By the time you are reading this the Reserve Bank will have passed its decision on the first Official Cash Rate review of 2024, and I expect that they would have made the call to keep the rate at 5.50%.
There has been some surprise with ANZ Chief Economist Sharon Zollner predicting that the Reserve Bank will increase the cash rate twice so hopefully for all mortgage borrowers it is her rather than me who is wrong.
A key factor which has made her think along these lines is that the unemployment rate has not increased at the rate that had been expected. It is currently sitting at 3.9% and had been predicted to be at 4.3% by now.
Another point is that while overall inflation has dropped more than had been expected the domestic side of that equation is stubbornly staying high.
In most cases we are recommending people fix for 6 months as we still expect rates to start to drop at some stage in the second half of the year and while mid to longer term rates are significantly cheaper, we believe that locking for the short term to give the ability to ride rates down as they drop will be a much better choice for most borrowers.
Even if the Reserve Bank doesn’t increase rates at the 28 February review it is worth listening to the commentary which will give a good indication on how the remainder of this year may play out and if the commentary suggests that it could be quite a while before we see the first cut to the cash rate then borrowers may be better to fix for 12 months to provide some more certainty.
It is also worth keeping an eye on the pending introduction of debt-to-income (DTI) rules by the Reserve Bank. I am personally no fan and think they are overkill however the introduction of these may allow the Reserve Bank to drop rates over time without the fear of fueling the property market as unlike in 2020-21 where historically low rates played the major part in fueling a property boom the DTIs would restrict borrower’s ability to access credit. At present high bank test rates are the main impediment around borrowers passing banks loan affordability criteria but as interest rates drop so will the test rates and there is a point where the DTI rules will become the main hurdle to overcome.
Kris Pedersen
21 February 2024