There’s been much talk lately about the minutes from the most recent Reserve Board meeting, in which it was revealed that the RBA discussed a “neutral” cash rate of 3.50%. Now, Deputy Reserve Bank Governor Guy Debelle has said the discussion shouldn’t necessarily be taken as an indicator of imminent rate rises.
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A neutral cash rate, as Debelle explained, is where the official cash rate would settle, if all the RBA’s monetary policy goals were being met. At its July meeting, the Reserve Bank Board estimated that this was currently around 3.50%, “given that medium-term inflation expectations were well anchored around 2.50%.”
After the minutes of this meeting were released, some industry experts, including online bank ME were quick to warn borrowers to prepare for rate hikes. Others pointed out that the Reserve Bank was still a long way from the eight rate rises that would take the official cash rate back to 3.50%, as former Board member John Edwards outlined last month.
Even Prime Minister Malcolm Turnbull weighed in, saying at an economic outlook conference at the Melbourne Institute, that his understanding of the minutes was that "rates are more likely to go up than down, clearly.”
But he added that, while the RBA may have been preparing for rate increases, "what they are not saying is they are going to increase the cash rate to 3.50% next month."
In a speech delivered today, Debelle echoed that sentiment, saying, “No significance should be read into the fact the neutral rate was discussed at this particular meeting.”
He also said that negative factors, including low wage growth, weak inflation, the lasting impact of the financial crisis and low corporate investment are still at play in keeping rates low for now.
Although Debelle pointed out that, “the fact that other central banks increase their policy rates does not automatically mean that the policy rate here needs to increase,” he did acknowledge international factors as one of three key influences that would affect the neutral rate in Australia, along with the economy’s potential growth rate and the degree of risk aversion.
Mozo Data Manager, Peter Marshall, said that while there were probably no rate hikes in Australia’s immediate future, the RBA was likely paving the way for an increasing cash rate later on.
“For a while now we’ve been expecting interest rates to start rising late this year or early next, in line with global trends and in response to domestic economic indicators as well. Having said that, the RBA is in a delicate position at the moment, with household debt so high and the property market still quite volatile,” he said.
“So I think while the Reserve Bank may not be ready to start raising rates just yet, they are starting to prepare people for increases in the future.”
According to Marshall, while the Reserve Bank will have its eye on the goal of returning to “neutral”, it’s not likely to make any sudden changes. He predicted that any rate rises in pursuit of a 3.50% cash rate will happen gradually, over a number of years.
Still, he cautioned Aussie borrowers not to get complacent in the meantime, and to start reviewing their financial situation sooner rather than later.
“Borrowers need to keep in mind that an ultra-low rate environment like we’ve been experiencing lately is unusual, and the RBA has no intention to stay there,” Marshall said.
So now is the time to prepare your finances for a return to higher interest rates. Start by reviewing your current home loan to see if there’s an offer out there that could save you money. You can find out by taking our Switch and Save mortgage calculator for a whirl.