The Reserve Bank of Australia (RBA) has kept the cash rate at 0.1% again, marking a year since the rate was set at its lowest possible number, but they have officially abandoned the 2024 target for an increase.
Now, a rate is likely to come sooner rather than scheduled with RBA Governor Philip Lowe suggesting that inflation and a better than expected economic recovery has caused the bank to move ahead of its target.
“The decision to discontinue the yield target reflects the improvement in the economy and the earlier-than-expected progress towards the inflation target,” he said.
“Given that other market interest rates have moved in response to the increased likelihood of higher inflation and lower unemployment, the effectiveness of the yield target in holding down the general structure of interest rates in Australia has diminished.”
Banks are already factoring in a raise earlier than 2024, with all of the Big Four raising their long-term fixed rates in the last two weeks, signalling to the market that they think the price of cash will raise.
That might not be the cash rate: the wider of price of funding on the bond market is set to rise again in February, which will likely lead to further rate rises.
“The RBA last lifted interest rates on Melbourne Cup Day in 2010 but the odds of an increase on Cup Day next year will certainly be shortening and there may even be rate rises implemented before then if the Australian economy continues its COVID recovery,” said John Kolenda, managing director of Finsure.
“If the RBA moved earlier than expected with interest rate rises that would certainly have an impact on the economy. There are many thousands of mortgage holders who have never experienced a rate increase, although I don’t expect significant increases when rates are lifted again.”
“Of comfort to consumers is that interest rates remain at record lows and lenders are continuing to battle it out more than ever before and fighting for borrowers with special offers. However, the fixed rate train has left the station with some of the major banks increasing fixed rates.”
“Another factor at play could be the price of money that banks need to raise via the bond market which could see them lift rates out of cycle.”
“If the RBA turns off its term funding facility early next year, the banks still need to securitise billions of dollars through the bond market. If they’re already pricing in a rise, then the cost of funds will go up, which they’ll likely pass onto consumers.”
