Rise or no rise? Plan for interest rates in 2022 revealed

The Reserve Bank Governor has just taken the extraordinary step of trying to calm panicked Aussies, laying out what he plans to do with interest rates next year.

Australian Reserve Bank Governor Philip Lowe has declared he has no reason to raise the cash rate target in 2022. Picture: James Brickwood/Pool pic

The Reserve Bank Governor has taken the extraordinary step of trying to calm panicked Aussies by re-declaring his commitment to keep interest rates on hold in 2022, but he may be too late.

In an address on Recent Trends in Inflation to the Australian Business Economists forum Tuesday, RBA Governor Philip Lowe made an emphatic statement that the cash rate would not move next year.

Mr Lowe said “the latest data and forecasts do not warrant an increase in the cash rate in 2022”.

The comments came as 16 lenders hiked fixed interest rates twice in the past month, including three of the big four CBA, NAB and ANZ, while Westpac has lifted fixed rates three times., according to RateCity data.

Both owner-occupiers and investor rate packages are being hit by increases with none of the big four having any rates below 2 per cent now, while NAB has just one.

MORE: ‘Sleepwalking into disaster’: Tiny rate rise could trigger property catastrophe

The Reserve Bank of Australia is sticking fast to its refusal to jack up the cash rate target until it’s sure that a recovery is well and truly underway.

In wide contrast to market expectations, Mr Lowe said “the economy and inflation would have to turn out very differently from our central scenario for the Board to consider an increase in interest rates next year”.

“It is likely to take time to meet the condition we have set for an increase in the cash rate and the Board is prepared to be patient,” he told the room.

“In terms of the cash rate, the Reserve Bank Board has said that it will not increase the cash rate until inflation is sustainably in the target range. It is hard to precisely define what ‘sustainably in the target range’ means. But we want to see underlying inflation well within the 2–3 per cent range and have a reasonable degree of confidence that it will not fall back again.”

Mr Lowe said labour market developments were also important.

“Unless labour productivity growth is very weak, it is likely that wages will need to be growing at 3 point something per cent to sustain inflation around the middle of the target band. This doesn’t mean that we have a target for wages growth or that wages growth is the only determinant of inflation.”

Mr Lowe said RBA’s “central scenario is that underlying inflation reaches the middle of the target by the end of 2023”.

“If this comes to pass, it would be the first time in nearly seven years that we will be at the mid-point. This, by itself, does not warrant an increase in the cash rate. As I have said, much will depend upon the trajectory of the economy and inflation at the time. It is still plausible that the first increase in the cash rate will not be before 2024.”

He said there could be effects on labour supply of the reopening of the international border and other factors that could bring that forward.

“It is therefore possible that faster-than-expected progress continues to be made towards achieving the inflation target. If so, there would be a case to lift the cash rate before 2024. It is also possible that progress will be slower than expected, which would result in the cash rate staying at current levels for longer.”

Even if the RBA does not move at all next year, mortgage holders will find themselves facing higher mortgage costs, according to RateCity.com.au research director, Sally Tindall.

“The banks have hit the accelerator on fixed rate hikes. They’re coming in thick and fast and they’re typically getting bigger with each hike,” she said.

“At first, the fixed rate hikes were isolated to longer-term rates, but now banks are lifting across the board at an extraordinary pace. In the last month 16 lenders have hiked their fixed rates twice, including all big four banks. Westpac has now hiked its fixed rates three times in one month.”

“These fixed rate hikes are more than speculation the cash rate could rise earlier than expected. The cost of wholesale funding is increasing, and the banks have decided it’s not sustainable to keep fixed rates at ultra-low levels.”

“Customers waiting in the queue for their fixed loans to settle will be rightly frustrated at these rapid rate rises, unless they had locked in their rate.”

“In this environment where banks are hiking multiple times a month, customers would do well to consider paying a rate lock fee, particularly when some banks are struggling to process loans quickly.”

Ms Tindall said there were still 95 fixed rates under 2 per cent but “the list is shrinking quickly”.

“By this time next year, it’s possible there may be next to no fixed rates starting with a ‘1’,” she said.

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