RBA should start series of interest rate hikes sooner rather than later

Reserve Bank of Australia governor Philip Lowe. Picture: Richard Dobson

All the “experts” have suddenly – for want of a better word – discovered interest rates.

They are now singing almost in one voice two things.

The Reserve Bank will finally raise its official rate in June – the first rate hike it will have made since late-2010; and so, when the banks follow through with rate hikes on home loans, the first increase in repayments the vast majority of borrowers will have ever experienced on their current loans.

Secondly, the RBA will then keep pulling the rate lever again and again as we travel through 2022 and 2023.

But on the second point we do get more variation – with some “experts” predicting “only” seven rate hikes, through to the (few) pessimists (or sadists) saying there will be as many as 13.

If we got the first, repayments on a $500k loan would “only” go up around $700-750 a month; if we got the second they would go up by more like $1300-plus a month.

The first bit has been sparked by one word – “patient”. It’s the fact that it disappeared from the latest monthly statement from the RBA last week.

In previous statements, RBA governor Philip Lowe has said he was prepared to be “patient” about raising interest rates; now as one headline neatly put it, he’s “lost” patience.

OK, so if he’s signalled a rate rise – and, like the proverbial London bus, they never come in “ones”, but in multiples – why wouldn’t he get on with it, and deliver the first hike at the next meeting, in early May?

Especially as that meeting comes one week after the latest inflation figures, which will show headline inflation of well over 4 per cent for the year to the March quarter and inflation in the latest six months running at close to 6 per cent on a an annualised basis?

And remember, the RBA’s supposed to keep inflation in a 2-3 per cent band?

Let me also tell you, the vast majority of rate rises from the RBA, stretching back through the 1990s, came at the meeting immediately after a quarterly CPI number; and that was almost without exception the case when the RBA was starting a series of rate rises.

So why are the “experts” all saying June and not one, as far as I can see, saying May?

There’s a bit of a thin argument that the RBA would like to see the next wages data, which comes out later in May, before hiking.

But we all know the real reason: it’s the “event” that is going to happen in mid-May after the RBA’s May meeting, after a certain car journey this weekend which starts at, not goes to – opposition leader Anthony Albanese should note – The Lodge.

The “experts” almost unanimously – I haven’t actually noted a dissenter – believe the RBA won’t hike smack in the middle of an election.

Even though that is exactly what the RBA did in 2007. It hiked just two weeks before the election. And that was when rates were really punishing – the hike took the official rate to 6.75 per cent and home loan rates to over 9 per cent.

Now, the RBA is “thinking” of hiking to just 0.5 per cent (initially), which would take (variable, not fixed) home loan rates for owner-occupiers to just 2.5 per cent.

Furthermore, while the RBA did not hike in the subsequent 2010 election campaign, that was only because it had done the hiking earlier in the year; and indeed hiked three times.

The 2010 election was in August; the RBA had hiked in March, April and May. It would hike just once more, in November, and that’s the last time it did.

In my judgment, Lowe would shred his and the RBA’s credibility if he did not hike in May, if the inflation numbers come out as high as I expect.

He would just make it worse, if he did then hike in June; again, especially, if as I suggest, the first hike is 0.4 per cent, to get the rate back in sync at 0.5 per cent, not a frankly pathetic 0.15 per cent to take it only to 0.25 per cent.

Yes, there will be further hikes after that, but the predictions of 7-13 are really quite idiotic. Who knows what’s going to happen in the world next month, far less through the rest of the year.

And 2023? Puleeze. The RBA will play it month to month.

The “predictions” are really founded on the yield curve for Commonwealth bonds; that, crudely, if the two-year bond yield is 2.2 per cent, as it now is, that means that in two years’ time, early 2024, the RBA’s official rate will be 2.2 per cent.

It’s just a nonsense extrapolation.