One of Australia’s leading economists has made his forecast for interest rates in the coming year, with more rate action expected in the fixed space.
“The Reserve Bank of Australia is still fairly insistent that it is not in any hurry to raise interest rates,” he said.
“Although they dropped the specific reference to 2024, they still seem fairly confident that – notwithstanding what financial markets are pricing – they won’t raise the cash rate this year.
“I’m inclined to agree with them about that. I think that while it is true that inflation has picked up here in Australia, it is still doing so more slowly that in almost all other advanced economies.
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“Moreover, since the RBA’s inflation target is a bit looser than that of other central banks – 2-3% with a midpoint of 2.5% compared to 2% - there are good reasons to think that the RBA will be one of the last central banks in the world to raise rates in this cycle.”
“I suspect that, although there will be much talk about rate increases in Australia this year, they probably won’t start to happen until the first half of 2023.”
Eslake added that the bulk of the rate action was likely to be found in fixed rates, which operate more independently of the RBA and their monthly cash rate call.
“Fixed rates price off longer term bond yields and, the further out you go are less sensitive to the RBA cash rate and more sensitive to US bond yields, so there’s still some upside for them to rise during the year and I expect that we’ll see lenders raising them a few times over the course of 2022,” he said.
“For those who took out loans for two or three years in 2020, some of those fixed rates will need to be rolled over at higher rates than those borrowers have been paying for the last two years.”
