Will they or won’t they? The factors facing the RBA on historic rate day

If the boardroom at the Reserve Bank of Australia was a firing range, we are now officially using live rounds.

The nation’s central bank is due to meet at 2:30pm this afternoon when the nation’s top economists could decide to increase interest rates for the first time in more than a decade.

If they do, it will signal the end of “cheap money” for Australians and remind voters that the cost of living is increasing right in the middle of a Federal Election campaign being fought on that exact issue.

The Reserve Bank of Australia’s Governor Philip Lowe has a big decision ahead of him in how the nation’s economy will be shaped. (Graphic: Tara Blancato)

If they don’t lift rates, they may be accused of playing politics at a time when the economy desperately needs the central bank to step in.

You’re not alone – here’s a back-of-the-pub-coaster explanation of the factors the RBA is weighing ahead of a potentially historic meeting.

First up … What are interest rates?

The rate that is set by the RBA is the interest rate on unsecured overnight loans between banks.

It is not the exact rate you are paying on your mortgage – but it does have influence.

When the RBA increases the interest rate (more correctly known as the “cash rate target”), it makes it more expensive for your lender to conduct business.

Lenders typically pass these costs on to the borrowers, leading to the accepted notion that when interest rates rise, so too do mortgage repayments.

Fair enough. Why then are interest rates rising? Can’t the RBA just keep them low forever?

You’ve certainly read a lot about the “cost of living” recently, and if you haven’t read about it, you’ve lived it.

This is the result of inflation, or the general rise in the cost of goods and services over time.

Obviously a carton of milk costs more now in 2022 than it did in 1962.

A small level of inflation is generally considered to be good for an economy, as it proves demand is high and provides incentive for business. Too much inflation means goods get too expensive, too quickly and nobody spends any money at all.

The cash rate target is the RBA’s main tool to control inflation.

If Aussie households know their mortgage repayments are going to go up, they are likely to hold back on spending elsewhere in the economy – thus reducing demand and easing the rate of inflation.

Record-high petrol prices are the biggest proof that inflation is eating away at household budgets. (Flavio Brancaleone)

I’m just barely understanding. Give it to me straight: will interest rates rise and how much is it going to cost me?

Yes – interest rates will rise, but we don’t know the exact timing or schedule of these rate hikes.

This afternoon the RBA could decide not to raise rates at all, instead preferring to wait and see what is happening to Australian wages before moving its hand.

What we do know is this: a number of rate rises are coming as Australia eases out of emergency economic conditions created by COVID-19 and into regular business.

How much a rate rise will cost you depends on how big it is.

If the RBA hikes by 0.15 percentage points in May and 0.25 percentage points in June, someone with a $500,000 mortgage will see their repayments rise by $39 next month and by June they will be paying $104 more a month than they are today.

Two consecutive interest rate rises could see the average mortgage repayment increase by more than $100 a month.

What are the experts saying?

Most are now believing that the RBA will lift interest rates by 15 basis points (a fancy way of saying percentage points after the decimal) this afternoon.

Gareth Aird, Chief Economist at Commonwealth Bank, believes the RBA will hold its hand today not because of any political influence but because all of its conditions for a rate hike have not yet been met.

“On balance we think that the RBA will stick to its guidance from the April Board Minutes and leave the cash rate on hold at the May Board meeting. But it’s a close call,” he said.

Mr Aird is out on his own in the cold.

The remaining three of Australia’s “big four” banks in Westpac, NAB and ANZ all believe interest rates will increase today.

ANZ went so far as to say that an interest rate of 0.1 per cent is now “inappropriate” for Australia’s current economy.

The experts are unanimous about one thing though: rate rises are coming whether borrowers are ready or not.

When and how is another matter.

Big Four Banks stock nab anz commbank westpac
Everybody bar CBA is expecting an interest rate rise today. (Supplied)

Does the federal election make a difference?

It shouldn’t – the RBA is an independent body outside of political influence.

But the political ramifications of a hike in interest rates cannot be ignored.

Both parties are campaigning on a ticket of reducing the cost of living and addressing housing affordability.

A rise in interest rates will be used as ammunition by the ALP to take a stab at the Morrison government’s “economic management”.

A decision to keep interest rates as they are will see the RBA cop criticism for being politically influenced by the Coalition, who would benefit from a rate rise being paused until after the May 21 election.

In the end it’s likely that the RBA will do whatever its board collectively feels is the best course of action for the Australian economy, and will simply ignore the many hundreds of inches of newspaper opinion that will be written about their decision.

The RBA is independent of politics – but what it does is always inherently political. (AAP)

Will a rise in interest rates cause property prices to crash?

It’s important to remember that Australia’s property prices have absolutely exploded in the past two years, up as much as 26 per cent according to CoreLogic data.

AMP Capital’s Chief Economist Dr Shane Oliver says while he expects house prices to fall up to 15 per cent over the next two years, he cannot see the market crashing altogether.

“House price crash calls have been a dime a dozen over the last two decades, only to see the boom roll on after periodic dips,” Dr Oliver said.

“So, the experience since the early 2000s warns against getting too bearish. Some would see a 15 per cent fall in prices as a crash, but I take it to mean prices falling 25 per cent or so.

“Our assessment is that while a crash is possible, it is unlikely unless we see very aggressive rate hikes – say taking the cash rate to 4 or 5 per cent – or much higher unemployment, driving a sharp rise in defaults and forced property sales.”

So even if property prices retreat by 15 per cent, we’re all back at where we were in late 2020 or early 2021.

Character and charm of historic Aussie pubs

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

Reference-www.9news.com.au

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