Households have prepared for incoming rate rises: RBA

The Reserve Bank of Australia’s (RBA) governor says people have understood that interest rate rises are coming and have responded appropriately.

Following the increase to the official cash rate by 25 basis points to 0.35%, RBA governor, Philip Lowe, told a press conference that households had prepared for rate rises by saving an extra $240 billion over the last two years.

“They've squirrelled that away. It's in bank accounts and the average owner occupier with a mortgage is more than two years ahead of the mortgage repayments. Back in 2018, they were only one year ahead,” Lowe said.

“So people have understood that interest rates would go up. It's happening earlier than many borrowers expected but we all knew that interest rates couldn't stay at this current level forever.”

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Lowe said low interest rates were no longer needed which he believed was a testimony to a resilient economy.

“Nobody predicted, at least to my knowledge, that we would be looking at the lowest unemployment rate in decades now.

“During the dark days of the pandemic, through March of 2020, people were talking about an unemployment rate in Australia of 15%, that there would be deep scarring that would take many, many years to overcome.

“Fortunately, things have worked out much better than that, which means that we don't need these very low level of interest rates.”

Future outlook

Kerry Craig, global market strategist at J.P. Morgan Asset Management, said: “Clearly the RBA’s tolerance for an inflation overshoot is very limited and we expect further rate hikes in June and August, one of which may see the RBA move by more than 25bps to get back to a more familiar path”.

Shane Oliver, chief economist at AMP, said: “We expect the cash rate to rise to 1.5% by year-end and to 2% by mid next year. But the RBA will only raise rates as far as necessary to cool inflation and high household debt has likely made rate hikes more potent”.

“Since the RBA has started increasing the cash rate much later than its peers, we do not expect the bank to pause between hikes until it reaches a certain threshold. We expect the bank to increase the cash rate relatively aggressively until the OCR reaches the pre-COVID level of 1.5%. We expect this to be reached by Q3, with a 25bps increase in June, followed by 90bps of hikes in Q3. We now see the cash rate reaching 1.75% by end of 2022,”” commented Barclays analysts.

“More concrete evidence that inflation is becoming prevalent in wage-setting behaviour could see the RBA hiking even further this year, and we can’t rule out a 50bps rate hike in H2 if upside the upside price pressures continue,” said Josh Williamson, chief economist at Citi Australia.