Inevitable rate rise will surprise mortgage holders

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The interest rate hawks are screeching louder with the latest surge in inflation prompting economists and financial market analysts to predict that the Reserve Bank of Australia (RBA) will be forced to raise official interest rates earlier than expected.

The RBA has maintained for the past few years that it did not envisage a need to lift rates until 2024 or perhaps late next year at the earliest.

But some economists are tipping the central bank may have to take action as early as May this year which could be in the middle of the Federal Election campaign. The last time interest rates rose during an election campaign was in 2007 when Labor’s Kevin Rudd defeated then Prime Minister John Howard.

According to the latest figures from the Australian Bureau of Statistics, headline inflation was up 3.5 per cent in the year to December 31, while underlying inflation – which is the RBA’s preferred measure – was 2.6 per cent, still solidly within the central bank’s two to three per cent target band.

Westpac economists have predicted the RBA will lift official interest rates from 0.1 per cent to 0.25 per cent in August, followed by a larger 0.25 per cent point hike in October.

But Bluestone Home Loans consultant economist Dr Andrew Wilson has dismissed this as “nonsensical” because the short-term outlook for the national labour market “remains patchy”, with the self-imposed voluntary lockdowns due to the recent surge in COVID cases throughout most of the nation impacting “economic performance through January, February and perhaps beyond”.

Despite all the screeching in the media about possible rate rises, I think many mortgage holders are not engaged with the idea and when rates do go up it could be a shock to the system seeing the last RBA rate hike was in November, 2010!

I expect as brokers we’ll see a lot more clients contacting us when this does happen.

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