We discussed some of this on ABC Radio which you can view or listen to on YouTube here.
Before we figure out the answer to whether a borrower should lock in interest rates... here is what our central bank is doing.
The RBA released today its quarterly Statement on Monetary Policy (SOMP)which looks at the current conditions such as how Covid lockdowns are impacting our economy, but also where they think things will head in the short to medium term. You can view the whole publication here, and have a look at all the factors they analyse and present.
Investment professionals love this stuff and pour through these important updates for clues they may have missed. This is because if the RBA changes any of the interest rate, currency, or monetary supply settings... this could cost them dearly in their portfolio positions. But this is also why everyday Australians should be aware of what is happening, as we all borrow, invest, work etc... and these factors can impact whether we have a job, can afford to buy property, and where to invest.
What we learned is Australia has inflation of around 3%, but excluding a few things, the RBA looks at "trimmed mean" which is at 2.1%. The RBA usually raises interest rates when inflation gets above the 2-3% zone... and up until recently, it has well been below this.
The chart above shows a quick spike in interest rates last week on the inflation news. Luckily for borrowers though, the RBA (in releasing the SOMP) has tried to hose down higher interest rate expectations.
Essentially the RBA said that while they expect the unemployment rate to fall from around 4.5% (now) to 4% next year, they don't think they will raise interest rates until 2024. So they did signal the next move is higher... something we haven't seen for around 10 years!
A number of economists and money managers agree with the RBA that the next interest rate move will be up. But it is the timing of that which is in dispute.
Firstly, there are overnight cash rates... and this is what the RBA is talking about, and secondly there are longer term interest rates which range from days to years, and like the 2 year interest rate chart above, these have already begun to rise.
The Commonwealth Bank disagrees with the RBA on the overnight cash rate move, they think the next move will be higher and happen in November 2022.
As for what a borrower should do, it's always best for them to speak with their financial adviser or mortgage broker about their own unique situation.
