What is the answer for an investor?
Look at your buffer just in case we have a rate rise.
An interest rate rise this year is “plausible”, with the Reserve Bank governor Philip Lowe urging new homeowners to build in a buffer to withstand any increase in mortgage repayments as the economy recovers from the COVID-19 recession.
While optimistic about the economy with unemployment likely to be at 3.75 per cent by year’s end, Dr Lowe also revealed working Australians were unlikely to enjoy a real increase in their wages until 2023.
Financial markets have priced in four interest rate rises this year. The cash rate, which was last increased in 2010 when it returned to 4.75 per cent, has been at an all-time low of 0.1 per cent since November 2020.
In November last year, Dr Lowe – who had previously said interest rates were likely to remain unchanged until 2024 – said market expectations of a rate rise in 2022 were a “complete overreaction” to inflation pressures, adding the chance of an increase was “extremely unlikely”.
Since then, the consumer price index has soared to 3.5 per cent while underlying inflation, the RBA’s key measure of price pressures, has increased to a near 8-year high of 2.6 per cent.
Pressed on whether the bank would lift rates this year, Dr Lowe said the faster-than-expected economic recovery, the rise in inflation and the sharp fall in unemployment all meant a 2022 rate rise was now a chance.
“It’s certainly a plausible scenario that rates go up later this year,” he said.
Therefore what is the answer for an investor?
As a mortgage holder, it would be prudent to start to look fairly soon at those “Fixed Rates” mortgage offers available now as they will soon be on the rise.
Look at your buffer just in case we have a rate rise, start to plan now for this, it will happen, in line with this, it may be a good time to have a review of your discretionary spending?
Stephen Catterall MBA
Assoc Professor TUA
Property Advice Solutions