Interest rates: What today’s RBA move means for house prices and shares

The first Reserve Bank of Australia meeting of the year was a big one. Here’s what it means for your mortgage, house prices and your shares.

Amid global economic uncertainty and rising inflation, the Reserve Bank of Australia’s first meeting for this year on Tuesday was an important one.

In it, RBA Governor Philip Lowe said interest rates have been kept at a record low 0.1 per cent – for now – while confirming the RBA will halt the extraordinary money printing program that helped carry the economy through the Covid-19 crisis.

He also admitted the red-hot inflation roiling financial markets had exceeded his predictions, prompting him to upgrade the central bank’s economic forecast and set the scene for a potential 2022 rate hike.

Reacting to the news and breaking down what it means for everyday Aussies, Shane Oliver — the Chief Economist at AMP — said he now expects rate hikes to commence in August.

“Ultimately, we see the cash rate rising to around 1.5 to 2 per cent in the years ahead but it’s a bit of guess and the RBA will only raise rates as far as necessary to cool inflation,” he said in a note.

“Rate hikes from later this year are unlikely to be enough to threaten the economic recovery but they will add to the slowdown in the property market where we see dwelling prices peaking later this year.”

What does this mean for my mortgage?

While the predictions of rising interest rates sounds ominous for those of us looking to buy a home, Dr Oliver said rates will not rise to “nosebleed levels”.

He said this is because the RBA will move in small increments – probably two steps at a time and pause to see what happens before doing more.

“We are assuming a rise in the cash rate over the next few years to around 1.5 to 2 per cent, which all things being equal will translate to an increase in variable mortgage rates of up to 2 per cent,” he said.

“While this will cut into household spending power it should still be manageable for borrowers as banks were imposing a serviceability buffer of 2.5 per cent up until October (ie, borrowers had to still be able to service the loan with up to a 2.5 per cent higher interest rate) which has since been raised to 3 per cent.

“This would take the cash rate back to or just above where it was in the years just before the pandemic but assumes much lower unemployment and faster wages growth and inflation.”

Will property prices rise because of this?

Dr Oliver said the Australian property market is highly sensitive to the monetary cycle as a result of very high price and debt to income ratios.

“Rate hikes in 2009-10 were quickly followed by a period of weaker prices and macro prudential tightening achieved the same in 2015-16 and then more so in 2017-19,” he said.

“Dwelling price growth has already started to slow and we expect the combination of worsening affordability along with rising fixed rates and then rising variable rates later this year to see home prices peak in the September quarter and fall 5 to 10 per cent in 2023.”

What about my shares?

There has been a bit of turmoil on the markets in recent weeks, and no doubt many Aussies will have taken a bit of a hit on their shares.

However, Dr Oliver said the RBA is removing stimulus and getting closer to rate hikes is good news because it means economic conditions are improving.

“While rate hikes will cause bouts of uncertainty, we don’t see RBA rate hikes this year as being enough to end the economic recovery and bull market in shares,” he said.

He said this is because monetary policy will still be relatively easy for much of this

year at least.

“It’s usually only tight monetary conditions that result in economic downturns & we are a long way from that,” he said. “This means that profits will continue to rise.”

“However, the move towards RBA interest rate hikes does mean that we are now in a more constrained and volatile period for shares compared to the environment of the last year.”

Originally published as What today’s RBA move means for you

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