Minutes from the latest Reserve Bank meeting show that borrowers may have narrowly escaped a bigger rate hike and should brace themselves for the chance of a super-big move in June.
Most important points:
- RBA minutes show May 3 rate decision was between a 25 or 40 basis point increase
- The minutes show that the RBA’s economic forecasts are based on a cash interest rate of 2.5 percent by the end of 2023
- CBA CEO Matt Comyn says his bank expects cash interest to hit 1.6 percent
Most economists had expected the RBA to hike rates by 15 basis points at its May meeting, while a few had tipped a 40 basis point rate hike and a few expected it to wait until June for the first move.
However, the Reserve Bank caught everyone by surprise by raising interest rates by 25 basis points.
It seems that either no movement or a 15 basis point increase was barely on the agenda at the May 3 meeting.
“Members at this meeting considered three options for the size of the rate hike: raising the spot rate by 15 basis points, 25 basis points or 40 basis points,” the minutes said.
“Members agreed that raising the spot rate by 15 basis points was not the preferred option as the policy was very stimulative and it was very likely that further rate hikes would be needed.
“An increase of 15 basis points would also violate the historical practice of changing the spot rate in increments of at least 25 basis points.r
“However, members agreed that the preferred option was 25 basis points. A move of this magnitude would help signal that governance is now returning to normal operating procedures after the extraordinary period of the pandemic.”
The fact that a 40 basis point increase was seriously considered has led many economists to speculate that it could happen in June, especially if Wednesday’s wage price indices surpass the 2.5 percent annual growth most economists currently expect.
“The mere discussion of a 40 basis point move means it cannot be ruled out, especially if the numbers surprise again positively,” argued CBA’s Belinda Allen.
“We think an upward surprise of 1 percent quarter-over-quarter growth in the Wage Price Index (WPI) tomorrow could be enough to push the RBA over the line at 40 basis points, but if it comes out on our forecast of 0 ,8 per quarter-over-quarter, that outlook will diminish,” noted David Plank, ANZ’s head of Australian economics.
While the Reserve Bank generally avoids giving exact predictions or guidelines about the future path of interest rates, it did disclose the assumptions underlying its latest economic forecasts.
The RBA economists assumed that the cash interest rate would reach 1.75 percent by the end of this year and to 2.5 percent by the end of 2023. -2024.
Those assumptions are derived from a combination of economists’ forecasts and market prices.
However, many experts don’t expect interest rates to rise that high, including the Commonwealth Bank’s economics team.
“Our general view is that interest rates will rise to about 1.6 percent,” bank manager Matt Comyn told The Business.
“So less than many other commentators or even the market are predicting right now.
Mr Comyn said his bank had tested new mortgage applicants to make sure they could meet repayments if mortgage rates rose to at least 5.25 percent.
The RBA has been criticized for its previous interest rate guidelines, which some say have led some borrowers to take out loans based on those expectations of ultra-low interest rates for at least the next few years.
But it wanted to point out that it wasn’t the only central bank to publicly predict that interest rates were unlikely to rise before 2024, only to have to raise them this year.
“Members noted that [Sweden’s] Sveriges Riksbank had raised its key rate by 25 basis points in response to higher-than-expected inflation after indicating in February that it did not expect to raise its key rate until at least 2024,” the minutes said.
Posted † updated
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