Why interest rates could increase sooner than expected

The Reserve Bank of Australia has kept the official cash rate on hold at 0.1% at its April meeting, but many economists say a rate hike could be imminent after the RBA governor dropped a key phrase from his monthly statement.

Australians haven’t experienced a rate hike since November 2010, and the rate dropped to its current historic low of 0.1% during the pandemic.

The RBA could be just months away from its first rate hike in more than a decade. Picture: realestate.com.au

Few, if any, economists were predicting the RBA to increase the cash rate this month or even before the May general election.

But now everyone will be watching next month’s meeting extremely closely, and it’s all because the RBA governor dropped the phrase “prepared to be patient” from his post-meeting statement.

In previous speeches and statements RBA governor Philip Lowe has used the phrase, reiterating the central bank’s desire to wait until it is certain inflation is sustainably in the target range of 2-3%.

“Inflation has increased in Australia, but it remains lower than in many other countries; in underlying terms, inflation is 2.6% and in headline terms it is 3.5%,” Mr Lowe said in his post-meeting statement.

“Inflation has picked up and a further increase is expected, but growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target.”

Inflation data released at the end of April could push the RBA to move in May, economists say. Picture: realestate.com.au

At the end of the statement Mr Lowe said important additional evidence will be available over the coming months on both inflation and the evolution of labour costs.

“The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target,” Mr Lowe’s statement ended.

Change in statement ‘significant’

PropTrack economist Paul Ryan said the fact Mr Lowe didn’t say the board was “prepared to be patient” in this statement will be viewed as potentially significant.

“That may signal that they think they’re closer to the combination of factors that they are looking to see before they start a hiking cycle,” Mr Ryan said.

“The RBA is waiting to see evidence of sustained demand in the economy consistent with inflation within its target over the medium run.”

Geopolitical tensions have driven up the cost of living further. Picture: realestate.com.au

Mr Ryan says the RBA will be keenly watching quarterly inflation data, released at the end of April, which will factor in the war in Ukraine and severe flooding, events which have further driven up the cost of petrol, groceries and housing.

“Higher inflation increases the likelihood of higher interest rates later in the year,” Mr Ryan said.

“This will weigh on housing price growth, which has clearly slowed in anticipation of these higher borrowing costs.

“The outlook for housing prices later in the year is one of a balance between higher mortgage rates and the higher income growth the RBA is looking to see before raising rates.”

Mr Ryan said he expected interest rates to remain on hold until either August or November.

Interest rate expectations brought forward

Following the RBA meeting ANZ and NAB brought forward their rate hike forecast, they now join the Commonwealth Bank in expecting the first rate increase will be in June. However, a May hike is also seen as possible, depending on price movements in the Consumer Price Index (CPI) later this month.

“We’ve gone with a June start rather than May because the RBA specifically states that “over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs,” ANZ head of Australian economics, David Plank said.

Many economists expect rates to rise in June, but haven’t ruled out May. Picture: realestate.com.au

“While the Board will have the inflation data in time for the May meeting, it won’t have new information on labour costs until it meets in June.

“A May rate hike should not be ruled out, however. A surge in core inflation in the Q1 CPI could leave the RBA thinking it has little choice but to move.”

Westpac expects the first increase to occur in August.