The Reserve Bank of Australia (RBA) has used the term “patient” to describe its stance on when it will lift interest rates, but it would appear the bank may be preparing to lift sooner than expected.
RBA governor Philip Lowe has previously stated rates will not lift this year. One of the main reasons for this was because Lowe wanted to see the inflation rate stay within the bank’s target range of 2 to 3 per cent.
But isn't the inflation rate at 2.6 per cent and therefore within the RBA’s target range? Yes.
Also read: Wages lift 2.3%: What now for the RBA?
However, Lowe said he wanted the inflation rate to be “sustainably” within that target range - so not just for one or two quarters.
He wanted to see inflation stay within that range for a long period of time.
Lowe had argued that supply chain issues caused by COVID forced the cost of goods to increase, so inflation was not expected to remain at those levels.
He had said he wanted to see at least two more quarters of inflation data inside the RBA’s target range.
“Since the onset of the pandemic, the board has said that it will not increase the cash rate until inflation is sustainably in the 2 to 3 per cent target range,” Lowe said at the recent AFR Business Summit.
“It has indicated that it wants to see evidence that inflation will be sustained in this range, rather than simply be forecast to do so.
Change of tone
But now, Lowe says the RBA is no longer looking to see two more consecutive quarters of inflation growth.
This means the chances of the central bank hiking rates this year has just become more likely.
“The Reserve Bank will respond as needed and do what is necessary to maintain low and stable inflation in Australia,” Lowe said.
This was the first time Lowe indicated the RBA would be prepared to fight rising inflation since the pandemic hit our shores.
Before the end of his remarks, Lowe echoed the same statement he made about a month ago.
“Given the outlook, though, it is plausible that the cash rate will be increased later this year.”
And while it is not the first time Lowe has made this statement, given his changed outlook on inflation it is the most telling sign yet mortgage holders may need to brace themselves for a change.
How much will my mortgage repayments rise?
Canstar research found a cash rate hike of 0.5 per cent would take the average variable rate to 3.55 per cent.
If lenders were to match the increase, someone with a 30-year, $500,000 mortgage could pay an extra $137 per month.
A cash rate hike of 1 per cent would take the average variable rate to 4.05 per cent.
This means the same borrower above could see their repayments increase by $280 per month.
If the cash rate rose in line with Westpac’s recent 1.65 per cent forecast, the average variable rate would increase to 4.70 per cent.
This would mean the same borrower above could face an extra $471 per month in mortgage repayments.