Interest rate rise in Australia is imminent

The biggest hint yet that Aussie homeowners are going to be hit with an interest rate hike very soon has been given and it won’t be the only one.

The rising cost of living and a jump in wages has forced the Reserve Bank of Australia to concede that an interest rate hike is headed homeowners’ way very soon, with economists tipping June as the first month for an increase.

It released the minutes of its April monetary policy meeting on Tuesday and hinted it would move to raise the current record low rate of 0.1 per cent.

The last time interest rates rose was a staggering 11 years ago in November 2010, which means more than one million homeowners could be facing their first hike in rates.

“Inflation had picked up and a further increase was expected, with measures of underlying inflation in the March quarter expected to be above 3 per cent,” the RBA’s minutes read.

“Wages growth had also picked up but, in aggregate terms, had been below rates likely to be consistent with inflation being sustainably at the target.

“These developments have brought forward the likely timing of the first increase in interest rates.”

Homeowners will face their first interest rate hike in 11 years. Picture: NCA NewsWire / Gaye Gerard

Investment firm VanEck’s portfolio manager Cameron McCormack said a rate rise could come as soon as May or June.

“The Reserve Bank of Australia meets in two weeks to decide on the official cash rate. While the Reserve Bank may be reluctant to raise interest rates during an election campaign, it has done this before in November 2007, on Melbourne Cup Day,” he said.

“So, we can’t rule it out.”

He said inflation concerns were driving the move as it hit 3.5 per cent in the last quarter of 2021 and could rise above 4 per cent in the next three months.

The UBS supermarket survey also found that food prices at Woolworths rose by 4.3 per cent during the March quarter, he added.

“However, given the economic uncertainty created by Russia’s war against Ukraine, the Covid-19 pandemic and heightened stock market volatility, the central bank may choose to wait until June to raise interest rates,” he warned.

“Following that, bond markets are pricing in an increase in interest rates every month until December 2022.

“We could see official rates by the year’s end reach 2 per cent. This will have a sobering impact on the economy, especially households, lifting lending rates and placing greater stress on homeowners and businesses to repay their debts and mortgages.

“Property prices too are likely to stall this year as demand for property drops.”

Governor of the Reserve Bank of Australia Phillip Lowe. Picture: AAP Image/Joel Carrett

All of Australia’s big four banks have predicted interest rates to lift from June this year and the potential for five hikes in 2022.

AMP’s chief economist Dr Shane Oliver also flagged a potential May increase by 0.4 per cent rather than 0.15 per cent.

He also forecast that house prices could fall by 15 per cent in the next two years.

Other countries have recently moved to increase their interest rates with Canada and New Zealand hiking them by 0.5 per cent last week, noted the Reserve Bank, while the US signalled it was likely to lift rates in May.

Inflation is a huge concern for interest rate rises. Picture: NCA NewsWire / Gaye Gerard

It comes as the International Monetary Fund has called for central banks to raise interest rates to prevent inflation from skyrocketing and has been described as a “clear and present danger” for countries.

Tobias Adrian, financial counsellor and director of the IMF’s monetary and capital markets department, said the invasion of Ukraine was significantly contributing to the inflation problem and banks needed to move to stop it.

“Interest rates might have to rise beyond what is currently priced in markets to get inflation back to target in a timely manner,” he said. “This may entail pushing interest rates well above their neutral level.”