- The Reserve Bank of Australia (RBA) hasn’t increased official interest rates since late 2010.
- It is now actively discussing increasing rates, although it says there is not a strong near-term case to deliver higher borrowing costs.
- ANZ Bank thinks it will be more than a year until it feels confident enough to lift the cash rate.
For the first time in over seven years, the Reserve Bank of Australia (RBA) is now actively talking about raising interest rates.
Mirroring recent commentary from RBA Governor Philip Lowe, the minutes of the bank’s April monetary policy meeting noted that “members agreed that it was more likely that the next move in the cash rate would be up, rather than down.”
Even though it admitted that “there was not a strong case for a near-term adjustment in monetary policy”, citing the likelihood that it will take some time for inflation to return to the midpoint of its 2-3% inflation target, for a central bank who has used policy statements in the past to signal looming rate changes, the introduction of this line has got the markets talking.
How soon is near-term? A month, a quarter or even a year or two.
Like Westpac’s Chief Economist Bill Evans, David Plank, Head of Australian Economics at ANZ Bank, says it’s still likely to be at least a year before a rate increase will be delivered.
“We think the RBA is a long way from acting on its tightening bias,” Plank says.
“We think the uncertainty about the outlook for household spending will constrain action on the part of the Bank until wages accelerate meaningfully and the Bank gets more comfortable with how the shift from interest only loans to principal and interest loans is impacting.
“This is unlikely to be until May 2019 at the earliest, in our view, which is when we are pencilling in the first RBA rate hike.”
Plank says the RBA’s gradual tightening bias does come with a number of caveats, noting that progress on lowering unemployment and boosting inflationary pressure will likely determine when the RBA will feel confident enough to increase official borrowing costs.
“[Its language] indicates that the Board seems to think there is a case for a rate hike — just not a strong one at present,” he says.
Financial markets share an almost identical view to ANZ, not pricing in a full 25 basis point rate increase in the cash rate until mid-2019.