RBA drops yield curve control: What does that mean for borrowers?

Australian paper notes.

The RBA has spent the past year insisting that the conditions for a rate hike won’t be in place until 2024 at the earliest. But that guidance went out the window at yesterday’s monthly policy meeting.

RBA governor Philip Lowe was forced to drop his usual messaging around a 2024 rate rise, along with a key tool the Bank has leaned on for more than a year to keep interest rates low. 

All this means we could be looking at a very different interest rate environment as early as next year. So what does that mean for new and existing home loan customers? And is now a good time to lock in a fixed rate?

First of all, what is yield curve control?

Since March last year, the Bank has been purchasing billions of dollars worth of three-year government bonds as part of its “yield curve control” policy.

The price of bonds and the interest rate attached to them move in opposite directions. So by driving up their price, the RBA has been able to keep the yield (or return) on these bonds at a low 0.1%.

But a rapidly improving economy and stronger than expected inflation had made that target difficult to sustain, and last week the RBA found itself on the back foot against traders who have long rejected its messaging around the next rate hike.

When markets pushed up the yield well beyond 0.1%, the RBA made the extraordinary decision not to defend its target, and in yesterday’s policy meeting the central bank abandoned the target altogether. 

So what does this mean for borrowers?

The yield curve control target served as an assurance that interest rates would remain at their current low levels for at least three years. Now that it’s been retired, we could very likely see the cash rate rise in the next year or two.

Mozo’s banking expert Peter Marshall said that expectation had already fed through to some fixed rates, particularly longer-term options which have been steadily climbing for months now. 

“Banks have already been increasing fixed home loan rates for terms of two years or more, and the RBA's recent actions make it likely that the pace and size of rate increases will pick up over coming weeks and months,” he said.

Currently, the average 4-year fixed rate in our database sits at 2.68% p.a. (up from 2.37% p.a. in March 2021), while the average 5-year rate is slightly higher at 2.88% p.a. (up from 2.62% p.a. in March 2021).

Meanwhile, cuts to variable rates have accelerated in recent months. But with the RBA poised to move on rates in the coming years, banks are most likely trying to steer customers away from their still attractive fixed rate options.

“Variable rates should remain low for quite a while yet, but by the time they do start to increase fixed rates will probably be much higher than they are now,” Marshall said.

“Each borrower has to make their own assessment of whether they believe it's better to fix now or stick with a variable rate for a while longer — not an easy question to answer and perhaps taking the split loan approach is the best way to hedge rate risks.”

For more information about mortgage and lending trends, head over to our home loan statistics page. And if you’re in the market for a home loan, visit our home loan comparison page, or browse the selection below.

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