RBA interest rates ignore script: should you ignore forecasts?

The RBA discussed raising interest rates at its latest meeting. That suggests that most forecasters have failed, so how do you react?

Where the hell are those interest rate cuts we were told were coming this year?

Home loan borrowers struggling under the weight of 13 Reserve Bank of Australia rate rises since May 2022 had been expecting relief in 2024 to pare back at least some of their 60 per cent jump in variable-rate loan repayments over the past two years.

Meanwhile, business owners have been battling both higher borrowing costs and the impact of weaker household spending because of two years of rising interest rates and other living costs.

Forecasts from economists and financial markets for rate cuts starting in mid-2024 had been a light at the end of their dark tunnel.

Now, that light could be a freight train coming, in the form of more rate rises.

Tuesday’s declaration by the RBA board that inflation is falling more slowly than it previously thought, and that its priority is returning CPI to the board’s target range of 2-3 per cent next year, did little to ease rising fears that we may yet see another rate rise.

Interest rate forecasts are dangerous to trust. Picture: iStock

The RBA left rates on hold again but it appears spooked by the latest 1 per cent quarterly rise in the CPI – that’s 4 per cent on an annualised basis – and may smack borrowers again this year with rate rise number 14.

It was only in December last year that money markets pointed to multiple RBA rate cuts starting in August, and some economists said a May cut was on the cards. Fast forward to today and a rate cut any time soon appears remote.

And if, as increasingly likely, we fail to see any cuts before 2025, that will mean that almost all financial forecasters got it wrong.

Accurate forecasting is more about luck than skill, which is why it’s wise to never make big financial decisions based on them.

Usually forecasts are forgotten by the time a prediction’s date rolls around, but some bite those who make them. Hard.

We saw this with RBA back in 2021 flagging no rate rises until 2024, then whacking borrowers with more than a dozen of them in 2022 and 2023. This played a big role in costing former RBA governor Philip Lowe his job.

Just like people who borrowed big on the belief that rates would stay low for longer, anyone who trusts financial forecasts is putting their wealth and household finances in danger.

Interest rates, stock markets and property prices generally don’t go where you expect them to, so avoid making financial decisions based on other people’s predictions.

Always have a buffer and prepare for the worst. It’s why banks assess borrowers’ ability to repay home loans at a rate 3 per cent above current variable rates.

Forecasts fail because things change. In Australia we’ve had massive migration pushing up demand everywhere, particularly for housing, and that has helped keep inflation higher for longer.

Another factor is that RBA rate rises target just a small proportion of the population. About one-third of Australians have mortgage, and a majority of them are ahead of repayments and not seriously struggling yet.

The latest inflation figures featured hefty rises in health and education costs, but they only climb in the March quarter so hopefully won’t be repeated this year.

But who knows? When it comes to accurate forecasting, does anybody know anything?

Originally published as RBA interest rates ignore script: should you ignore forecasts?