The Reserve Bank is a 50-50 chance to deliver a late election campaign interest rate rise to millions of Australian home buyers with the nation’s second-largest lender warning people could face the largest one-off rate rise since the start of the century.
In what would be the biggest intervention in an election since 2007, analysts and financial markets increasingly believe the RBA cannot delay normalising interest rates and will have to move at its May 3 meeting to deal with growing inflation pressures.
Reserve Bank governor Dr Phil Lowe. The RBA board meets on May 3, and markets have tipped a 50-50 chance of an interest rate rise.Credit:Oscar Colman
Westpac expects the bank to lift rates by 0.4 percentage points, from the historic low of 0.1 per cent to 0.5 per cent, when it finally starts tightening monetary policy. The bank had previously anticipated the bank taking rates to 0.25 per cent, chief economist Bill Evans said.
“However, given our expectations of a rapid further increase in underlying inflation and a forecast fall in the unemployment rate for April to a 48-year low of 3.8 per cent, we expect the board will decide on a bolder initial lift in the cash rate,” he said.
The last time the RBA lifted rates by more than a quarter percentage point was in February 2000 when the bank took the then cash rate to 5.5 per cent. Within a year, it started cutting rates to avoid the dotcom global recession that Australia narrowly avoided.
If banks passed on in full a 0.4 percentage point increase, the repayments on an $800,000 mortgage would lift by $168 a month.
Financial markets, after inflation data and comments from the head of America’s central bank, on Friday aggressively tightened expectations of rate rises here. They now put the chances of a rate increase at the RBA’s May 3 meeting at 50-50.
By year’s end, they believe the cash rate will be at 2.25 per cent and by the end of next year at 3.5 per cent.
The bank last lifted official interest rates in November 2010. Since then, more than 1.1 million people have taken out their first mortgage, never having experienced an interest rate increase.
AMP Capital chief economist Shane Oliver said there was a strong case for the RBA to lift rates at its May meeting and to make that a 0.4 percentage point increase. He said there was a real risk next week’s inflation report would show price pressures embedding themselves across the economy.
“The further blowout in Australia means that Australia is now starting to face the same risk as in various other countries that inflation expectations will get out of control locking in higher than target inflation, making it even harder to get inflation back down again,” he said.
Both sides of politics have aimed at cost of living issues throughout the election campaign. The Coalition announced $9 billion worth of measures, including a 22.1 cent a litre 6-month cut in fuel excise, in the budget.
Prime Minister Scott Morrison claimed on Friday the Coalition’s economic plan would put downward pressure on interest rates.
“How do we ensure that we have the maximum downward pressure on rising interest rates, the maximum downward pressure on rising cost of living? You do that by having a strong economic plan,” he said.
Shadow treasurer Jim Chalmers said while the economy was improving, the Coalition was failing to help people deal with real cost pressures.
“If you walk down the main streets of this country, as we have been, then we understand people are falling further and further behind because of skyrocketing cost of living and falling real wages in the government’s own budget,” he said.
Much hinges on Wednesday’s March quarter inflation report. Capital Economics economist Ben Udy expects underlying inflation to reach 3.6 per cent for the March quarter. Westpac and ANZ predict a rise to 3.4 per cent – an increase of 0.8 percentage points, which would be the biggest in more than a decade.
“The Reserve Bank is increasingly coming around to our view that rate hikes will be needed before long,” Udy said.
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