Cash rate hold sets up Feb 2022 showdown for interest rates

by Mike Wood08 Dec 2021

With the cash rate held again, all eyes have now turned to February 1 2022, and the next Reserve Bank of Australia (RBA) announcement.

 

The first cash rate decision of next year could set up a seismic shift in the interest rate environment in Australia.

Banks are already pricing in a raise in the cash rate at a currently undefined moment in the next two years, as evidenced by a massive gap between two-year and three-year fixed rates, while the likelihood is that the current term funding period will end at some point in the first three months of 2022.

“Let’s face it, the RBA has done an exceptional job supporting the economy through the term funding facility,” sid John Kolenda, managing director at major aggregator Finsure.

“Now that Australia has a much better handle on the coronavirus, it would appear that the economy is well back on track, which would mean that the RBA won’t be doing any more of the term funding support, which in turn will mean that the banks will be having to go back to the markets.”

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“That will see their cost of funding increase, and no doubt with that pressure, at some point next year as their costs go up, the banks will likely look at increasing their interest rates in an out of cycle event to cover those additional costs.”

The trajectory is such that, by the time the RBA actually increases the cash rate, it will likely not matter as much as a result of market-led interest rate rises that have come about due to higher costs of funds for lenders.

“If you listen to the RBA Governor’s position on it, they seem to be holding the argument that they don’t see any argument to lift rates until 2024,” said Kolenda.

“Now, there’s no doubt that there will be inflationary pressure that may change their position, but at the moment, it is probably more likely that the banks will increase rates out of cycle because of higher funding costs.”

“That would appear to be the more likely outcome for next year. I think it’ll be the third or fourth quarter of next year, because the RBA is not likely to increase rates – certainly that’s not what they have articulated publicly over the last couple of months.”

First RBA cash rate of 2022 will be crucial for brokers

“From a broker point of view, it’s about trying to help customers understand their position and, in the likely event that rates go up, what sort of impact it will have on them on a monthly basis.

“They need to run out scenarios for if the rates go up by 25 basis points, you repayments will go up by this much; if it’s half a percent, this is the likely outcome.”

“It’s about better preparing consumers for that outcome, which we will see. These rates are historically low and there’s only one way that they can go – up. It’s just about being prepared for that event and understanding what the scenarios are for monthly repayments in the event of an increase.”