RBA makes surprising decision on official cash rate

The Reserve Bank of Australia has made a decision to keep the official cash rate on hold at 3.60% this afternoon, though it has maintained that a single pause in rate hikes does not mean it will not continue its longer-term campaign to bring inflation more firmly under control.

There was some uncertainty over the direction the RBA board would take at its meeting today, due to concerns over the potential of an international banking crisis and early signs that the local inflation rate was beginning to drop in response to successive rate rises.

Ultimately the tapering in consumer price growth and the threat of global ructions along with other economic indicators were enough to encourage the RBA to hold off increasing rates in April while the impact of previous increases work their way through the economy.

RBA Governor Philip Lowe said the RBA board recognised that monetary policy operated with a lag and that the full effect of this substantial increase in interest rates was yet to be felt.

“The Board took the decision to hold interest rates steady this month to provide additional time to assess the impact of the increase in interest rates to date and the economic outlook,” Lowe said.

Jean-Pierre Gortan (pictured above right), managing director at commercial brokerage Simplicity Loans & Advisory, said the RBA’s hold signalled a stabilisation of what continued to be a very uncertain interest rate environment.

“This will allow clients to start making decisions with some more confidence knowing that we are coming to the end of the rising cycle,” Gortan said.

George Li (pictured above left), director and principal adviser at Leading Financial Solutions, said the rate hold would probably not impact clients in a big way given the multiple rate rises since last year.

“It probably makes very little difference given how fast the rates have increased in the last 12 months – customers have already budgeted for higher repayments,” Li said.

The RBA’s fight with inflation is not over

Li said a continuous push to curb inflation in Australia in 2023 was likely to result in a few more interest rate rises this year.

“This makes sense given how expensive things are at the moment,” he said.

Gortan agreed that the RBA was unlikely to have much of a choice about increasing rates in 2023 if inflation continued to remain high.

“Until inflation is under control or at least on a significant downward trend the governments have to stifle demand,” Gortan said.  “This can be done by increasing interest rates but could also be done through reduced government spending or higher taxes.”

Gortan noted that, if left unchecked, high inflation would erode the purchasing power of people’s incomes, making it more difficult for them to afford the goods and services they needed.

“It can also lead to wage-price spirals, where workers demand higher wages to keep up with rising prices, leading businesses to raise prices further to cover their costs,” he said.

However, Gortan warned that the cycle could soon start having larger impacts on the economy.

“My personal view is within four to six months once inflation is under control, we will need a rate reduction to counter any impending recessions, which may already be inevitable. Interest rates are only part of the equation; even if rates stabilise or even come down, we are likely to see property values reduce and unemployment rise.”

The consumer price index dropped to an eight-month low of 6.8% in February from 7.4% the previous month, according to the Australian Bureau of Statistics, indicating the inflation peak may have passed.

However, ahead of today’s RBA decision, banks and brokers had been split on the direction the RBA would take, with ANZ and NAB betting on a rise and CBA and Westpac expecting the RBA to take a break in April.

Li said many clients who were coming off fixed rates at the 2% mark have already tightened family budgets with the expectation of large rate rises and much higher loan repayments.

He said fixed rate customers of Leading Financial Solutions were enquiring about potential lenders and deals a good six months ahead of their fixed rate expiry.

Brokers dub 2023 the ‘year of the problem’

Li said that the lending environment was tighter than it had been two years ago, and this meant that a loan that the business had previously serviced might not be able to stack up now.

He said borrowers needed to get advice early rather than wait until their fixed rates expired.

Gortan said the team at Simplicity Loans were calling 2023 ‘the year of the problem’, because “everyone we speak to seems to have a problem that needs to be solved”.

“While most clients are still able to meet repayments either due to savings or strong business conditions, others are having difficulty in accessing capital due to bank requirements for interest coverage and lower asset values. Many clients have made investment decisions based on low interest rates and hadn’t expected them to rise so quickly,” he said.

Simplicity Loans expects this year to be very busy in the commercial lending space.

“We expect many businesses to come into difficulties in accessing the necessary funding to keep their businesses growing, so will turn to an experienced commercial team,” Gortan said. “We look at this next period as an opportunity, and will continue to invest in our business to expand our reach to help more clients.”

Li said residential borrowers should consider second tier lenders who have niche policies tailored to specific client segments that can potentially improve servicing given the high rates.

All major local banks were still predicting interest rates would continue to increase in 2023 ahead of today’s RBA announcement, with ANZ tipping a cash rate peak could be as high as 4.1%.

From AustralianBroker

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