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Why The RBA Won’t Raise Interest Rates

If you’ve been paying any attention to the news recently, you will have noticed a growing number of voices starting to speculate about interest rate rising.

In fact some people started to think that the first Tuesday of November RBA meeting would see the ‘Rate that stops a nation’, half an hour before the ‘Race that stops a nation’… ie the Melbourne Cup would be (briefly) upstaged by an interest rate hike.

But it didn’t happen. The RBA decided to keep the cash rate on hold at 0.1%. And even when the announcement came through that the rate had stayed put, some of the media headlines said things like “RBA holds fire on rate rise”, and “rates could rise at any month now”.

So, why the sudden beat-up?

This month marks one year since the last movement, which was an unorthodox reduction of 15 basis points from 0.25%. The understanding was that for one reason or another, the RBA didn’t want to go to zero last year. Some people thought it was because they couldn’t, but make no mistake, they certainly can and if they need to go further, they can even go negative. Countries like Japan and Denmark have already done so.

Since then, the RBA has said over and over again that it would not consider a rate rise until 2024, when it predicts inflation and wage growth to have recovered to a level that is within its target zone.

Keep the roof on

As we know, markets have been firing all over the country this year, from a combination of record low interest rates, a lack of supply of listed properties and the effects of government and central bank stimulus measures flushed through the economy as a result of Covid.

The natural reaction to house prices getting out of reach is to call for the RBA to interfere by making it more expensive for people to borrow money. Many people believe that’s the only way to knock the steam out of the runaway house prices. But others argue that it should instead be up to governments to facilitate greater supply of housing, by making more land available to developers and removing some of the red and green tape that can hold supply back.

Forever indebted

The problem with raising interest rates now, is that over the recent years of super low rates, Australians have taken on more debt than ever before. In fact, during the pandemic, Aussies borrowed an extra $130 billion to spend on property. Owner occupiers now owe $1.2 trillion and investors owe $650 billion on property.

RBA Governor Philip Lowe addressed this at the Tuesday announcement press conference as he rejected suggestions of a rate rise before the end of 2022.

“The fact that debt levels are quite high at the moment means that interest rate increases will be quite effective,” he said. “People have more debt. So the cash flow channel is more effective when people have more debt.”

Essentially what this means is that a rate rise of any significance would result in…

Defaults, defaults, defaults

Data from the ABS shows the average new mortgage holder in NSW currently pays $2636 a month on an interest rate of 2.3%. This number would be considerably higher in Sydney and other capital cities.

A full percentage increase would see mortgage holders paying thousands extra each year and if they have stretched themselves to buy in the first place, it would be more than they could handle.

A wave of defaults would push Australia into a recession and potentially a depression with little prospect for a fast recovery.

Recovery not complete

Philip Lowe also said Australia’s economic recovery from Covid was underway, but that forecast GDP growth of 3% over 2021, followed by 5.5% and 2.5% over 2022 and 2023, plus an improvement in employment levels, depended on there being no further setbacks on the health front.

He said the RBA expected unemployment to head down in the near future, reaching 4.25% in 2022 and 4% at the end of 2023.

However, he noted that in order for inflation to be sustainably within the 2-3% target range for a rate rise, the labour market would need to tighten up enough to generate materially higher wage growth. He said he believed this “would take some time”.

Want to take advantage of low interest rates? Book in an appointment with our Mortgage Strategist team at Zinger Finance to see how we can help you build your investment property portfolio.

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