While the latest figures saw the RBA maintain the cash rate at its record low level of 0.1%, what does this mean for consumers and lending providers in 2022?
While the numbers are starting to indicate that Australia may have already passed the peak of it’s real estate boom, finance industry insiders believe that interest rates and the nation’s cash rate are the two biggest factors that could cause the property bubble to burst.
With nowhere to go but up, many homeowners face the real possibility of paying thousands of dollars more per year. When interest rates inevitably rise, it’s expected that many Australians will be under pressure purely based on the size of their mortgages, many of which were taken out to match increasing property prices.
Despite much speculation, it would seem that this conundrum appears to be a while off yet. At its monetary policy meeting on February 1 2022 – the first of the new year – the Reserve Bank of Australia has decided to keep the cash rate at the record low figure of 0.1%, meaning no immediate hikes on interest rates. However, the RBA also announced that it will stop buying government bonds from February 10, thus ending additional monetary stimulus – but what does this all mean for homeowners?
No Major Hikes On Interest Rates Just Yet
Interest rates are essentially market prices, which means they are a function of what can be broadly dubbed a case of supply and demand. There are both short term and long term factors that have driven interest rates lower on a global scale, all of which have in one way or another affected us here at home.
In essence, The Reserve Bank Board sets the target for the nation’s policy interest rate, otherwise known as the cash rate, in the Australian cash market – the market in which banks lend and borrow money from each other overnight. In extremely simplified terms, the cash rate is the interest that every bank has to pay on the money it borrows, or in its own words, the “overnight money market interest rate”. In turn, the RBA ensures that the cash rate remains consistent with the target the Board has set as part of the monetary policy decision. Changes in the cash rate flow through to other interest rates in the economy, influencing a wide range of economic activity and ultimately inflation.
RBA governor Phillip Lowe has publicly stated many times that until inflation sits sustainably between 2-3%, the cash rate will not change. As outlined in Dr Lowe’s statement at the National Press Club, the RBA has shifted its projections for underlying inflation, with it expected to climb further in coming quarters to around 3.25%, before declining to 2.75% over 2023. Dr Lowe has also stated that in order for inflation to be sustainably within its target range, it would need annual wages growth to rise to at least 3%.
“Based on the evidence we have, it is too early to conclude that inflation is sustainably in the target range. In terms of underlying inflation, we have just reached the midpoint of the target range for the first time in over seven years. This comes on the back of very significant disruptions in supply chains and distribution networks, which would be expected to be resolved over the months ahead. We don’t want to see inflation too low or too high. We will do what is necessary to maintain low and stable inflation, which is important not only in its own right, but also as a precondition for a sustained period of full employment.”
However, the decision to wind back the RBA’s bond purchasing program is a clue that Australia’s economy is bouncing back faster than anticipated. Dr Lowe said that this decision was taken following a review of what other nation’s central banks had done, and the general strength of the economy.
In simple terms, when a nation’s central bank buys government bonds, it is injecting cash into the financial system. The RBA first announced on November 3 2020 that it would begin to purchase bonds issued by the Australian Government and by the states and territories in the secondary market, under a $100 billion bond purchase program. In this way, it was effectively helping to lower the whole structure of interest rates in Australia, without reducing the cash rate below 0.10%.
While repealing such an initiative arguably marks the beginning of the end for pandemic related concessions and economic support, significant changes to the cash rate and associated interest rates aren’t predicted to eventuate until the second half of 2022 at the very earliest. For homeowners, many are understandably flocking to their mortgage broker or lending provider to discuss their options for fixing interest rates – but is this a good idea or not? When it comes to the world of mortgages, it’s best to partner with a reputable provider.
Your Guide For Navigating The World Of Home Loans
The big attraction of buying your own home is just that – it’s yours, once you’ve paid back the banks of course. Apart from having somewhere to live, the quest for home ownership is also about having a long term investment strategy. If we’re looking at it from the viewpoint of decades instead of months, generally house prices do rise, and so does the value of your investment.
With a background in banking, finance, business development and project management, there’s no better advocate to have on your team than Nikki Berzin. As a fully qualified mortgage broker and director of Cherry Lending & Finance, Nikki is passionate about all things finance, and empowering her clients with the tools to hit their property goals is what she does best.
If you’re looking to get into your first home, purchase an investment property or even want to look at your options for refinancing, the first step is starting the conversation. Get in touch with Nikki today, or call her directly on 0427 374 155 to bring your mortgage dreams to life.
Disclaimer: Your full financial needs and requirements need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility apply.
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