is currently full of interest rate debate, and the discussion seems to be not about whether rates will rise, but rather by how much they will rise.

Economists are falling over each other to predict RBA rate hikes as soon as June, even though the RBA has repeatedly said it does not plan to increase the rate this year.

And once rates take that first step upwards, the consensus seems to be that it will be the first in a series of rises.

But is that really going to happen? And is it even possible?

The mother of all trend reversals

Let’s take stock for a minute and look at the last decade. The last time rates were increased was in 2010, more than 11 years ago. In the time since, rates have trended steadily downwards, from just over 4%, all the way down to 0.1%.

Along the way there have been long periods of stagnation, from 2016 to 2019 for example, when rates stayed put on 150 basis points (1.5%), before continuing on their downward plunge.

As b Invested founder Nathan Birch points out, our current position is at 10 basis points, which is 10% of 1%.

If rates were to go up by even half a per cent, which would be five times what they are now, they wouldn’t even be as high as they were two years ago.

So multiple rate rises would take one of the greatest reversals the economy has seen. And Nathan believes rates will not rise past 0.5% if they rise at all.

So why do the banks keep saying they will?

Many of the direst rate rise predictions some from bank economists. Bill Evans from Westpac is the prime example, claiming that an initial 15 basis point rise in August of this year will quickly be followed by a 25 point lift in October and then a further five rate hikes between the end of this year and the end of 2024.

Meanwhile, CBA says the first rate rise will be in June and will reach 1% by the end of this year.

In the background, the big four lenders and other tier one banks have been hiking their fixed rates of their own accord, without waiting for the RBA to move first.

Ask yourself, is it possible the big banks are hoping that by spreading the word far and wide that rates will rise, not only will customers quietly accept the hikes they are being dealt already, but perhaps the negative sentiment will take steam out of the market and expose less people (and therefore their lenders) to risky debt levels? It’s something worth thinking about.

What would rate rises mean for buyers?

The first obvious effect if rates were to rise would be on buyers who had borrowed the absolute most they could afford and were looking for property. Suddenly, their buying budgets would go down.

This would mean less competition for the buyers who could absorb the rate rises. Often, the borrowers who are stretched to capacity to get one property are first home buyers, or at the very least owner occupiers.

Property investors on the other hand are usually using equity as a deposit, have less risky loan to value ratios and may also be planning to pay interest only on their loans, which would make small rises less damaging.

Less owner occupiers buying property can also mean more people looking to rent the same types of property, so investors may find interest rate increases offset by rising rental income on the back of tighter vacancy rates in their chosen areas.